At the heart of every construction project is the translation of concepts into a real three-dimensional structure. The translation from paper to a physical form requires coordination of effort from multiple parties since every construction project will need at least three separate parties involved: an owner/developer, a designer, and a builder. Most projects involve countless other parties such as engineers, subcontractors, construction managers, and suppliers (to name a few). All of these participants must work together as a team to ensure the success of the project. Yet, each participant also has their own methods and needs to consider.
When the individual needs sufficiently match or coincide with the goals of the team, there is harmony on the project and everyone benefits...it is a rather remarkable sight when the plans take their intended physical form. The owner is pleased, you are paid handsomely for your work, the project receives public praise, and you are on top of the world....
But construction would not be an industry labeled as "litigation-spawning" if there were not downfalls. Often disputes arise when the struggle between the role of the individual and as a team member clash. Other times, disputes arise from the very nature of construction, such as: 1) the lack of future relationships because participants that have never worked together before and do not anticipate working together again; 2) inexperienced participants, and/or unrealistic or uncommunicated expectations; 3) blurred responsibilities in the roles of the various participants; and 4) uncertainties like weather, site conditions, labor, timeliness of materials and other unknown or unpredictable events. And this is just a short list of the unpredictable scenarios that might play out during a project to create disputes between the participants...
It is well known that construction disputes can lead to years of costly litigation and finger pointing that no one but the attorneys will benefit. Each dispute, even the minor ones, can drain your energy, time and money to the point that you cannot enjoy the praise, payments you do receive, or even the structure you helped to create. Such an outcome makes being in the construction business an undesirable occupation that you would rather avoid.
So how can you reduce the time-consuming and seemingly endless drain of your energy, resources, job profit, success of your business in addition to the possibly crippling involvement in a costly complex litigation on a project? The answer is not as complex as you might think -- create reasonable agreements to protect your essential interests in every project relationship and implement easy and practical methods for your company to handle the coordination and other requirements faced on every project.
While each project you work on will have its own unique characteristics and needs, each one can be managed successfully using some core concepts and business practices. The following is a list of the eight key concepts that can be implemented for every project:
- START OFF ON THE RIGHT FOOT: Each project that comes through your doors should be viewed as a research project first and then as a sales opportunity. What does this mean exactly? It means pre-qualify your jobs thoroughly....
First, you should quickly learn as much as you can about the project. To help you in this process, some questions you might ask yourself are:
- who are already known participants on the project and what experience do you have with each of them,
- are you sufficiently staffed, qualified, experienced or capable of performing the scope of work on the project you intend to bid,
- what sort of profit will you make on the project and are there any other benefits you will obtain from participation, and
- do you have any other obligations that might impact your performance on the project?
- These are just some of the questions you should consider and for each project you encounter over the years, find one issue in that project that can be translated into a question you can use during the research process in the future.
Second, review at length the plans and specifications for the project. Are there any expectations or requirements on the project that are unrealistic or cause for concern? Have these concerns been alleviated at all in discussions with the owner? Is there substantial publicity potential on this project that can benefit you with future business so that your usual protections can be reduced? It is not wise to guess at what is required or the price of your scope of work because the bid is due immediately. For every project, you must remember that your primary goal is to bid it at a price that gives you a fair profit.
In short, DO NOT even bid projects that are out of your reach in terms of experience or qualifications or jobs that look unprofitable to you because of the extreme expectations. Trust your gut...if it does not seem right for you, it probably is not right. You will end up making more money by passing on those few projects that are not good for you in a given year than you would by taking everything that comes in the door.
- WRITTEN AGREEMENTS: Everyone involved in business has heard the rule "get it in writing" at some point. This principle is equally valid in the construction industry, though not absolute from a contractor's perspective in the construction industry. A written agreement is, of course, always advisable as discussed below; however it is sometimes argued that in some situations, it is better for a properly licensed contractor to work on a handshake deal knowing that the law will award the reasonable value of the work performed rather than enter into a contract that is overly disadvantageous to them. Simply put, the construction industry is often one that demonstrates the "actions speak louder than words" philosophy.
The problem with that approach is that a well drafted agreement can save years in court and tens of thousands of dollars in attorneys fees and most professionals in the construction industry realize that a written agreement is a necessity for any significant project.
It is strongly recommended that you have a written agreement for every project you work on. Written agreements help everyone involved predict what is expected as well as the consequences that will stem from particular events during the project. It gives you guidance, security and knowledge to alleviate your worries and other concerns during a project so that you can focus on your role and tasks for the project's success.
A good contract will not only address the basic terms of your role, relationship and obligations on the project, it will also take into account many of the risks and possibilities that might be unique to the specific project your bidding. It might be useful for you to review two articles on this website related to contracts, the Contracts article as well as the article on Arbitration. For each project, review the written agreement thoroughly, and, at a minimum, think about and address in the agreement the responsibilities of each party for the risks anticipated on the job and what protection should be in place to ensure recovery of the payments owed to you. Also remember that you get what you ask for so ask for anything you might want during the contract negotiations because you just might get it and if you do not get it, you might discover this is not a written agreement you should or this is a business relationship that is not right for you.
Further, you should work with your attorney so you have a general contract to use for your projects or one that gives you the terms or clauses you should insist upon before signing any agreement. If you are presented with a contract prepared by the other party, you must review it thoroughly and if it does not meet with the requirements that you have, do not sign it or if you do not want to pass this project up, run it by your attorney for how you can negotiate the terms that concern you so that you are not in such a disadvantageous position.
(A more thorough checklist for what you should look for, include and demand in your contracts is specified in the article entitled "The Ins and Outs of Construction Contracts" included in the articles for construction law on our website).
- GET PAID OFTEN. Part of your early contract or business relationship discussions should focus on the payment schedule for the project. As a contractor, you should try to obtain a schedule that keeps frequent smaller payments coming to you rather than larger drawn out payments. The reason is simple - a majority of construction disputes occur at the time of or near the final payment so you can reduce the chance of being involved in a full scale and costly litigation case over large amounts of money by minimizing the final payment as much as possible. In fact, to the extent possible, your final payment should be as close to the $5,000 small claims court limit as reasonably possible so you can resolve that dispute without fear that it will impact the bottom line for your company or require the expense of attorneys and major litigation.
In addition to the payment schedule, most contracts set forth retention clauses for the final payments to the contractor. If the project is being financed by the owners themselves, you should attempt to avoid any retention clause being included. However, if your participation on the project is contingent on your agreement to some form of retention, negotiate one that is 5% or less of the total contract price or for some portion of it (50%) to be paid upon a certain event that occurs near the end of your scope of work. Unless the project price is in the millions, any retention above 10% should be avoided as much as possible.
Finally, make sure that any additional work that is requested has been authorized in a written change order before you perform the work. Change orders are probably the biggest reason parties end up in a dispute on a project that takes years of effort and costly litigation. Yet, additional work that is covered by change orders is also the easiest problem to avoid if the right procedures are in place. It should be an absolute rule in your company that all additional work must be covered by a written change order signed by the other party before you even commence with the work.
If you cannot prepare a written document due to the urgency of the additional work or other circumstances prevent documentation or signature for the additional work, you should have your staff have their own written form for the owner to sign approving the work. It is dangerous to have oral change orders in the extreme and the issue of change orders makes up the bulk of construction litigation. If your employees have somehow agreed to a verbal change order, try to get it confirmed in writing and, at the least, this verbal approval should be documented in the daily logs or field notes for that day plus followed up soon thereafter with a written change order. NEVER WORK WITHOUT AT LEAST A VERBAL CHANGE ORDER AND HAVE STANDING INSTRUCTIONS TO YOUR EMPLOYEES TO INSIST IF AT ALL POSSIBLE ON EXECUTED WRITTEN CHANGE ORDERS.
- TRACKING THE PROJECT THROUGH EFFECTIVE COMMUNICATION AND RECORDS: One of the biggest complaints to the Bar is the failure of lawyers to effectively communicate with their own clients. Indeed, the studies taken indicate that poor communication rather than the results of cases is the primary complaint of clients. Likewise with construction projects, for the bulk of problems stem from ineffective communication of the people on the project.
Poor communication is often found as the primary or foundational cause of a dispute between business partners as well. A team without good communication is a team divided.
It is, therefore, highly recommended that you encourage and establish a working line of communication with the other participants on a project. In fact, make it a requirement of your staff that all calls are returned within 24 hours, requests for meetings are met within 10-14 days or less absent extreme time conflict, and letters are answered within two days of receipt with a minimum response noting receipt of the document and expectations for when a more thorough response will be forthcoming. Keeping in continuous contact with the other parties on the project can dramatically reduce the problems you encounter on a project by putting you in the process of their resolution before they become problems.
It is also recommended that any matters of importance, especially deviations from the plans and specifications requested by the owner or other design professionals on the project, be documented in writing. It is vital that these writings should also be signed by the parties requesting the changes. This recommendation is based on the simple fact that many lawsuits go on for years arguing over oral discussions between the parties as to the changes that were made on a project and many times the other parties have selective or forgetful memory as to what they requested or agreed upon. Thus, where you are asked to deviate from the contract, plans or specifications or other obligations, your best protection and insurance to avoid future costs and expense to you is to have written documentation of the situation (even if it's not signed by the other party).
- PERFORMANCE OF THE SCOPE OF WORK IN A TIMELY, SKILLFUL AND CUSTOMER SERVICE-BASED APPROACH: It should go without saying but the best way to ensure your success on a project and payment for your work is to provide quality performance of your work and good customer service. If you did not do work that is equal to the industry standard for workmanship, offer to replace it at your cost before the owner discovers the error and becomes angered. This does not mean you need to adhere to extreme expectations but for every project you should at least perform your scope of work in a workmanlike manner and with the skill that professional contractors would perform in your position. Failure to do so presents risks to you and your business beyond the project you are working on as construction, while a heavily populated industry, is generally operational by word of mouth so a failure to perform up to workmanlike standards on one project may affect your company's reputation on many projects down the road.
- BENEFITS OF INSURANCE: Almost every project requires you to carry some sort of insurance policy. You should try to limit the insurance carried by you to policies that will give protection against basic and disastrous risks that might occur policies (i.e. workers, compensation and comprehensive general liability for injuries on the project plus all vehicles owned or hired for use on the project as well as a rider that covers your tools and equipment). If it is a smaller project, negotiate for the owner to carry the builder's risk or construction of the project insurance. On larger projects, it may be expected for you to carry the builder's risk policy. For all projects, you must make sure that all trade contractors or subcontractors hired by you on the project have insurance coverage that is equivalent to your own.
Further, if faced with a lawsuit or other legal proceeding on a project, DO NOT forget you have an insurance policy that should be considered before any expense or action of your own. Specifically, upon notice of the litigation matter, you should immediately inquire whether you have insurance that might provide one or more of the following: a) all amounts owed on a judgment against you in the case; b) contribution or full payment of any settlement offered in exchange for dismissal of you from the action; and/or c) payment of your legal fees and costs in defending the case. If you have been paying on your policy and it covers the circumstances you are being sued upon, you should immediately question and obtain written confirmation of the obligations that your insurance company will take on in the action so you do not have to incur such expense.
- PROTECT YOURSELF WITH MECHANICS LIEN LAWS: California has many laws which are designed to benefit the contractor who adheres correctly to vital filing of requisite notices and other timing deadlines. You should review the article on our website regarding Mechanics, Liens, Stop Notices and Other Payment Remedies so that you have a basic understanding of laws that protect you and the methods for preserving your lien rights and you should actively seek legal counsel to obtain required legal expertise both in filing your appropriate notices and avoiding the lapsing of important deadlines.
In the event a dispute occurs on a project, make sure you comply with all deadlines to ensure that your claim will not be denied for those reason. Also, make sure you follow all of the dispute resolution, notice procedures or other obligations set forth in your contract to avoid reducing your claim or voiding it entirely because of these minor omissions. For all disputes that arise, even those that seem minor initially, it is recommended that you run the situation by your attorney at the beginning of the dispute and especially before you agree on any resolution or course of action in the dispute.
- PICK YOUR BATTLES: Remember that your primary goal on the project is to make a fair but good profit on the job...praise and publicity are also good though not as essential for the doors to stay open. You may already know this universal truth though it bears repeating - large construction disputes can equal profits and income for the attorneys at the expense of the contractors (and others from the construction project that are involved in the case).
For you to be truly successful on a project, you need to pick and choose your battles wisely. Standing firm and refusing to make any concessions is basically a one-way ticket down the road of construction litigation with you paying the tremendous expense. So know how to compromise and when you should do so.
At times your best bet is to avoid a dispute entirely because it saves you time and money due to the fact that you already compromised early on. If you have put the time in early on to get the details worked out and responsibilities of each party in a written contract and you are sticking to the policy of having all additional work covered by written change orders, you are way ahead of the game in resolving any disputes that come up. Simply refer to the document that applies to a given dispute with reasons for why its terms also present an immediate resolution. In more than 85% of the disputes that come up on the project, you will be able to avoid them with minimal effort by referring back to the agreements you have in place.
Another option is to reach a compromise with the other party. How you do so varies because of the specifics of the situation but there are some general methods that will apply to every situation. These general rules of thumb are: 1) review all of the facts relevant to the issues within the dispute to determine what facts support your position and which ones do not; 2) gather any documents that support your position; and 3) discuss your findings with your attorney to see if there are any laws favoring your position and what your chances of prevailing would be if the dispute ends up in litigation. All of this will give you a clearer picture for determining what concessions you should offer and those that you should not so you can negotiate an effective and beneficial compromise with the other party.
The last choice is, of course, litigation but if you have methods in place that allow you to determine those battles not worth winning and those that are, you will be choosing litigation because it is the best path for you to take. At times you will have to litigate and few are the builders who do not end up in court or arbitration sooner or later. If that is the case, you would hopefully have used counsel to draft the contract and have the various clauses mentioned in the Contracts article to protect you. Litigation can be expensive but at times it is the appropriate action to take to protect your interests and luckily, under the law, with lien rights and stop notice rights, the Contractor has powerful tools which, if used correctly, can gain effective relief relatively quickly. The key is to obtain competent legal advice immediately and make sure all deadlines are properly met.
These 8 practices are just general guidelines that you should tailor to meet your own needs and goals. Take the time to review the other articles and forms on our website as they will assist you in implementing each of these practices in your company and help tailor them for you. A little time and effort by you now will save you money down the road, help increase your profitability and improve your business relationship on every project.