IT IS WELL-KNOWN that the construction industry is a high-risk business. Despite careful planning and many years of experience, the "disaster" project always lurks around the corner. Although contractors generally have a high tolerance for risk, a truly disastrous project can wipe out even the strongest company.
The performance of construction contracts and related agreements for the furnishing of materials has some level of risk. Projects that have experienced large losses generally can trace problems to a serious of decisions and conditions that, after the fact, can be recognized as warning signs. For contractors, the path to a "bad" job usually is well-marked.
The following represents significant mistakes made by contractors that can contribute to unsuccessful outcomes.
1 ASSUME TOO MUCH. Most construction projects are obtained through some form of estimating. Particularly where the contractor is under some pressure to bid successfully on a project (such as lack of work or desire to keep a competitor from moving into your "territory"), bidders often tend to assume conditions will be favorable; they will be able to implement a key substitution to provide a less-expensive material; production will be optimal; or the other party may not enforce certain contract provisions. Although a certain level of risk taking is part of the construction business, the contractor does himself no favors by making excessively optimistic assumptions without any solid basis for believing they will be reality once the project starts.
2 ALWAYS TAKE THE LOW SUBCONTRACTOR PRICE. When the general contractors bid projects, they typically receive subcontractor pricing until very near the time bids are to be submitted. On occasion, a subcontractor will submit a price for a scope of work that is substantially less than its competitors. Many contractors feel compelled to use this price because they believe the other bidders will use the price. However, prices substantially below the market often are mistaken. The contractor should obtain verification of the price or strongly consider ignoring the bid, particularly if it is from a subcontractor with no track record in the area. The contractor runs a considerable risk that a below-market subcontractor will not ultimately execute a subcontract (leaving the contractor to absorb the additional cost to contract with the next bidder) or, if they execute a subcontract, will be unable to perform properly because of inadequate cash flow.
3 IGNORE THE FINE PRINT. In today's construction industry, form general contracts, subcontracts and purchase orders have reached a new level of detail and complexity. Most participants are well armed with form agreements drafted by experienced construction attorneys, which heavily, if not totally, allocate all risks in the favor of the party offering the agreement. Yet many contractors, subcontractors and suppliers execute these contracts with little negotiation, without legal review by their own counsel and without insisting on reasonable changes that are necessary to balance risks. Not every contract will be even-handed, but some provisions simply are unacceptable and require negotiation. Failure to obtain necessary changes may preclude the contractor from recovering any relief even in situations where the other side has clearly caused damage.
4 AVOID GIVING NOTICE. Most construction and supply contracts require notice in the event extra work, change conditions or delays are encountered. Many contractors, subcontractors and suppliers are reluctant to give written notice for fear of "rocking the boat." However, many jurisdictions require written notice if called for by the contract or a statute, and the failure to do so may result in total or partial loss of the right to recover.
5 DON'T ANSWER LETTERS. Many contractors are understandably reluctant to become involved in the type of letter-writing contest that often marks troubled projects. However, while there may be some short-term administrative saving, the failure to properly respond to communications and document positions often is fatal when projects move to litigation, arbitration or even formal claim submissions. It often is assumed that the failure to respond constitutes agreement with the letter. At the very least, documenting conditions and situations as the job unfolds is an excellent way to maintain records-reconstructing projects after the fact is difficult and often quite expensive.
6 DON'T WORRY ABOUT LEGAL RIGHTS. For most contractors, every project starts fully collectible. On public projects, claimants usually have a right to recover against the payment bond for the project furnished by the general contractor and also on bonds furnished by subcontractors if applicable. In private projects, claimants normally have rights under the mechanic's lien statutes of that state. However, bond and mechanic's lien rights are controlled by statute, and strict compliance frequently is necessary. The furnishing of certified notices and other types of paperwork, if not accomplished in a timely manner, may totally bar an otherwise valid claim.
7 DON'T WORRY ABOUT RECORD KEEPING. On projects that experience significant delays or involve substantial amounts of additional work, capturing all the additional costs usually is a challenge. Detailed record keeping and cost accounting is critical to tracking additional costs and ultimately presenting and recovering them. Nevertheless, many contractors and suppliers fair to carefully allocate costs to additional work, keep daily time sheets and records of those costs, and properly account for onsite equipment, as well as otherwise engage in sloppy record keeping practices that make assessment of costs difficult if not impossible. Many claims have been lost merely because the contractor was unable to properly document the added cost relating to conditions that clearly justified compensation.
8 DON'T SETTLE TOO SOON. On projects where a contractor, subcontractor or supplier is losing significant money, panic often begins to set in as the losses mount. On some occasions, the party causing the loss may offer to settle certain issues provided that a complete release is executed. Contractors should be particularly careful about accepting payments early in the project in full settlement, particularly where the extent of the delays or additional costs is unknown. As losses begin to mount, the temptation to take an early cash offer can be overwhelming. However, if such payment is tied to a complete release and settlement of all claims, the contractor may find the amount accepted was far below the actual losses and further relief is not available.
9 DRAG OUT THE JOB. When a project is going badly, there often is a temptation to avoid or minimize losses by not manning the project heavily or attempting to reduce forces. In some cases, prudent labor allocation can mitigate losses. In most cases, it causes the project to fall farther behind and makes the contractor susceptible to claims that he has not properly staffed and progressed the job. When a project has gone bad, it usually is advisable to have it completed as quickly as possible.
10 LET IT GET PERSONAL. When projects experience delays, disputes and significant losses, tempers typically become very short. As the parties jockey for position, they frequently take actions the opponent can find upsetting. Nevertheless, in virtually all cases, management of the project is a business problem. Personal vendettas, temper tantrums and verbal attacks do nothing to resolve the problems or set the stage for future settlement and typically make the process more difficult and more time consuming. Even in "The Godfather," an attempt to murder an enemy was "only business."
Notwithstanding the mistakes described above, disputes and issues during construction projects simply cannot be avoided. However, proper management procedures, careful planning and the appropriate use of legal council can mitigate the loss to contractors.
