WE HAVE A GREAT CONTRACT, SO WHY ARE WE STILL DEALING WITH CLAIMS IN COURT (Part 3 of 3)

Posted by: Josh Quinter (jquinter@kaplaw.com)

In the first 2 posts of this series, we talked about why even the best of contracts don't prevent all litigation and provided some tips on how to manage risk in a way that minimizes the chances of seeing the inside of a courtroom. In reality, the best approach is an integrated one that includes preparing the most appropriate contract possible (understanding there is no such thing as a perfect one), providing good leadership, and managing the risk in the field. It is this last component that is the subject of this final post.

Construction companies too often think that the only way to manage their risk is to shift who is responsible for mistakes when they happen to another party in the contract language. This is a mistake on multiple levels. To begin, the law makes certain contract provisions unenforceable regardless of what the parties agree to in the written contract. For example, it is not possible to waive your lien rights in certain states – regardless of what is in the contract. Second, to assume the contract covers all scenarios encourages a false sense of security that can create a dangerous culture of indifference. Third, and perhaps more important, it overlooks the fact that the best form of risk management in most cases is simply making conscious choices about how best to manage projects.

The number of options available to manage risk on a project are only restricted by the level of creativity a company is willing to use to solve problems. With the impact of technology today, there are so many more options to manage risk on-site. Here are a just a few basic things to consider:

(1) Do your financial due diligence before the contract is signed. By the time payments are late and an issue has arisen, it can be too late to address the real problem: the owner does not have enough money to build the project. There are a number of factors to consider when doing such an investigation and the indicators are fluid depending on the nature of the project. For example, in some instances a single purpose owner entity would be cause for concern. On other projects, it may be perfectly normal.

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(2) Consider if your project has a complex element to it and plan accordingly. Some projects have components to them that make them a little harder than the rest to complete. This could be a unique safety issue, a very compressed schedule, or stacked trades that require an immense amount of coordination. For all projects, but especially these, don't pick the project leadership team based on who is available or next up in the queue. Think about who has the best skill set to manage that risk and put them in charge. If you have a unique or large potential safety issue on a project, put your most knowledgeable and respected superintendent on the issue of safety on that project. Decisions like these prevent the problem from even occurring.

Change Order.png(3) Do the right things to prepare for a lawsuit. Often times companies avoid a lawsuit by doing the right things as the project progresses, thereby discouraging adverse parties from litigating in Court because they know who has the upper hand when it comes to proofs. Most contractors, by definition, despise documentation. The result is that the change order never gets issued let alone signed, and a proof problem now exists for the contractor who is trying to prove it should be paid for that change in scope. Construction companies can benefit from learning a simple proposition when it comes to lawsuits: "If it's not documented, it never happened." This is a slight exaggeration for effect, but it's much closer to truth than not.

(4) Don't let small problems turn into big ones. When an issue comes up, don't kick the metaphorical can down the road by working on something else. And when the other party tries to do that when you raise the issue, do your best not to let them do it either. Most construction project related legal disputes can be traced back to a smaller issue that if addressed promptly on the project would never have grown into an issue so large a lawsuit is required. Cell phones and tablets are a great tool in this regard. It's not hard to take a picture or send an email while still on site. In a similar vein, it's better to engage your trusted team of advisors (i.e. lawyer, accountant, insurance broker) early and spend limited resources to resolve the issue when it comes up. This helps avoid spending large sums with that same team later because a problem was allowed to fester and balloon into something much larger.

(5) Stay on top of billing. It is sufficient to say that if you bill regularly, it's easier to understand when you have a problem. More regular billing also means the amounts invoiced will generally be in smaller increments. This allows you to manage the size of the A/R on problematic projects.

These are some of the simple steps a company can take to manage risk on a project. When integrated with a good contract and solid leadership that puts people first and empowers them to be the best they can be at their jobs, the results can be phenomenal. Not only is the risk in any given circumstance managed better, it is much more defined. This makes it easier for the entire team to do its part to keep the company out of court.

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