Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP. |
Given today's litigious society and the multiple entities involved in a construction project, contractors are vulnerable to lawsuits and disputes. Resolution of legal claims, whether in court or before a mediator or arbitrator, is at best costly and time consuming, at worst a step toward possible bankruptcy.
We recommend reviewing your income statement for the last five years and examining how much was incurred for legal expenses. The most important question to ask is why were such expenses incurred© These costs are no different from any other overhead item and should be managed just as well.
Contractors leave themselves open to claims and higher legal fees for various reasons, but three stand out: Many contractors regularly fail to pay close attention to a contract's fine print, they often do not create enough oversight and documentation of change orders and they often fail to sufficiently maintain accurate accounting records. Since only the largest contractors can afford in-house legal departments, most contractors must retain outside attorneys to represent them on an as-needed basis. The following suggestions may be helpful in controlling legal fees and reducing claims.
As contracts grow more complex, it is easy to miss the fine print. If there is an onerous clause in a contract, however, you must understand its impact. Your attorney can provide invaluable advice in evaluating such clauses. Even though you may have no option other than to accept a questionable clause, at least you'll know the risk you are assuming.
For contractors, it's important that all key personnel on a particular project understand the contract's requirements, especially key clauses dealing with such issues as milestone dates and liquidated damages. Designate a senior manager as the primary contact with the outside counsel. This person should be able to determine matters that require the attention of an attorney.
Even when a contract is written in even-handed language and clearly understood, problems often result from change orders. Contractors don't always properly document costs. The best way for a contractor to reduce problems is to maintain good site records, including daily logs, time sheets, cost reports and schedules. Such records are essential not only in managing the job, but may provide support for your attorney in a claims process. When it comes to change order management, there is no such thing as too much information.
Contractors want to be responsive to owners and their requests for changes to the project. But too often, work gets done with the understanding that a change order will be processed once work is completed. Later, when no formal change order has been issued, the contractor foots the bill. The realities of the construction world make it difficult to get timely change orders. But waiting to get a written work order until the end of the job can play havoc with your financial statements. This is particularly true if the change order remains unsigned and the financial statements are released to the surety and bank.
Price increases for steel and other materials can turn a profitable job into a losing proposition. When negotiating your next contract, be proactive and include a clause allowing price increases for materials to be passed along. The clause should specify the material items covered and provide a means for computing the increase. Contractors also can avoid claims by doing more homework. In the rush to win projects, contractors often do not adequately research a project owner's financial viability and history of claims and lawsuits. The most prudent contractors will obtain a Dunn and Bradstreet financial report on prospective project owners and ask owners to provide proof of adequate financing. Owners who are unwilling to provide such information should be dealt with carefully or avoided.
Even when all these steps are taken to avoid disputes and reduce legal fees, claims will still occur. That's why it is imperative that contractors maintain accounting records that are as clean as possible. It is always a good idea to seek advice from a CPA who works regularly in the construction industry. Accounting documents need to reflect jobs costs and do so in a highly organized and accurate way. For this to be possible, however, records need to be kept daily, not on a catch-as-catch-can basis.
The attorney you select should focus his or her practice on construction. Like your accountant, your attorney should become a trusted adviser. You can make life much easier for your attorney - and your overall corporate health - by maintaining thorough documentation. Should you encounter a dispute of any kind, these records will be your best defense. If not properly prepared, however, they're going to be your worst enemy.
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