Every stage of the construction cycle has its telltale signs. Two years ago the market was sizzling and we were advising contractors on how they could manage this surge.
Many thought we had seen the peak of the cycle last year, and we were offering advice on improving team performance and margins. Now that the market appears to have crested, we are seeing a return of that all-too-familiar place: prices have risen, margins have narrowed and the stress of an overheated market has inevitably led to administration entanglements and, of course, claims.
It is this stage that I call “Return of the Payment Wars.” The signs are unmistakable: More and more contractors are finding themselves either dealing with ostensible justifications for nonpayment determinations or having to rebut excuses for nonpayment. And an ever increasing amount of resources are spendt on contract administration.
To avoid (or at least mitigate) the wars in 2019, consider these five ideas:
Read your contract(s)
Oh, I know you have heard this a thousand times, maybe more. And you use the same form contract time and again.
You think you have it memorized. Still, every time you call me up, I’ll ask for “that old form.” And I’ll read it. And, generally, I’ll find something that is useful in guiding me to the administration and resolution of some difficulty. You will too.
Too many times when I ask for a copy of a contract after being consulted on a payment war, I hear either: (a) “I am not sure where it is”; or (b) “I am not sure what it says.” If you don’t read your contract, you could lose an opportunity to avoid unnecessary disputes. Just last week I saw a message from an old client who was sharing some pearls of wisdom he had received from one of our retiring attorney partners. The client said the number-one bit of advice he cherished in his work with my retiring partner was: “Read your contract, Harry.” That’s good advice.
Pay attention to time
We all know that time is money. But too often we see trouble arise because time considerations have not been given adequate weight during negotiations over work that has been changed throughout the course of a project.
When such a modification does take place, it’s not enough simply to fill in that empty “time” blank found on a change-order form, the one you use to add or subtract the number of days you have to get a job done. There are many other administration matters that are also affected by time considerations.
For example, in construction today, nearly everyone is asked to sign a conditional lien release before getting paid. You may later find, especially if you have unanswered questions over a disputed change, that this sort of release impairs your rights (or fails to shield you against additional claims).
We seem to be seeing an escalation of these matters, likely again because we are in that phase in the business cycle in which an overheating market is placing administration teams under stress. If you encounter a big deviation in the designated scope of work for a particular project, sit down with your team (and advisers) and talk about how your time should be managed, discussing everything from how the change will be negotiated to payment cycles and the closeout of whatever project it is you’re working on.
Have coffee with your contracting partners
This advice most likely dates me, but it is so much more important today than it was 10 or 20 years ago. We all are moving too fast, have too much to do, and cannot keep up with the stream of emails, texts and tweets that are incessantly coming our way. Much of contract administration, particularly the management of payment and payment-related matters, is managed through email.
And many declarations of war occur without there being any in-person contact or discussion. Researchers tell us that 80 percent of communication is nonverbal. In other words, we lose a lot of context when we use talk to each other using electronic means. Even local rules guiding attorney behavior in litigation require lawyers to talk to one another in person before filing motions. There’s a good reason for this. It’s much harder to be difficult if you are looking someone in the eye.
Remarkably, there is no similar conferral rule for contractors. Notices of claim and notices of cure, along with other declarations of war, are allowed without any in-person discussion. All too often when our firm is engaged, and we ask clients if they have sat down with the people on the other side of their dispute to see if an agreement can be reached, the answer is no. And remarkably, we have found that more than half of the disputes we deal with can be resolved through simple, in-person discussions.
More than 90 percent of all commercial disputes are now resolved only after a professional facilitator has been brought in. Why not adopt the practice of turning to in-person discussion early on in a dispute, and thus trying to work out these situations before they fester?
Work with those you trust
I know this is easier said than done. But the contractors who are best prepared to cope with payment wars today are those that work with trading partners they trust. If you are anxious about a new bid opportunity or language in a new contract, trust your gut. And if you are venturing into new territory and do not have not have an established relationship with your likely partners, do your homework and find out if they are more likely to use a handshake to resolve a problem, or to reach for a lightsaber.
To learn if a new business prospect has warts, reach out to accountants, insurance brokers and attorneys. Word gets around, and we all figure out quickly who is on the dark side. How many times have you heard it said, “The best projects I have had are those I turned away?”
Darien Loiselle is a construction-law attorney at Schwabe, Williamson & Wyatt in Portland, Oregon. Contact him at 503-796-2069 or firstname.lastname@example.org.