6 Reasons for Construction Profit Fade
By Wesley Middleton
Profit fade. This is a situation your bonding agent doesn’t want to see. Profit fade is a tool very seldom used by the company owner or controller, despite the fact that it can be very effective in identifying issues inside a company.
Preparing a fade analysis on a regular basis can help identify trends that may warrant further investigation.
What is a fade analysis? In a very general sense, it is simply a comparison of your original estimated gross margin on a job to your actual progression throughout the construction period. Generally, a fade of 10% or more will result in a call from your bonding agent. The more variability in your contract over time, the more of a risk you appear to be to your bonding agent, and the less confidence he/she will have in your ability to estimate and manage jobs.
A Note on Fade/Gain Calculations: Avoiding a Common Error
If you have an estimated profit of 2% and your profit drops to 0%, then technically you have a 100% profit fade. The calculation should be a percentage change, rather than the difference between two percentages. Let’s look at another example: if your 2% gross margin represented $1 million and the job broke even, then you’d want an explanation of the 100% profit fade. The current schedule would only show a 2% fade.
Sources of Contract Fade
When preparing a fade analysis, it is important to break it down by project manager, estimator, category of construction work, or other categories that may exist in your company. This can further isolate the cause of the contract fade. Here are six important reasons that you may be experiencing contract fade:
1. An estimator who is not competent at estimating jobs and is too optimistic in his/her estimates; or aggressive bidding by an estimator who is struggling to win contracts.
2. Change orders that are unprofitable or simply have not been approved and recorded in the accounting system.
3. An under-performing project manager who is not effective in managing the costs and people on the job.
4. Jobs that are outside the company’s expertise, resulting in a learning curve that causes additional costs or job delays.
5. The accounting department is not coding job costs to the correct job. Having the project manager and estimator review and approve the final job costs will help in this area.
6. Cost shifting, otherwise known as fraud. It could be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud, or the accounting clerk could be doing the same thing. Either way, the same review process in #5 above would help prevent this from happening.
Seeing the Better Picture
Comparing the total actual costs to the estimated costs simply isn’t enough. Seeing the change in gross margin from year to year adds an additional level of analysis.
A well-planned deception of systematically “shifting” job costs from one contract to another between periods may not be detectable by only comparing estimated costs to actual. Preparation of the fade analysis is better supported by a well-prepared WIP or contract schedule.
For a basic contract fade analysis template, click here.
“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.” wmiddleton@middletonraines.com
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
The Necessity of Daily Cash Reports and Reconciliation
By Mike Crabtree
I occasionally do outside consulting work in order to help small companies ensure that their accounting processes are in good working order. Small construction companies often have limited resources, and accounting is not always high on an owner’s list of priorities, especially if operating at a “Mom and Pop” level. However, this can lead to problems.
Bank Account Reconciliations
Perhaps not surprisingly, one of the areas I am frequently asked to address is that of bank account reconciliations. People get involved in the day-to-day activities of operating a business and put off the monthly reconciliation of their bank account for a few days…or weeks…or months.
I was recently asked to come in and catch a company up on their bank reconciliations. The operating account hadn’t been reconciled in 15 months. They had a strong positive cash flow and were not audited, so reconciliations hadn’t been a high priority. After all, what could really be wrong?
The owner wasn’t directly involved in the accounting process, relying on a very young “bookkeeper” he had hired on the recommendation of a friend. She was very good at the day-to-day tasks, such as filing paperwork, processing lien waivers, writing checks, making deposits, etc. However, she didn’t really understand the mechanics of properly recording cash transactions, even at the basic level of understanding that a deposit should be a debit to the ledger cash account and a check should be a credit. Sometimes, she would forget to record a deposit.
Additionally, as is common with many small companies, the owner would frequently write manual checks when he was out of the office. Sometimes he would tell her, sometimes he wouldn’t. Sometimes she would record the ones she knew about, and sometimes she wouldn’t.
It didn’t take long before she realized she was in trouble, but she was afraid to tell her employer. She did make an attempt to reconcile the cash account at first, but because of the number of transactions that had occurred during the month and her lack of understanding, she gave up…and continued on as before.
Again, cash flow was strong, so no disaster occurred.
Eventually, the company wanted to get a bank loan for expansion (they had never before had one due to the strength of their cash flow), and part of the lender’s requirements was current bank reconciliations. At this point, I was called in.
Ultimately, I discovered that there were more than 500 improperly recorded or missing transactions directly related to the cash account, which also caused the books to be significantly off as a whole. After a significant amount of time and fees for my services, we were able to get his cash reconciled and the books in order. The company got the loan, but it was discovered that there was $150,000 less cash than thought. It was an expensive lesson.
Now, the bookkeeper in this situation was a good person, no fraud was committed; she just didn’t understand her job as well as she should have, got behind and was afraid to ask for help. I was able to teach her some basic “debits and credits” so that she could successfully go forward in the future.
The owner in this case was very understanding and kept her at the company (along with my phone number). However, this entire situation could have been avoided if he had required and reviewed the bank account reconciliation. Still, even a monthly reconciliation might have been inadequate given the number of transactions that occurred over a 30-day period.
This is why I recommended a daily cash report with short-term anticipated cash inflows and outflows as well as a reconciliation of cash. With internet access to banking activity available today, it is unnecessary, in fact unwise, to wait until your monthly bank statement to reconcile.
A daily comparison of your banking and book activity allows missed cash transactions or backwards postings to be discovered and corrected in just a few minutes. Situations like this one will never happen again, and management/ownership will always know its true cash position.
Mike Crabtree has over 20 years’ experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
Construction Project Management for the Not So Smart!
4 Steps to Successful Construction Project Management
By William Goodman
Because of the ever-growing array of huge, complex and technically challenging projects in today’s world, project management has become a critical skill. People need special tools, techniques and knowledge to handle their project management assignments, such as confirming a project’s justification, developing project objectives and schedules, maintaining commitment for a project, holding people accountable, and avoiding common pitfalls.
Having or obtaining these critical skills may be somewhat overwhelming and intimidating. However, by following a few basic and simple steps a manager can avoid getting tangled up with the technical challenges and pitfalls that inherently come with being in this position.
It’s no secret that following a simple rule called KISS can be good philosophy to have: Keep It Simple Stupid. But, here are some additional steps to take to avoid traps and challenges:
1. Know Your Contract.
You must know the contract: what it says, the objectives, the contractors’, owners;/clients’ and architect’s responsibilities, , the deliverables, milestones, the common terms, etc. Be sure to highlight and tab the essential parts of the contract that require action for quick reference later.
By understanding the contract, you can manage assignments and project justification. Prepare a matrix to track the assignments and who is responsible for each task or action required.
2. Communicate, Communicate, Communicate.
The manager must be able to communicate whether in writing or verbally. According to Dale Carnegie, author of How to Win Friends and Influence People, 85% of success on the job is due to one’s ability to lead people and personality. Only 15% of success is due to one’s technical knowledge. Therefore, the ability to communicate with people is vital and essential in increasing your success tremendously. It takes time to develop good communication skills and a good part of that development requires you to be a good listener. You should be listening two times more than speaking.
Try to avoid these kinds of pitfalls when communicating: expressing your feelings, making it personal, guessing or making assumptions. These types of emotions do not go over well in the business world, let alone in construction. Stick to the topic and facts. Be proactive – not reactive. Always maintain your composure and confidence. And, always be ready for that unexpected curve ball that undoubtedly will come at some point in time, but do not waiver or overreact to these types of situations.
3. Be Prepared.
One of the more important and time consuming tasks that a manager is responsible for is preparing and administering project meetings. Plan to start preparing for a scheduled meeting – whether it’s a conference call or in-person – at least a week in advance.
First, start by drafting the meeting agenda. Then, gather and assemble supportive documentation and exhibits that will be reviewed at the meeting. Be sure that all participants have confirmed or accepted the meeting request or invite. If applicable, send out the meeting agenda and attachment to the participants a day in advanced.
Finally, when it comes time for the meeting, allow for some interaction and light conversation between all attendees. Most importantly, be prepared and anticipate the unexpected.
4. Keep Things In Proper Perspective.
You must be able to adapt to an array of personalities and the unexpected. Therefore, you need to be flexible with your management style so that you can make adjustments to achieve your goals and end results. Do not take yourself too seriously. Instead, strive to balance seriousness and light humor. This is something you are more apt to figure out through real-life experiences.
William Goodman, Senior Project Manager for Triune, is a highly accomplished multi-talented project manager with over 30 years of construction experience. He encompasses excellent skills in preparing schedules and managing job costs, budgeting, contract negotiation, Design Build, and pre-construction services.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
15 Issues Leading to Construction Subcontractors Being More Heavily Scrutinized by Bonding Companies
15 Issues Leading to Construction Subcontractors Being More Heavily Scrutinized by Bonding Companies
By Brady Cox
It might seem counter intuitive, but some Bonding Companies do not embrace the opportunity to serve subcontractors. So what’s different about subcontractors and subcontracts? Why do some sureties redline this entire segment of the market?
Some of the possible reasons are as follows:
The Number One Issue – Low on the Food Chain!
One complaint underwriters have about subcontractors is that they are farther down the food chain than General Contractors (GC’s) are.
GCs have a “prime” contract, meaning they work directly for the project owner and are the first recipient of cash payments. Only then are subcontractors subsequently paid by the GC. Subs may face delays and sometimes even harassment at the hands of GC’s.
Remember, subcontracts are all private contracts not regulated by governmental or institutional rules, even if the prime contract is so regulated. Put simply, subs have a harder time collecting their money.
14 Other Issues for Subs and Their Sureties
1. GCs may not normally disclose bid results (2nd & 3rd bidders’ figures). This makes it difficult to evaluate contract price adequacy – a disadvantage for both the sub and surety.
2. Unregulated procurement procedures and contract administration: GCs may be aggressive in their procurement methods, pressuring subs for price concessions: “Knock their heads together.” Such practices make the subcontracts less profitable and therefore more risky for the sub and surety. Subs can also be victimized with verbal awards and unwritten change orders.
3. Contract documents (including bond forms) may be nonstandard, drafted by GCs specifically to give strong advantages over subs and sureties. In some cases, the normal Performance Bond transforms into a forfeiture-type financial obligation.
4. Flow-down or pass-through clauses in subcontracts force subs to assume obligations rightfully belonging to the GC. An example would be wording that makes the sub responsible for the liquidated damage amount on the prime contract if they are found to have caused a delay on the subcontract.
5. “Pay when paid” language can result in delayed payment to the sub. “Pay if paid” can result in the sub never being paid.
6. Unbonded public work is rare, but in such cases there is no Payment Bond at the GC level to protect the sub, and liens (filed against the project for failure to receive payment) may be prohibited.
7. Indemnification: Broad-form indemnity clauses can make the sub financially responsible even if they are not at fault.
8. Delay damages: Subs may be barred from seeking financial recovery.
9. Lien waivers: When read literally, these documents may operate to waive and release claims for which the subcontractor has not yet been paid.
10. Termination for Convenience: This contract clause can enable the GC to terminate the contract and leave the sub with a series of unreimbursed expenses and lost profits.
11. Some trades perform their work late in the project, meaning the bond is carried for a lengthy period with no progress on the contract.
12. Certain trades can operate with minimal capitalization, so the field may be populated with lightly financed companies. Such competitors can drive down contract prices, making it harder for others to bond their work.
13. Financial reporting may be less sophisticated than for GCs (CPA financial statements vs. bookkeeper or QuickBooks).
14. Due to their size and circumstances, subs may lack bank support, such as a working capital line.
Conclusion
Subcontractors literally perform the majority of all construction work. They are the backbone of the construction industry and cannot be ignored by sureties.
When it comes to bonding, subcontractors need to demonstrate that they are well-managed companies that reflect the same attributes as a successful GC.
Brady K. Cox is a Principle with the Baldwin-Cox Agency, LLC. in Dallas, TX. The agency was founded in 1990, and has always focused on providing construction bonds to contractors. Today the Baldwin-Cox Agency,LLC is one of the largest bond producers within all of North Texas.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
I Sent a Bid to the General Contractor, Now Where Is My Contract?
By Ed Krum
So your company has submitted a bid to the general contractor; now what? Well if you followed the suggestions from the last post:
1. Let the general contractor’s estimator know in advance that your company intends to submit a bid, especially if you haven’t worked with them before. A phone call is best.
2. Communicate with the general contractor’s estimator prior to bidding. Here are few good things to communicate:
a. Estimator, did you notice “so and so” about the project?
b. Estimator, the architect is doing it this way and we can save money by doing it this way and we will get the same result.
c. Estimator, here is a list of similar projects that our company has completed.
3. Send in your bid with enough time for the estimator to call you with any questions he/she might have.
4. Call the estimator to check if he/she received your bid and answer any questions.
5. Wish them luck.
This will give you something to refer back to as past communication. In all likelihood, you sent your bid to all the general contractors that submitted proposals for the project, and this communication will increase your chance of getting the project.
At this point, there are a couple pieces of information that you need: first, the general contractors with the three lowest bids, and second, how your firm’s bid compares to the others.
Once a project bids, it can be some time before a notification goes out stating to whom the owner intends to award the project. Since most projects go through some type of evaluation process, allow anywhere from a few days to a few weeks for the process to play out.
The other factor in how your firm’s bid compares to others is a tricky question of what is ethical and what is not. Trying to get a tabulated bid tab showing the dollar amount of each of your competitions’ bids before the project has been awarded to a subcontractor could be seen by some as unethical, as it gives the firm an unfair advantage to negotiate with the awarded general contractor.
The best approach is to develop a relationship with the general contractor so that your firm can get a seat at the negotiation table regardless of what your bid was. Spend time reviewing your firm’s bid now that the project has bid; go back and see if there are ways to cut costs, also known as sharpening your pencil.
Few negotiations end up with both parties getting everything they are asking for, so be prepared to give up something and know what you are willing to give up before you sit down. Most importantly, you want to convince the general contractor that your firm is easy and a joy to work with.
Ed Krum, Senior Estimator for Triune, is a highly accomplished, multi-talented project manager, with over 25 years of commercial construction experience. He is a skillful and highly regarded in value engineered, conceptual, competitive, negotiated and design/build estimates.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
That’s Not In the Contract, Do I Still Have To Do It?
Changes Clause, Request for Equitable Adjustment and Claims Overview
By Kay Kendall
Claims Clause!
In most federal government contracts, there is the Changes Clause that allows the government to direct changes to the contract. In that situation, the contractor, in accordance with the Changes Clause, can submit a request for equitable adjustment, or REA, if the contractor determines that the change will increase the cost or duration of the performance of any part of the work under the contract.
Requests for Equitable Adjustments (REAs)
Sometimes contractors experience constructive changes instead of a directed change. A constructive change is not the result of the government directing the contractor to do something, but could be a result of a circumstance the contractor encounters in performing the work. Even though constructive changes are not addressed in the Changes Clause, they are remedied as though it were a change directed to the contract.
Furthermore, well-settled case law has established that when a contractor performs work beyond that required by the contract without a formal change order, and such work was informally ordered by the government or is caused by government fault, a constructive change has occurred, thereby entitling the contractor to an equitable adjustment (American Line builders, Inc. v. United States, 26 Cl. Ct. 1155, 1179. 1992). As such, the contractor can submit a REA requesting to recover the additional costs and time to perform this work.
Where Should REAs Be Submitted?
REAs should be submitted to the person in the government that has the authority to make decisions to obligate the government to financial liability. In most cases it is not the resident engineer or contracting officer technical representative (COTR). Delegation of authority was discussed in the first article Delegation of Authority and Notifications. Refer to that article for more discussion on the delegation of authority.
What Happens If My REA Is Denied?
In the event the REA is denied or cannot be settled at a lower level, the contractor can elevate the REA to a Certified Claim. The FAR contains a Disputes Clause which provides the contractor another avenue to pursue recovery. If the contract contains the Disputes Clause then it is subject to the Contract Disputes Act of 1978, as amended (41 U.S.C. 601-613). If the contractor elects to submit a Certified Claim under the Contract Disputes Act of 1978, then the contractor must include certification language in that claim certifying that the claim is made in good faith; that the supporting data are accurate and complete to the best of the certifier’s knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable; and that the person certifying the claim is duly authorized to certify the claim on behalf of the contractor.
It is not a requirement to submit an REA and have it denied or be unresolved before submitting a certified claim.
However, there is an advantage to submitting the REA first. The costs for preparing and submitting a REA and supporting documentation are generally allowable costs to include in the REA. The costs for preparing and submitting a Certified Claim are not allowable costs to include in the REA. When a claim is properly submitted and certified, interest begins to accrue on the claim from the date the contracting officer receives the claim, but the government interest rates are low.
The Certified Claim MUST be submitted to the contracting officer or to the person designated in the contract. The Certified Claim, should be submitted in a manner such that the date it is received can be verified. Certified mail with return receipt requested is a common way to send it formally. A second copy can be forwarded by email, but a hard copy should be sent and tracked.
For contractor claims of $100,000 or less, the contracting officer must, if requested in writing by the contractor, render a decision within 60 days of the request. For contractor Certified Claims over $100,000, the contracting officer must within 60 days decide the claim or notify the contractor of the date by which the decision will be made.
If the contracting officer fails to notify the contractor of the decision or provide the date in which the decision will be made, then the claim can be “deemed” denied. At that point the contractor has the option to file a timely Notice of Appeal to the Armed Services Board of Contract Appeals (ASBCA) within 90 days of the denial, or to file a lawsuit in the United States Court of Federal Claims within one year of the denial (except as provided in the Contract Disputes Act of 1978, 41 USC 603 regarding Maritime Contracts).
Do I Have To Continue To Work If My Claim Is Denied?
Regardless of whether the REA or claim is denied, the contractor is required to proceed diligently with performance of the contract.
REAs and Certified Claims should reflect the accurate costs that the contractor believes it is entitled to recover. The government has no tolerance for inflated or exaggerated claims. In the next few articles we will discuss how to prepare and price the government construction REA and Claim.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: Do I still have to work if the federal customer directs me to complete work that is not in the original scope or where they have not provided a contract modification? The quick answer is absolutely. The customer does not want you to use a work stoppage as a means of holding them hostage.
However, I have seen instances where the work is clearly not within your scope, yet you are still required to proceed even if it puts your company at financial risk. In such a case you may want to seek assistance from other interested parties such as the Small Business Administration or your congressional representative.
Remember, regardless of how some may act, most people in the federal government still believe they are not in the business of putting small businesses out of business.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
4 Critical “Breach of Contract” Killers
By Sarita Smithee
The most important part of a breach of contract suit is the contract itself. The first thing a court is going to look at when it judges your claim is what the contract says. For that reason, both drafting the contract and drafting the breach of contract lawsuit regarding the contract language are critically important to a breach of contract claim’s success. There are four critical issues that can kill a breach of contract claim, and some simple things you can do to keep them from complicating your lawsuit.
Misrepresentations or Non-Disclosures
If fraud or misrepresentation occurs during the negotiation process, any resulting contract may be unenforceable. The policy behind this is to encourage honesty and good-faith bargaining. Misrepresentations commonly occur when a party says something false (such as telling a general contractor that all your employees have been approved to work on a project, but the majority of them are not eligible) or, in some other way, concealing or misrepresenting a state of affairs (such saying that you have never been disbarred from doing federal contracts by changing your company’s name). A nondisclosure is essentially misrepresentation through silence—when someone neglects to disclose an important fact he had a duty to disclose about the deal. Standard protections against misrepresentation and nondisclosure claims consist of including specific contract terms to address prior representations; however, these must be extremely carefully drafted to have any legal effect.
Violations of Public Policy
Contracts can be found unenforceable on grounds of public policy not only to protect one of the parties involved, but also because what the contract represents could pose a threat to society as a whole. For example, a court will never enforce a contract promoting something already against state or federal law or an agreement that offends the “public sensibilities.” Any contract that would permit a party to perform a service that he is not statutorily licensed to do would also be unenforceable. If a court does find the contract unenforceable, and the contract permits it, the court may choose just to rewrite the unenforceable term.
Impossibility or Impracticability
In some cases, a contract is deemed unenforceable because it would be impossible or impracticable to carry out its terms. These are usually cases when some unforeseen event, such as a natural disaster, occurs before the contract is carried out and makes performing the contract much more difficult or expensive than the parties originally anticipated. Standard protections against an impossibility claim involve removing the “unforeseen” nature of the claim and assigning that risk to the other party to the contract. For example, many contracts specifically state whether acts of God or interference by third parties are a defense for non-performance.
Failure to Include Material Terms
If the contract doesn’t contain the terms you’re suing on, the court can’t write them in for you. The best way to protect yourself against breaches of contract and to put yourself in the best position if you ever do have to sue is to have solid contract terms. In a standard business contract, the following terms should be clearly spelled out:
- Payment Obligations – Specify who pays whom, when the payments must be made, and the conditions for making payments. Money is almost always a contentious issue, so this part should be very detailed, and it should include the specific circumstances that constitute a breach of the contract. If you’re going to pay in installments or only when work is completed to your satisfaction, say so and list dates, times, and requirements. Include the method of payment as well. While some people might be okay with a business check or business charge card, others might want a cashier’s check or a wire transfer.
- What happens when a breach occurs? When certain breaches occur, the other party has the option to terminate the contract without being on the hook legally for his own breach. In other situations, if the breach is not so serious, the other party can recover his damages from the breach, but he can’t terminate the contract. The court can sort out these circumstances if a lawsuit ensues, but it makes more sense to set these out in the contract so that the parties know the consequences of their behavior ahead of time. For example, serious breaches that give the other party the right to terminate the contract might be missing a certain number of payments or failing to make a critical delivery.
- Anticipation of changed circumstances. The contract should assign the risk of any anticipated circumstances that might affect the contract. These might include the destruction of the property that is the subject of the contract, bankruptcy of a party, interference by third parties, and even acts of God. The contract should state who bears the loss caused by these circumstances in the event they occur, and whether the occurrence of these excuses performance of the contract.
- Resolving disputes. If you want to receive written notice of a breach and have time to correct it before the other party files a lawsuit, specify those terms in the contract. Or, if you want to handle any disputes through arbitration or mediation instead of going to court, specify those terms as well. The contract should also state what state’s laws apply, and what county any lawsuit must be filed in should a dispute arise.
Sarita Smithee is an associate with The Beckham Group in Dallas, Texas. The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant. The firm drafts and prosecutes/defends civil cases involving numerous types of contracts, and has just about seen it all.
Vince Fudzie– the blogger’s Reality Bite: This is some basic contract information but it is imperative that you understand it, whether you are a subcontractor or general contractor. After all, we are in the contracting business, which means there will be many contracts you will have to enter into if you are successful.
The issues that Sarita brings up about misrepresentation and non-disclosure can be extremely detrimental to subcontractors as well as adversely affecting general contractors. Recently, we had a subcontractor with a $1.5 million contract who made significant misrepresentation that allowed us to terminate his subcontract and legally not pay him for work that he thought he had performed.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
Litigate Versus Arbitrate in Construction Contracts
To Bind or Not To Bind, That Is the Question
By Robert Wolf
“I just heard that my favorite baseball player was awarded $15 million in arbitration from his team. THAT is what I am looking for.”
When clients talk about wanting arbitration, it typically stems from watching a little too much SportsCenter on ESPN. Unfortunately, most arbitrations are not as simple or exciting as the arbitration proceedings we hear about on sports channels.
In fact, in many situations, arbitration can be a BAD CHOICE FOR CLIENTS.
What’s the Big Difference?
Arbitration
Generally speaking, arbitration (or an arbitration “hearing”) is a procedure where the parties actually have a trial, but instead of being in front of a jury, they are in front of a panel of 1-3 lawyers or former judges. There is no jury, and the panel of 1-3 individuals decides the outcome of the case based on the evidence presented.
Once a decision is reached, that decision is binding. While one can appeal an arbitration decision, they are rarely overturned unless the arbitrator is found to have some type of undisclosed conflict of interest or some other unfair bias.
Mediation
Mediation is a different type of dispute-resolution procedure. Mediation is NOT a trial. The parties in a lawsuit start the day by sitting around a large conference room table, with each side puffing their legal chest, explaining why their side is the side of truth and justice. The mediator is the referee, and usually keeps things from getting too out of hand. This mediator is impartial and has no stake in the outcome, since the mediator receives a pre-set hourly rate or flat rate for his or her services.
After the opening comments/chest-puffing, the parties split into separate rooms, and the mediator goes room to room analyzing the strengths and weaknesses of the case. The mediator then gives an opinion as to what a judge or jury might decide if the case actually goes to trial.
No one can force you to do anything at a mediation, except to show up in good faith and try to get the case resolved. If you do not like the offer made by the opposing party or the demand made of you, then at the end of the day of mediation, you can just go home. Nothing has been decided for you, and your case continues.
What is Right for My Business?
The answer to this question is often issue-specific. Ask yourself if you would rather have a jury or a panel of lawyers and/or former judges deciding your case. Jurors are always told to check emotion at the door when they walk into a courtroom, but they are only human.
If your issue is one for which you want to avoid the emotions of twelve people who do not know a lot about you or your company, then arbitration is a potential for you. Keep in mind, though, that arbitration is still expensive – you still go through the process of taking depositions, exchanging documents, and arguing about evidence before the arbitration hearing itself.
I have seen many companies choose arbitration, as opposed to trial (or requiring a mediation), when handling subcontractor agreements. Sometimes companies are afraid that a jury might side with the “little guy” when a general contractor tries to enforce certain provisions in the subcontract agreement. Therefore, arbitration might make more sense in that situation.
Discuss your goals with an attorney before you decide whether to require the other party of the contract to go to arbitration, or before you sign a contract waiving your rights to a jury trial. Always make sure you understand the advantages and disadvantages of each, and determine what is right for you.
Remember, the question of arbitration or trial (and mediation before trial) is a lot more complicated than whether a sports team or a sports player has the winning salary idea for a baseball player.
Robert Wolf is a senior associate with The Beckham Group in Dallas, Texas. The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant. The firm drafts and prosecutes/defends civil cases involving numerous types of contracts.
Vince Fudzie – The Blogger Reality Bite:
For years I felt that arbitration was the best way to avoid costly litigation; therefore, we included an arbitration clause in our subcontracts. However, after being a defendant in a couple of frivolous lawsuits, I am not longer a fan of the arbitration process for a few reasons.
1. There is not much control over how much the arbitrator can charge the parties for his/her services, which can sometimes overshadow the most costly law firms.
2. The arbitrator often doesn’t have a clue about how our industry works.
3. Arbitrators often try to “split the baby down the middle” instead of making a soundly supported decision.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
New To Federal Contracting? Or, Just Have New Problems In Government Contracting?
Delegation of Authority and Notifications
By Kay Kendall
Competition for construction contracts in the private and non-government sectors has been increasing. Contractors that previously never considered federal government projects are starting to enter the federal construction arena.
Government money. Construction contracts. Put existing workforce to work instead of laying them off. Increase revenues. Sounds simple, right? Not necessarily!
What many of these contractors are finding is that contracting with the federal government is a whole other ball game. The government has its own set of regulations that are strictly followed and enforced. Phrases like “good enough for government work” used to mean a high standard, but in the commercial world of construction today, it means barely good enough to get by. Barely good enough to get by in commercial construction will probably not meet today’s government standards.
Problems arise on government projects, just like on any other project. The difference on government projects is that you have to follow the government’s rulebook – the FAR (Federal Acquisition Regulations). The FAR is a complex set of regulations that are often difficult to interpret.
In federal contracting, complex issues arise. Remember the old saying, “I’m here from the government and I’m here to help?” Don’t believe it. The government is not there to solve your problems and rarely will you get genuine assistance. They have certain procedures they have to follow, and even their “language” is different. They speak in acronyms and have their own terms.
In this article, we will discuss delegation of authority and notifications.
One of the first things contractors need to know is who in the government has authority to direct the contractor. Usually at the beginning of the contract, or in the preconstruction conference, the contracting officer will provide letters of delegation of authority. These letters will provide the person’s name, their title and specifically what they have the authority to do.
Some can just review submittals and pay requests and make recommendations to their superiors. Others have authority to obligate the government to a financial liability, and those that do have the authority have a dollar limit to which they can obligate the government. Many contractors get into trouble by taking comments from a government field representative, performing the work and not getting paid. Because the contractor did not notify the contracting officer or another person with financial authority, the contractor performs the extra or changed work at its own risk.
If the contractor receives a directive that it believes is a change to the contract, or encounters what it believes is a differing site condition, the contractor is required to provide written notification immediately before the work and/or the schedule is impacted, and certainly before any work is performed regarding the directive.
It is important to notify the contracting officer. Even though contractors communicate with the contracting officer’s technical representative (COTR) or other site personnel, the contract requires the contractor to notify the contracting officer – the one in ultimate authority. The notice is also important because if, for example, the differing site condition may result in significant costs or delays, the government must be given the option to make a decision about the situation. For example, the differing site condition may present a problem that can’t be corrected with the funds in the contract, and a termination for convenience may be in order.
Or it may take some time to resolve, and in order to keep costs down the contracting officer may order a suspension of work until they work out the problem. Of course the government has the option to deny that a differing site condition exists and direct the contractor to continue the work. At that point, the contractor has notified the government per the contract and should send a letter to the contracting officer stating that it disagrees but will continue the work and submit a Request for Equitable Adjustment (REA) or a claim at a later date. In a future post we will discuss REAs, Certified Claims and what the difference is between them.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: As a 17-year federal contractor our company has seen its share of REA’s, claims and audits; it is simply a part of doing business with the federal government. However, you can go a long way in helping your company successfully navigate these issues if you simply become an expert at understanding the requirements of the specific federal contract you are working on. We go as far as breaking down the entire contract into a chart that focuses on the who, what, when, why and how of a contract. Try it and it will help you avoid getting into trouble.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
Five Ways To Avoid Costly Construction Litigation
By Robert Wolf
Nobody, except lawyers, actually likes litigation. It’s time-consuming. It’s expensive. It’s stressful. But, there are some ways to help prevent such an expensive litigation process. Although no plan is perfect, these guidelines could help minimize your time, expenses, and stress level.
1. Use an Attorney To Begin With
I cannot tell you the number of times I’ve seen a contract, purchase order, or employment agreement where I’ve thought to myself or told a client, “If you had just come to us to draft this document to begin with, you would not be in this situation right now.” With so many “samples” of various types of documents on the internet, it seems that many businesses want to try their hand at drafting key contracts, employment agreements, and non-compete agreements themselves. While I can appreciate the need to conserve financial resources, companies often end up spiting their nose to save their face by creating documents tailored for their organizations without the benefit of legal aid.
2. Find an Attorney Who Understands Contracts
“My brother-in-law’s second cousin has a friend married to a guy who knows an attorney, who represented him on some traffic tickets. I’ll just use that attorney.” Well, you’ve at least followed Rule #1 – you are using an actual attorney. But, are you using the “right” attorney?
I don’t want a cardiologist performing brain surgery on my loved ones, and I don’t want an attorney specializing in criminal law to write my contracts. Likewise, I would not want an attorney specializing in contracts to defend anyone in my family on a criminal matter. So, make sure you are using an attorney specializing in the area you need, as opposed to a jack-of-all-trades-but-master-of-none attorney.
3. Find an Attorney Who Does NOT Need a Learning Curve
Although everyone learns something new every day, and the facts of each case are going to be different, you can spend a LOT OF UNNECESSARY MONEY if you don’t research your potential attorney’s actual case experience. You may have found an attorney specializing in contracts, but does that attorney have significant experience with the type of contract that you need, such as a subcontract agreement or independent contractor agreement?
If not, you could be spending thousands of dollars while the attorney conducts online legal research and re-creates the wheel, so to speak. Don’t be afraid to ask questions at the outset and determine your attorney’s own practical experience with the issue you are inquiring about.
4. If You Are Not Using a Litigator, Have a Litigator Review the Contract
So, you’ve done the right thing and found an attorney actually specializing in drafting and/or reviewing the all-important Subcontractor Agreement that you require. The attorney you are speaking to has drafted many of these types of agreements over the years.
But, has your attorney ever cross-examined a witness in a deposition or on the witness stand about the meaning and interpretation of this type of agreement?
Has the attorney had to sit through a deposition where he or she is defending a witness being cross-examined about the Subcontractor Agreement?
It is that last level of experience – actual litigation – that is invaluable. It is one thing to know all of the various statutes and laws, but it is another to have the practical experience of poking holes in the stories of many witnesses over the meaning of a single word or phrase. Litigators can use this experience to help you avoid future mistakes.
If you are not using a litigator, then try to have an attorney specializing in litigation review the document you are having drafted for you. It likely will not cost much, and can save you many thousands of dollars down the road.
5. Get a Budget Up Front
As attorneys, we do not like to be surprised with our clients’ stories, or with a client’s sudden inability to pay for the services rendered by attorneys. Likewise, it is not fair for a client to be unnecessarily surprised for a bill sent by an attorney. Do not just ask for the attorneys’ hourly rates. Find out how many hours are likely involved to complete a task. Ask for an approximate budget. Or, ask about an alternate arrangement such as a flat rate plan where you pay X dollars for the attorney to complete a specific task. In that case, if the attorney takes longer than expected to do the job, then you are not penalized.
There is no Perfect Plan. But, if you take these five factors into consideration, then more often than not, you will save significant money for yourself and your business in the long run.
Robert Wolf is a senior associate with The Beckham Group in Dallas, Texas. The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant. The firm drafts and prosecutes/defends civil cases involving numerous types of contracts.
Vince – the blogger’s Reality Bite: In addition to the points that Robert makes, help yourself out by providing your attorneys well-thought-out and organized documentation with which to represent you. Don’t be the person that gives his/her tax account a shoebox full of receipts. Somebody is going to have to wade through the information, and if your attorneys have to do it, they are probably going to be more expensive than some of the lower paid individuals on your staff.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
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