Getting Paid in the Face of Bankruptcy

In construction, owners, general contractors, subcontractors, and suppliers are all susceptible to bankruptcy. If any one of them chooses to declare themselves bankrupt, they not only leave the project vulnerable but the remaining parties are put at risk for not being paid, at all or in part.

Bottom line, any bankruptcy filing leaves the construction project irretrievably impacted and every party facing increased expenses in both time and money. In order to be paid, they’ve all got to work on two fronts now: the construction site and the bankruptcy courtroom.

Overview of the Bankruptcy Process – How It Begins

Declaring bankruptcy is a legal right guaranteed by the United States Constitution. Federal law and regulation defines and protects that right, and special federal courts have been created solely to deal with bankruptcy matters.

So much federal law has been created to control the bankruptcy process that it has been gathered together (codified) in a group of laws named the Bankruptcy Code. Within that code are several chapters, organizing various aspects of bankruptcy law by topic.

When an individual or a company involved in construction declares bankruptcy, they will most likely do so under one of three chapters:

•· Chapter 7 (“liquidation”), which essentially distributes the bankrupt venture’s assets (some assets are exempt from this process under the law) to the creditors and thereafter, the business dissolves;

•· Chapter 11 (“reorganization”), where the bankrupt business is reorganized or restructured, and continues in business in a new way; and

•· Chapter 13 (‘wage earners”), the most common choice overall, where unincorporated ventures (e.g., owners), keep their assets and pay creditors according to a court-approved plan usually for less than the full amount owed.

Immediately upon filing a petition for relief with the local bankruptcy court under one of these three chapters, the bankrupt will receive a case number as identification, and an assignment to a particular court and its presiding judge. Hearings will be held in the matter before that judge, and all correspondence to the court must contain the case number identifying the matter.

As soon as the bankruptcy case is created in the courts, the law stops everything with a procedure known as the “automatic stay.” This stay cuts off any actions by or against the debtor and forces everyone involved to participate in the judicial process overseen by the bankruptcy judge.

News of Bankruptcy — The First Response

It is wise to hire experienced legal counsel to deal with bankruptcy proceedings, and lawyers usually diversify their practices between debtors and creditors, large and small. Word of mouth is usually the best way to select good bankruptcy counsel.

An attorney can be very helpful in these situations. For example, if you want the general contractor to finish the job, your attorney can file the appropriate documents with the bankruptcy court to request that the automatic stay be lifted and the bankrupt company be allowed to finish the project. If the court grants your request, then the contract will continue as a “post-petition obligation,” with all the rights and duties contained within it.

An attorney can also advise you on the nuances of bankruptcy law and how it changes your previous arrangements. For example, the standard contractual provision that filing bankruptcy is an automatic default will not be respected under federal law: the contractual provisions defining default as being unable to properly man the job, or to pay subs and suppliers, must also exist in order to lift the stay and terminate the contract.

Your attorney can also file a proper “Proof of Claim” for you. This will be accepted by the court as valid unless the bankrupt disputes it in some way. If you do not file a proof of claim with the bankruptcy court, you cannot be paid. Always file a Proof of Claim.

In large bankruptcy cases, the court will segregate the creditors into secured and unsecured groups, and create committees for both with certain creditors serving on both committees as representatives of the whole. There are advantages and disadvantages to serving on a Committee, such as you may or may not be paid for your time, and it is best to discuss this option with your attorney before agreeing to serve.

There’s a Bankrupt on the Project: What Now?

When it’s a general contractor that files bankruptcy, the entire project comes to a sudden halt. The owner can rely upon his performance and payment bond surety – if the work has been bonded – to get things going again. If not, then the owner can ask the Bankruptcy Court for permission to try and find some assurance that the contractor will continue his work to completion.

When a subcontractor or supplier files bankruptcy, the project will not be completely stymied. Construction will work around the gap made by the bankrupt. Meanwhile, the general contractor will ask the Bankruptcy Court for permission to either terminate the bankrupt’s contract or to set up some type of assurance that they’ll get their commitments to the project met.

Regardless of who has filed, when they learn of any bankruptcy filing on a project, subcontractors and suppliers will usually file lien claims immediately in order to protect their rights to payment. This is a good strategy as long as the applicable state law defines their right as existing before the bankruptcy filing. Federal law allows perfection of pre-existing security interests.

No one should act based upon a contractual provision that attempts to deal with bankruptcy by stating such things as filing bankruptcy is an automatic default under the agreement. Every single action connected with the bankrupt must occur under the auspices of federal bankruptcy procedure, which means that you must appear before the court and obtain the judge’s approval before taking any action pursuant to the contract or otherwise. Act based upon the contract alone, and you will face the wrath of the bankruptcy judge.

Furthermore, everyone should check their payment records for any monies received from the bankrupt in the past ninety days. This is because federal law allows the bankruptcy court to order a return of payments received from a bankrupt for up to 90 days prior to the date the bankruptcy was filed. These are called “preference claims,” and while they were traditionally sought for only large amounts ($7500+), today preference claims for amounts as small as $250 are not uncommon.

Having an attorney is especially important if you want to fight a preference claim. There are legal defenses available to you, such as demonstration of a contemporaneous exchange of value, that can allow you to avoid a refund.

Depending upon the situation, the construction project may or may not proceed with a bankrupt debtor participating in the process. Regardless of whether or not they continue, or they are terminated, the project’s expense will increase for everyone in both time and money by the mere filing of the bankruptcy.

Preventative Measures

It goes without saying that the profit margin is shortened, if not erased, for many when a bankruptcy is filed. To minimize this cost, certain steps can be taken before starting any project:

1. Choose reputable parties to work with on each project you undertake. Established business ventures (5+ years) are less likely to fold.

2. Have legal counsel to review any construction contract before you sign it, with concerns not only for your legal rights and duties, but the ways you can protect yourself from the unfortunate circumstance of another party’s bankruptcy filing. Your construction law attorney should undertake the basics of bankruptcy law as i
t applies to the construction industry.

3. When you hear rumors of a project participant being in financial trouble, do not wait for notice of a bankruptcy filing. Check with your lawyer on what you can do proactively to protect your interests: he may suggest liens be filed, or various defenses to preference claims be established, as well as contingency plans including having alternatives at the ready (a new supplier if the current one goes belly up; an alternative electrical subcontractor if the project’s electricians go out of business).

4. Immediately seek the advice of counsel when you receive notice of a bankruptcy filing. There are set deadlines within which you must act or you will lose your right to any payment whatsoever for your work on the project.

Dealing With Delays During Construction

Before construction begins, everyone involved attempts to do one thing: predict the future in order to minimize the risk of unforeseen events that might delay the project’s completion.

Owners, developers, contractors, subcontractors, architects, engineers, sureties, financial institutions, insurers, and vendors all want the project to be done well, and done on time. Why? Because one or more of them will have to eat the costs of substandard work or a delayed result, and that can be very expensive.

Construction delays are extremely dangerous: they can slow the project, or even bring it to a halt. Every construction project, from the smallest home addition to the tallest skyscraper, shares the same basic life cycle: (1) planning; (2) design; (3) construction; and (4) finalization.

Construction delays seriously impact each of these phases, and additional articles provide information regarding pre-construction and post-construction issues. Here, dealing with delays during construction is addressed.

What Delays Construction?

It is inevitable that delays will occur during the construction of a project. No matter how detailed the advanced planning or how intricate the contract documents, it is impossible to totally remove the reality of construction delay.

Materials and Labor Handoffs

It is understood among construction professionals that materials will be needed that haven’t arrived, or materials will arrive early and need to be stored on-site. Deliveries cannot be scheduled to arrive exactly on the day they are needed.

Plus, no subcontractor can be exactly sure when another sub’s crew will be ready to turn over an area to his group, so he can have the exact number of men he needs on-site to immediately take over the area. There will be an understandable delay with each transition, or “handoff” of the work areas, as carpenters and plumbers and electricians and HVAC specialists each take their turns in various project locations. During the building of a custom home, there may be between 100 and 200 handoffs, each adding in a small time lag or delay.

Weather

Weather will be a factor. Historical weather records can be obtained for the area from reputable sources such as the National Oceanographic & Atmospheric Association’s weather service website (www.nws.noaa.gov). Depending upon the geographical area, and the project’s time allotment, additional days can be calculated as “rain days” or “snow days” based upon historical precedent.

Waiting for materials is simply a part of the process, as is work waiting for workers to arrive. So is changing weather. Rain stops construction. Droughts delay landscaping. Weather conditions also impact suppliers, and may even damage the site.

The Unexpected Crisis

These are understood, predictable construction delays that are more easily identified and addressed in contract documents and project timetables. An experienced contractor can estimate how much time handoffs will take, as well as time lags in material deliveries, along with rain days, and time can be added into the schedule to accommodate these events before they happen.

However, the trickier aspect of predicting the time a project will need for completion comes with the unexpected issues, such as unforeseen ground conditions; owner interference, through design changes or financing concerns; and errors in the plans or specifications. Usually, these unexpected issues are serious and complex problems that can throw a project into crisis.

Minimizing the Delays

Once construction has begun, the window of opportunity to address delay issues in the planning and contracting phases has shut. However, there are still strategies to be implemented to minimize delay, such as:

1. Insure proper permits are in place before each phase of the construction.

2. Insure proper site access.

3. Insure proper on-site security to minimize theft of materials and equipment.

4. Have safety training programs as well as plans in place for emergencies (medical and otherwise). On-the-job injuries cause delay.

5. Hire only the most experienced personnel for every position.

6. Owners should minimize their change requests, and in response to any requested changes, change directives and change orders should immediately follow.

7. Insure daily communication between contractor, subcontractors, and suppliers to streamline the work/labor scheduling process.

8. Insure healthy communication between owner, architect, and contractor on progress and attempt prompt resolution of any problems that arise.

9. Monitor all cost and time schedule impacts due to turnover and production changes.

10. Remember to consider the impact of union labor (minimum hourly wages, requisite hours per day, likelihood of union work stoppages) into labor needs.

The Law Recognizes the Impact of Time Delays

The law addresses the time component in construction, and both legislation and court cases abound that attempt to deal justly with the issues of construction delays, since someone must bear the burden of their cost in both time and money. Over time, general contractors have been held financially responsible for construction delays unless certain criteria are met. If the parties wish to allocate risk in a different manner than the manner provided in the applicable state law, they can do so within the contract via a variety of “delay damages” clauses.

In essence, the law instructs the contractor to document the delay in great detail, and thereafter, the burden for that delay will be assessed based upon its character. In most states, a contractor assumes the delay cost unless it is shown to be: (1) excusable; (2) compensable; (3) critical; and (4) non-concurrent.

Excusable

If the delay resulted from an issue that no one could have reasonably foreseen, then it is deemed “excusable” under the law. Likewise, if the delay could have been prevented, but wasn’t, and it was caused by someone other than the contractor, then it is also considered “excusable” as to the contractor.

The contract documents usually define “excusable” delays. Examples include acts of God, severe weather delays, labor union strikes, and design changes requested by the owner.

Conversely, “unexcusable” delays are those that the general contractor could have kept from happening. Examples include late deliveries by a supplier, and cash-flow problems.

Compensable

Again, the contract documents generally define what delay damages will be compensable. “No damages for delay” clauses are commonplace, and yet, are dealt with differently from state to state. Whether or not the contract, and/or state law, will allow the contractor to be compensated for a specific delay cost will depend upon the specific circumstance.

Critical

If the event did not impact the timely completion of the project, then it was not critical to its timing and technically, it is not a delay cost for which the contractor can get reimbursement.

Non-Concurrent

Two delays that happen at the same time are “concurrent delays” and whether or not the contractor can be reimbursed for a concurrent delay depends upon many factors: the contract language, the relationship between the delays, the state law on concurrent delay damages, etc. Usually, non-concurrent delays are the only delay costs that a general contractor can claim.

Documenting Delays During Construction

Even in the most harmonious of relationships, fully documenting the delays as they occur is recommended:
a genial owner, understanding and willing to undertake the cost of a delay today, may reconsider that position by the time that the project is finished. Written documentation is in everyone’s best interests.

Owners and Architects

Owners should inspect the construction as it progresses, asking questions and making notes in a chronological fashion. Architects should, likewise, keep detailed records of the building progress especially since they are likely to be approving construction as well as approving payments.

Both should keep detailed records, including dates and times for all communications; details of all conversations dealing with delay, including references made to any specific event, along with the pages of the design documents that are involved; and both should feel free to record their field inspections with photographs or videotape.

Contractors

Contractors, however, should include specific documentation within their records when unexpected construction delays occur pursuant to the requirements of both applicable law and the individual contract. Contractors not wanting to bear the cost of a delay should:

1. Give Written Notice of the Event

This should be done according to the terms of the contract, which may have detailed requirements on what the notice should say, who should receive it, and how long the contractor has to give the notice, or risk forfeiting the claim.

2. Document The Event

The event itself should be documented in the contractor’s records, with information including the date of the event; who saw the event and their contact information; who received notice and when it was sent; how the event impacts construction, both long-term and short-term (including references to pages in the plans and specifications); how it increases the cost of the project; and all communications dealing with the event, including proposed change orders and RFIs. Photographs or videotapes should be taken, and kept in the documentation.

3. Create a Separate Delay File for Each Event

Original documents should remain in the ongoing record-keeping system, and copies kept here, to document the event. This separate file is easier to use if any disputes arise at a later date: it is much easier to pull these separate files and attend a meeting, mediation, or meeting with counsel than to bring the larger project files.

4. Change the Time Schedule

Calculate how the event has changed the timeline, and keep copies of both schedules (pre-event and post-event).

Seattle Construction Attorneys with Post-Katrina Experience Issue Top Ten Ways to Avoid Scams


Wolfe Law Group, a construction boutique firm on First Avenue in SoDo, can offer something special to the residents of Western Washington in the aftermath of its devastating floods: post-disaster legal experience.

Prior to opening its doors in Seattle earlier this year, the firm practiced exclusively out of its New Orleans office, and weathered the economic and social twists and turns of the post-Katrina era.

Today, the firm published a “Top Ten” list of ways to avoid construction scams, and with first hand knowledge and recent memory echoes the WA Attorney General’s warning to residents to beware of post-catastrophe scam-artists.

“Sadly, victims of widespread disasters have to pay close attention to this,” said Scott Wolfe, founding partner of the firm. “From our experience in New Orleans, the affected residents get put in tight financial spots during the post-disaster period, and are particularly vulnerable to scams.”

Doug Resier, an attorney in the firm’s Seattle office, highlights that there’s no shortage on those willing to take advantage of the vulnerable.

“A lot of people see the billions of dollars being poured into a disaster area and rush in to take their share,” said Reiser. “After Katrina, thousands came into the area to capitalize on the rebuilding work. In fact, we found there were many people who spent their lives chasing disasters and the quick cash that could be made by catching victims off guard.”

The firm published an article on its blog with some insight as to why disaster victims are vulnerable to construction scams, how they happen and how to avoid them. A list of the “Top Ten” ways to avoid a construction scam is included in the article, and the list, without its notes, is reproduced at the bottom of this release.

“In post-Katrina New Orleans, our firm has represented hundreds of homeowners, contractors, architects and engineers in projects of all shapes and sizes to help residents rebuild their lives,” said Wolfe. “Unfortunately, a poorly informed decision can cost a victim further heartache, expense and delay. Our advice to victims is to take a deep breath before hiring a contractor, do some research, and hire experienced counsel.”

How to Avoid Construction Scams
Top Ten Red Flags and Tips

1. If the price is too good to be true, it probably is.
2. Don’t let your contractor find you, find your contractor.
3. A permit is not a license, insurance is not a license. A license is a license.
4. Be weary of unstructured payment plans, and upfront deposits.
5. Nothing good can come from dealing in cash.
6. Contractors who promise to work with your insurance company or promise to get you insurance proceeds are likely pulling a scam.
7. Insurance Certificate copies do not always equal insurance coverage, and Insurance will not cover poor workmanship and/or work defects.
8. If your contractor doesn’t want to get a building permit, he might not be a contractor.
9. You should get a written contract, and the contract should be more than an “estimate” or “invoice.”
10. Hiring an attorney is a prudent investment.

About Us
Wolfe Law Group has construction lawyers in Seattle, WA and New Orleans, LA. Our practice focuses on serving the construction industry and the parties involved with construction projects. In post-Katrina New Orleans we’ve worked on hundreds of construction projects of all shapes and sizes. Since Hurricane Katrina, the firm has also represented plaintiffs against their insurance companies and negotiated over 3 million dollars in insurance settlements.

Wolfe Law: http://www.wolfelaw.com

Article on how to avoid Construction Scams:
http://blog.wolfelaw.com/2007/12/beware-of-construction-scams-in-post.html

Beware of Construction Scams in Post-Disaster Environments


Wolfe Law Group can offer something special to the residents of Western Washington in the aftermath of its devastating floods: experience with post-disaster environments.

Prior to our opening the Seattle office in July 2007, Wolfe Law Group practiced exclusively in New Orleans, Louisiana, and weathered the economic and social twists and turns delivered courtesy of Hurricane Katrina.

It is with first-hand knowledge and recent memory, therefore, that we can echo this alert from the WA Attorney General to those residents affected by the recent floods: Beware of Scams.

The Seattle Post-Intelligencer has reported that some damage estimates are expected to reach the billions, and with so much money to be spent on repairs, it’s almost guaranteed that many will come through the region to take advantage of the unwary.

If you were affected by the recent flooding, it is very important to remain cautious during these trying times. In the aftermath of Hurricane Katrina, thousands of New Orleans’ residents were scammed for millions of dollars.

Our New Orleans office has represented many of these individuals in lawsuits against their “contractors.” Unfortunately, in nearly every case, the victims of this fraud experienced long delays in repairing their damages, unnecessary legal expenses and serious cash flow concerns as insurance money was spent for construction work not completed. In some cases, even with a judgment, finding and collecting from the illegitimate contractors is trying, slow and expensive.

Why Getting Scammed Can Happen To You and Why You’ll Be Faced with Tough Decisions
If the price is too good to be true, it probably is. Victims of disasters are vulnerable to scams because of the attractiveness of low bids and problems with their insurance.

From our experience, the hands-down number 1 reason why some New Orleans residents ended up with an illegitimate contractor, and a bad disaster recovery experience, was because of money. Go figure.

The price quoted by an illegitimate contractor will always be cheaper than the price quoted by a more reputable outfit. After all, without a less expensive bid, it’s impossible for a scamming contractor to compete with reputable outfit.

An abnormally low bid, therefore, should be your first red flag that you might be getting scammed. Unfortunately, however, disaster victims are pressured by a number of factors to turn their heads from these “warning signs” and accept the low bidder for their project.

The uninsured or under-insured victim
One reason why low bids might be attractive and tempting to disaster victims is because they could be under-insured or uninsured. In this situation, a nice gentlemen with a low price, who seems to have good intentions, can be convincing.

While financial times might be hard, and the low-bid offer might be tempting, a construction nightmare might be awaiting you if you fail to adequate investigate the contractor and take precautions before hiring.

The insurance problem – Why even those with adequate insurance are vulnerable
Many argue that we have a problem with the insurance industry here in America. Without weighing in on the debate, we will highlight some of the reasons why those with adequate insurance coverage and limits might still find themselves financially pressured to select an abnormally low price:

  • Insurance is not immediate. Let’s face it, before you get any money from your insurance company, you’ll have to make your claim, wait for your adjuster, wait for the adjustor’s estimate and then wait for the payment. The entire process can easily take sixty days. Victims find themselves unable to sustain the financial burdens of the wait.
  • The first check from your insurance company is rarely enough. First, in the aftermath of a disaster it is common for construction costs to increase. It is not safe to assume that the insurance company’s price lists will increase with the times. Further, many insurance policies will cover you for “Replacement Cost Value,” but only pay its insureds the replacement costs after replacement! From our experience in New Orleans, with the inaccurate insurance price list and the payment of only the depreciated value of your losses, your first insurance check might only be 20-40% of your damages! Try paying a contractor $100,000.00 for work performed when you’ve only received $30,000.00 from insurance.

As you can see, the next few months can be very trying to victims of disasters. When a victim has its back against the wall in these financial conundrums, it is difficult for them to even entertain hiring a reputable contractor with its “high” prices. And as a result, unfortunately, illegitimate contractors looking to make a quick dollar have a very large customer base, and a customer base full of victims with broken spirits and few choices.

The sad part, is that these “illegitimate” contractors may not always be con artists or criminals. In some instances, they are even fellow-victims.

With billions of dollars being poured into a disaster area, many consider it a golden opportunity to get into construction and take a share. While these individuals proceed with good intentions, it’s their lack of construction knowledge and inexperience that results in the “scam.”

For example, an inexperienced and unlicensed contractor with good intentions may have a low bid because they’re too inexperienced to properly bid a job. Mid-way through construction they’re asking to double the cost, or they’re abandoning the project amid embarrassment and cash flow problems.

If you’re a victim of a disaster, times will be tough, and you’ll be faced with difficult decisions in your quest to rebuild your home, business and/or life. Unfortunately, because of scams and bad situations, its important to move forward with caution.

How to Avoid Scams and Bad Construction Experiences
Your Top 10 Red Flags

From our experience in the construction market post-Katrina, we’ve compiled a list of the top 10 things to be weary of when hiring a contractor in a post-disaster environment.

1. If the price is good to be true, it probably is.
One of the most common red flags is a low bid. It’s important to never over-pay for a project, and its common to hire the lowest bidder in the construction industry, but its critical to ensure that your low bid is a responsible low bid. One of the most tell-tale signs that you might be dealing with an illegitimate or illegal contractor is when you receive an abnormally low bid.

If the price is too good to be true, it probably is, and you may end up paying exponentially more than your highest bid in defective work, legal fees and heartache.

2. Don’t let your contractor find you, find your contractor.
It’s very common for illegitimate and inexperienced contractors to solicit its customers. Take a deep breath and perform some research on the person who solicited you before allowing them to sell you on their services at your door. Spend time looking for contractors in your area online, and compare different companies.

You’re embarking on a large and likely expensive purchase, and the job will go smoothly if you do some homework and select your contractor.

3. A permit is not a license. Insurance is not a license. A license is a license.
Illegitimate contractors looking for work learn very quickly that they’ll be asked to provide a license to potential customers. They also learn very quickly that most customers aren’t exactly certain as to what a “license” is or looks like.

As a result, many victims of scams find themselves thinking their contractor is licensed because they were showed a work permit or an insurance policy.

Research your contractor’s license. It is possible for someone to get insurance or a permit without a construction license, and its even possible for someone to forge a Washington construction license.

Fortunately, there are resources on and offline for you to research your contractor’s license.

Check a contractor’s registration with Washington’s Labor and Industries at http://contractors.lni.wa.gov. You can also call 1-800-647-0982.

Talk to someone if you don’t understand the licensing systems and requirements, look into when the contractor was licensed and what type of license they hold. It is possible that they are licensed to fix your toilet, but not rebuild your living room. It’s also possible that the person was a science teacher last week and a contractor after the disaster.

If you know someone is unregistered and passing themselves as a contractor, report them to the Labor and Industries by calling the industry’s fraud hotline at 1-888-811-5974 or online at http://contractors.lni.wa.gov.

4. Payment Demands and Problems
Even without the backdrop of a disaster, payment procedures in construction is complex. During a disaster, however, things are even worse as contractors across the region will be busier than ever before and cash flow problems will be omnipresent.

It’s difficult to advise you to never pay an upfront deposit (because many legitimate contractors will require a draw before work begins), but it is something to handle very delicately.

You should never pay more than 10-15% of the project costs before work begins, and once work begins you should avoid making payments for portions of work that is not already completed.

Scamming contractors are very skilled in collecting nearly 70-90% of the job’s costs when only 0-30% of work is complete, and by the time you’re catching onto the problems, they’re already left town.

Payment terms and procedures in construction are complex, but use fiscal sense and trade money for work performed.

5. Nothing Good Can Come from Dealing in Cash.
Another tell-tale sign of an illegitimate contractor is one who seeks payment in cash. Nothing good can come from dealing in cash.

Make sure that you triple-check those who request cash payments, and when you do pay your contractor, keep detailed records of the payments, and be sure you can get copies of cashed checks or other evidence of payment in case of a dispute.

6. Contractors Who Promise to Work With Your Insurance Company or Who Promise that you’ll receive Insurance Coverage
Even legitimate contractors are not insurance adjustors, lawyers or experts in reading or applying insurance policies. Accordingly, you should be weary when a contractor claims they will assist you in your insurance claim.

Contractors build things, and when they are promising to get you more insurance money, they’re likely going to fail at both.

7. Insurance Certificates Do Not Equal Insurance Coverage, and Insurance Will Not Cover Against Bad Work
In the post-Katrina construction environment, illegitimate contractors will produce fake, expired or otherwise invalid insurance certificates in an effort to fool their potential customers. Construction insurance is quite expensive, and in order for these illegitimate outfits to compete in price, cutting down on overhead in this area is quick and easy.

If you ask for proof of insurance, accept a copy of their insurance, but look a little deeper into whether the contractor has coverage. You can make a phone call to the insurance company to ensure that the policy exists and is in effect, and you can even request from your contractor that your name be placed on the policy as a “certificate holder” during the progress of the construction project.

One common misunderstanding about construction insurance is that it covers bad or faulty construction work. This is not true. Construction insurance simply protects against “accidents” at the job site (i.e. injuries).

Do not make the mistake of hiring a questionable contractor because he is insured. His poor performance as a contractor will likely not be covered by the insurance policy.

8. Contractor who cannot get a building permit, may not be a contractor.
Many unlicensed or illegitimate contractors request that the owner – you – secure the building permit for the construction project. They may represent that this will “save on costs,” or is “required,” or any number of excuses – the simple fact is, however, that in 95 out of 100 occasions when this request is made, it is because the contractor is not properly licensed and is unable to get the building permit.

9. You should get a written contract, and the contract should be more than an “estimate” or an “invoice.”
A written contract is important for a heap of reasons: it memorializes the parties’ agreement, it provides critical information about the progress of the project, it imposes clear obligations on both parties to perform under the contract, etc.

Construction projects can be complex, involve multiple parties and disputes are very common. We cannot stress enough how important it is to sign a written contract with your contractor.

One indication that your contractor is illegitimate or not properly licensed is if he doesn’t want to sign a contract, provide or contract or otherwise “doesn’t use a contract.”

10. Hiring an Attorney is a prudent investment
Rebuilding after a disaster is challenging, and there are many traps for the unwary. You may potentially be dealing with large amounts of money provided by insurance companies and/or construction loans, and rebuilding your home or business can be a monumental task.

While hiring an attorney is an additional expense during the difficult time, in many circumstances it can be a money and headache saving decision.

Before committing to a contractor, have an attorney with construction law knowledge review the contractor’s credentials and the contract provided.

In regards the contractor, an experienced construction law attorney should quickly recognize any “red flags” that would indicate that this contractor is a potential liability.

In regards to the project as a whole and the contract, an experienced construction law attorney can review the terms a
nd provisions of the supplied contract and help you enter into a contract that is fair to all parties, and a contract that will help the project run smoothly.

About Us
Wolfe Law Group, L.L.C. is an experienced construction law practice with offices in both Seattle, WA and New Orleans, LA. In the aftermath of Hurricane Katrina, we represented homeowners, contractors, architects and engineers in projects of all shapes and sizes to help residents rebuild their lives. We bring a wealth of post-disaster construction and insurance legal knowledge to Western Washington in its post-disaster environment.

The Bidding Process 2 – The General Contractor’s Perspective

General contractors succeed or fail, for the most part, because of their ability to master the bidding process. Not only do they bid for projects themselves, they also accept bids from subcontractors and suppliers. In sum, no one understands the bidding process better than a general contractor of several years standing.

For a general contractor, the first question must always be whether or not it’s worth the trouble to bid a project. Contractors recognize that in today’s marketplace, owners are swayed by the lowest bid because keeping construction costs down is their primary concern. There is tremendous pressure upon the contractor to crunch numbers and squeeze the profit margin in order to bring that low bid to the table. Can they make a decent profit on the project, if they decide to bid?

General contractors also know that it’s all too easy for unscrupulous individuals to label themselves a “contractor,” and that owners tend to be so fixated on the bottom line that they fail to consider the nuances of construction expertise. To many owners, one general contractor is just like another — a mistaken belief that may well come back to harm them. Do the owners understand the importance of investigating the reputation and character of the contractor, should he decide to bid?

Finally, owners are constantly trying to find ways to cut costs during the construction process. Innovative construction methods are evolving, which are much more equitable to all involved in finalizing a construction project. For example, the General Contractor/Construction Manager method allows the general contractor to give input during the design phase and to set a flat fee for the project after he’s won the bid.

Owners are slow to implement these alternative methods, however, and the traditional design-bid-build process remains the industry standard. Will this owner be a problem through out the project, with change orders and cost questions, should the contractor submit a winning bid?

The General Contractor’s Practical Concerns in the Bidding Process

When faced with any new opportunity, a general contractor has to evaluate a wide variety of factors before and during the bidding process. These include:

1. Evaluation of Current Responsibilities

A successful general contractor runs an ongoing business. Staff members have jobs to do, and there are commitments to be met. Construction projects are already in process that must be completed, and the time and expense of compiling a bid for a new project cannot take away from current business obligations. Successful contractors must pass on some opportunities because resources simply are not available to do the bid, much less undertake the project.

2. Evaluation of the Bidding Opportunity

Not every invitation to bid comes with realistic expectations, from a contractor’s point of view. Owners are sometimes unduly optimistic in their ability to get financing for the project. Sometimes, owners are not as willing to proceed with the project once bidding reveals the true expenses involved in its completion. Before bidding, savvy contractors investigate and politely decline invitations to bid that offer an opportunity to expend time and money on a bidding process with little likelihood of an actual, feasible project award.

3. Evaluation of the Project

First, the general contractor will consider the physical location of the project. Any construction site that is too far from the contractor’s main office is simply not worth the effort. A general contractor cannot control a construction site that is located too far away. Different contractors will define this range of opportunity differently, of course. Large, national firms simply place regional offices near new, big projects in order to solve the logistical management problems. Smaller firms may limit themselves to certain counties, or regions.

Second, the general contractor will consider the type of construction that is involved in the project. Certain types of construction projects are handled by specialists who are not only used to dealing with their particular physical needs, but also with the layers of legalities they entail. It is not cost-effective for a general contractor to bid for a project outside his area of expertise.

Accordingly, hospitals, schools, and colleges are all projects usually constructed by general contractors specializing in these types of construction. Similarly, shopping malls, residential housing, and storage warehouses are usually built by contractors with experience in this type of project.

Third, the general contractor will consider the architect involved with the project. The general contractor, of course, is dependent upon the plans and specifications provided by the architect. However, he is also dependent upon the fairness and efficiency of the architect during the administration of the contract. An architect, together with his engineers, may have a great reputation for design but an unacceptable ability to smoothly administer a project. Conversely, an architect’s reputation may be for faulty designs requiring lots of changes during the course of construction. It may not be worth the contractor’s time and effort to compile a bid on a project that is tied to an unacceptable architectural firm.

4. Evaluation of the Bidding Competition

General contractors will also consider the number of bidders on a project, as well as their identity. Owners love to get as many bids as possible; however, contractors opine that a high number of bids means many of the bids are not necessarily accurate. Contractors also want access to the bid list, so they can identify the competition. General contractors will know which bidders are notorious for bid shopping and may choose not to bid against them – it will be a waste of time. They will also know if a bidder has such efficiencies of scale that they can offer a bid which cannot be beat. General contractors do not want to expend staff time and expense money in compiling bids that are doomed from the start to be unsuccessful.

5. Evaluation of the Bidding Procedure

Finally, general contractors need to know that the actual procedure for accepting, analyzing, and awarding bids is fair. General contractors expect all bids to be treated the same, and for all bidders to get the same information. Every bidder should be identified on a bidders’ list. All documents and other information necessary for bidding should be made available at the same time, and all bids should be due at the same time, on the same day.

General contractors should be given enough time to prepare proper bids. Their questions should be answered promptly, and those answers — with any addenda — should be shared with all bidders on the bidders’ list.

After the bids are opened, each bidder should get a summary of all the bids. The unsuccessful bidders should receive prompt refunds of their deposits.

Standardization of the Bidding Process

In order to standardize the bidding process across the industry, the American Institute of Architects (“AIA”) has created forms and instruction documents to help in the process. These include “Instructions to Bidders” (AIA Form A701-1997) and “Recommended Guide for Competitive Bidding Procedures and Contract Awards for Building Construction” (AIA Form A501- 1995).

An Alternative Bidding Method: The GC-CM Approach

In the General Contractor-Construction Manager approach, the general contractor’s entry into the process comes much earlier than the traditional design-bid-build method. During the design phase, the general contractor provides input into the design itself, using his knowledge of construction realities t
o improve the quality of p
lans and specifications before breaking ground.

Under GC-CM, request for proposals identify the preference for a GC-CM approach. General contractors submit bids accordingly: pre-construction services are bid, along with a construction fee and general conditions. A contractor is chosen at this juncture: the winning contractor bid is accepted before there are final construction documents. He becomes both general contractor (GM) and construction manager (CM) of the project.

After design and development are complete, and actual design documents are at least 50% finalized, the GC-CM gives a maximum construction price for the project. While the GC-CM undertakes the risk of cost overruns by this price commitment, the risk has theoretically minimized by the GC-CM’s involvement and contribution during the design process.

Current Developments

In addition to the continuing development of alternative construction methods, an option to the AIA documentation has been provided in 2007 by ConsensusDocs.Org. How well these implementations are incorporated into industry practice, however, will depend upon a great variety of regional factors. The circumstances in which general contractors do business across this country are far from uniform.

Louisiana Contractors – The Bidding Process, Post-Katrina

While many in the industry point only to Katrina, Louisiana was really hit by three near-simultaneous, separate disasters in what came to be a perfect storm for its construction industry. The devastation of Hurricane Katrina, and its aftermath, combined with the failure of the levee system in several Louisiana parishes as well as the city of New Orleans, and was joined shortly thereafter by the onslaught of Hurricane Rita in southwestern Louisiana. As a result, for contractors in particular, the construction industry in Louisiana would never be the same.

Federal legislation was in place that purported to protect Louisiana contractors. Particularly important was the Stafford Act, which provides that firms from the disaster area are to be used whenever possible for such things as debris removal and rebuilding, so the local businesses can survive and the local economy can be protected. Another important federal law impacting the post-Katrina construction industry was the Miller Act, which prohibits subcontractors, suppliers, and laborers who have not been paid from placing a lien upon certain, defined work.

In reality, the bidding process was held on a national scale and overseen by federal agencies dispersing federal monies. National companies won most of the bidding wars, with Louisiana construction industry piecing together deals here and there, trying to keep creditors happy and payroll current with the Miller Act preventing them for placing liens in the all-too-often situation of federal Katrina projects’ slow-pay. Many of Louisiana’s smaller contractors, subcontractors, and craftsman were businesses that have not survived, or are still in the process of repositioning themselves in a very different marketplace.

Washington State Contractors – Innovators in the Public Bidding Process

Washington State has been a national leader in adopting alternatives to the design-bid-build construction methods. In 1991, the State Legislature authorized the use of general contractor/construction manager method in the construction of state prisons. The alternative method was successful, and the GC-CM method was thereafter extended by the Legislature to the University of Washington and Washington State University, as well as communities of a certain population size (cities, 150,000+ pop.; counties, 450,000+ pop.; ports, 500,000+ pop.).

In 2002, legislation was passed to allow the GC-CM method for state school districts in projects exceeding $5,000,000, initially testing the method with 10 projects. Seattle Public Schools joined early, with three of its high schools (Roosevelt, Cleveland, Nathan Hale) using the GC-CM method.

Today, Washington State remains a leader in industry innovation. The success seen in the state, in both its public and private sectors, has encouraged continued creativity in finding solutions to construction issues nationwide.

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