Common Collection Mistakes and Pitfalls

This article is reproduced with permission from Wolfe Law Group, who originally published the article on its Construction Law Blog. The article discusses some of the common mistakes encountered when attempting to collect on a non-paying construction project. Liening, when stripped to its core, is simply a collection practice. A lot of Wolfe Law Group’s analysis that relates to collections in general, also relates to the specific device of construction liens. Therefore, we have chosen to share this information here.

Taking a reactive approach to collections instead of a proactive approach
Sometimes, unfortunately, the best collection procedures and attorneys on earth cannot fix a collections problem. An insolvent company who owes you $100,000.00 may owe you that amount forever.

Good collection procedures, therefore, begin before you are owed any amount of money; they begin at the time of contracting.

“An ounce of prevention is worth a pound of cure” rings true for those seeking to avoid a high receivables account. Starting with a good contract and following through with smart project management can help keep your uncollected accounts low.

Common contract provisions that may help avoid a collection scenario is discussed in a related blog post at:

Getting “Too Deep”
The worst collection problems are usually the most avoidable. Frequently, a construction company will continue dumping materials and resources into a project without compensation.

It’s important to reject the urge to perform your services upon a “promise” to pay. These promises are all too common between contractors, and in most cases, are all too empty as well.

Learn to notice cues from your prime contractors or customers that money is tight, and react by demanding exactly what you’re entitled to: payment. You may fear that the paying party will seek someone else to perform the work, but not only are they likely contractually restricted from doing this, but the substituted company will certainly expect payment as well.

Being Unprepared for a Non-Paying Customer
The longer an account goes unpaid, the less likely you’ll ever collect. One of the biggest mistakes you can make when faced with an overdue account, therefore, is to delay your attempts to collect.

It’s easy to put off attempts to collect when you’re not prepared. However, with a collection procedure in place, you can start collecting easily and automatically as soon as an account becomes overdue.

Collection procedures will keep you proactive, consistent and more successful at collecting on unpaid accounts.

Disorganization
Finally, the most common and avoidable collections mistake is being disorganized, and specifically being incapable to prove what you are owed.

As soon as an account goes into collections, it will go into dispute. The paying party will disagree with the amount of work performed, the quality of the work, its scope, the project’s change orders, etc.

In construction as you likely know, there’s no such thing as a perfect project, and so it’s not difficult for an adversary in collections to dispute the quality of your work because of paint chips or n incorrect doorknob.

Organization and a detailed record of the work you performed will help you avoid these time-consuming and expensive arguments. If you have photographs, time-sheets, job logs, etc., you’ll have the evidence necessary to combat these arguments and keep your overdue account from turning into a settled account.

Construction Change Directives: Avoiding the Risks

Here is an example situation: The Owner wants to change the scope of work, but the parties cannot agree on how this will affect the contract price. The Owner urges the increased scope should cost $50,000.00, but the Contractor estimates the work at $65,000.00. The dispute leads to a stand-off, where the Contractor refuses to make the change, and the Owner claims a breach in contract.

The Owner issues a Construction Change Directive under the Contract Documents, requiring the Contractor to proceed forward with the change…Now what?

Depending on the terms of your contract, the Contractor may be required to perform the work for the lesser amount, or – in certain circumstances – without payment until the parties can resolve the dispute through ADR or litigation!

Clearly, a Construction Change Directive can greatly affect the success or non-success of a construction project. It’s important, therefore, that you deal with the perils of these Owner-friendly devices during contracting, and not when an unpleasant situation arises.

Construction Change Directives Treatment in the AIA and ConsensusDOCS Documents


If you’re working with form contract documents, they will almost always allow an Owner to issue an interim change directive. And in almost every circumstance, in the case of non-agreement over a change, the Owner is allowed to require the Contractor to proceed forward while the dispute is pending.

Importantly, however, these contracts differ on the procedures for resolving the dispute between the parties.

Under the AIA A201 General Conditions, if the parties cannot agree on the impact of the change directive on the Contract Sum, the Architect makes the determination and her determination is binding upon the parties. If the contractor disagrees with the Architect, it can dispute the decision through the dispute resolution procedures of Article 15 (2007 ed.), but it may be left having to fund the entire cost of the directed change until the final resolution is reached!

The ConsensusDOCS – a new set of contract documents introduced in September 2007 – seems to offer a more balanced approach. Most importantly, ConsensusDOCS provides interim relief to the contractor in the case of disagreement, requiring the Owner to pay the Contractor 50% of its estimated cost to perform the work while the Parties dispute the remaining amount.

Contractors signing the AIA A201 agreement should be cautious about the Construction Change Directive provisions. Without altering the AIA language, a dispute over a construction change directive will likely weigh heavily in favor of the Owner.

Construction Changes When Using Custom Documents


It’s no secret that thousands of construction projects are embarked upon without the use of an set of contract documents from the AIA or some other association. In fact, its safe to assume that most construction projects in the United States are regulated by more custom and simple contracts.

It’s easy for a lawyer to analyze the impact certain situations may have on a construction project when looking through the prism of time-tested contract forms, but in everyday life, its more difficult to make these predictions.

In regards to Construction Change Directives, for example, when two parties not using the AIA or ConsensusDOCS forms find themselves arguing about the cost of a change order, they may find themselves with very clear or very ambiguous options.

On the one hand, they may have a contract that speaks very clearly to the point. The contract may give the Owner unfettered ability to direct a change, or it may state that the contractor is unequivocally not required to deviate from the original scope without a written and signed change order.

On the other hand, the contract may be completely silent on the point. In this circumstance, unfortunately, the Owner and Contract might be for a lengthy and trying dispute proceeding.

When contracting with custom documents, contractors should analyze that documents treatment of change order and construction change directive procedures. If the contract is silent on the issue, have an attorney draft some language to regulate what will happen in the event of a dispute. If the contract speaks to the issue, ensure that your company won’t be left to dry when the Owner decides he or she wants a kitchen ten times the cost of the original scoped kitchen.

Conclusion

Change Orders and Construction Change Directives are the root of most disputes in the construction industry. Understand what your contract will require from you and the other party in the event a change is necessary, and ensure that your contract is reasonable in the event of a dispute.

Related Articles:
Construction Contracts 101 – Use of Standardized Forms
A Cure for Construction Litigation: Proactive Thinking
Wolfe Law Group Practice Areas – Construction Contracts
Wolfe Law Group Practice Areas – Construction Disputes

The 2007 Edition of the AIA A201 and Important Revisions – Signer Beware


In October 2007, the American Institute of Architects (AIA) released the 2007 edition of its Family of Contract Documents for the construction industry; undoubtedly, the most popular set of documents in the market. The documents are clearly the leader in the industry and have been court-tested for nearly 100 years.

While a number of changes have been made to the document sets by the AIA over the past decade, the October 2007 release is the first major change to the A201 General Conditions document since 1997. The A201 General Conditions is referred to as the “backbone” of the AIA Family of Documents.

The changes made by this release are numerous, and are the by-product of changes in the construction industry, modern technology and even the marketplace for the sale of contract documents.

The Forces Behind the Changes
When reviewing the changes made to the AIA Family of Documents, or any set of contract documents, it’s valuable to understand the driving forces behind those changes. As far as the 2007 AIA docs are concerned, a lot has changed in the world of construction, and the world as a whole, in the last decade.

The construction industry itself looks much different in 2007 than it did ten years prior. A surge in design-build arrangements led the AIA to revise its design-build language in 2004, and introduce the A141. The real estate boom went full-throttle with residential buildings being constructed faster than ever before, encouraging many to get into the “flipping” business, and condominium complexes in large cities across the country became commonplace developments.

While Alternative Dispute Resolution devices were available in 1997, their popularity has only gained since that time, and novel devices (such as construction neutrals) have risen from obscurity.

In addition to changes in the industry, the entire world has changed as a result of extreme advances in technology. In 1997, very few contractors were using their AOL dial-in connection as a critical component to their business. In 2007, however, electronic communication is unavoidable.

Finally, the marketplace for contract documents themselves has also changed since 1997. While the AIA documents have enjoyed a fairly uncompetitive market, recently other organizations have begun producing documents for the construction industry.

One prime example of an AIA Competitor is the Associated General Contractors of America, who began publishing its own documents in 1997. In September 2007, just one month before the AIA release, AGC folded its documents program and joined more than 20 leading construction associations who united to publish a consensus set of contract documents called ConsensusDOCS.

The AIA and ConsensusDOCS documents are now in direct competition, and it will be interesting to see how this competition changes the documents themselves, and whether the AIA set of documents will lose some of its dominance in the market.

The ConsensusDOCS website has put together a matrix to compare its new documents with the ACG and AIA Documents, and you can download and view the matrix here:

http://www.consensusdocs.org/information_matrices.html

While the next ten years will prove interesting, it is fair to say that the 2007 AIA documents were drafted in an entirely different world than the 1997 edition. This led to a number of important revisions that will alter the way your construction project is administered, and many of these changes are below discussed.

Some Important Changes between AIA 201 Editions, 1997 v. 2007
Now with a background on the environment leading to these changes to the contract documents, those who use the AIA contract documents (regardless of its edition) should be aware of some critical revisions to the new edition.

Dispute Resolution
By far, the most significant change to the A201 General Conditions regard the provisions governing dispute resolution.

First, the “dispute resolution” provisions have been completely re-located. While previously within Article 4 of the General Conditions, a portion of the contract that regulated the “Architect” and the “Administration of the Contract,” the provisions are now found within a new Article 15, regulating the “claims” topic.

This relocation is more than a move around the corner, its a move to a completely different town.

When ADR and Article 4 were connected, so to was the Architect. In fact, the Architect played a critical role in dispute resolution under the 1997 documents. In the 2007 documents, however, the parties can elect to have the architect take a back-seat, and to create a dispute resolution program independent of the Architect.

The parties can elect to have all “claims” decided upon by an Initial Decision Maker, commonly referred to as a “neutral.” This seems to be a pleasant change to the old ADR provisions. Since Architects are generally hired by, and paid by the Owners, many contractors and other related parties were suspicious of the Architect’s impartiality. Further, the Architect oftentimes found herself between a rock and a hard place, required to be “neutral” while collecting payment from the Owner.

The ability to engage a neutral party to make these decisions is a very critical change to the A201, and the importance of this alteration is highlighted by the complete movement of the ADR provisions to a non-Architect related article, and an article of its own.

Second, the ADR provisions have gone from mandatory by default, to unselected.

In other words, in 2007 the parties will resolve their disputes through litigation unless they affirmatively choose to mediate and/or arbitrate. This gives parties the freedom to pick and choose their dispute resolution process, and selection of the ADR procedure is as simple as checking the box next to ADR process of choice.

Responding to the Digital Age
One thing that cannot be avoided in 2007 is digital information and electronic communications.

In the fast-paced world of construction, project information, change order requests, project correspondence and more is being exchanged instantly through email and other electronic means. How will these communications and digital information get handled by parties to a construction project?

A201 § 1.6 speaks to the issue, and AIA has introduced E201 as an exhibit to its document family. The E201, “Protocols,” sets forth its purpose within the document by stating “This Exhibit establishes the procedures the parties agree to follow with respect to the transmission or exchange of Digital Data for this Project.”

Setting Contractual Time Limits on Disputes and Claims
In §13.7 of the 1997 A201, the documents set forth certain time limits dictating when legal statutes of limitations would run against claims under the contra
ct. In essence, the provision sought to circumvent the legal statutes, and instead create a “contractual statutory period” for claims.

The 2007 edition eliminates this provision completely, and now the parties claims are simply subjected to state law.

The reason for the change is two-fold. First, it was not very popular among some parties to the contract, and second, many states do not allow the parties to contract around statutory time periods.

Additional Duties Upon Contractor to Review Field Conditions and Contract Documents
The 1997 edition of the A201 was sometimes criticized because the Contractor was only liable for errors and omissions it “recognized” and “knowingly” failed to report. Many argued that this let the Contractor “off the hook” on far too many occasions, and that the documents did not impose a great enough obligation on the Contractor to review the field conditions and the contract documents to determine – as he or she only could – whether the execution of the design at the job-site was feasible as contemplated.

The 2007 edition, however, does heighten the obligation of the Contractor under §3.2. Now the Contractor must “promptly report to the Architect any errors, inconsistencies or omissions discovered by or made known to the Contractor…”

Owner Ambiguity regarding Allowances Selections
The 1997 documents required that the Owner make material and equipment selections under an allowance “in sufficient time to avoid delay in Work.” The new A201 language is changed just a bit, now requiring the Owner to select these items “with reasonable promptness.”

This change seems to be more ambiguous than the 1997 language, and begs the question of whether the Owner has the duty to “avoid delay in the Work,” and whether the Contractor has a strong claim against an Owner who does delay the Work by its lack of selections when the Owner arguably acted “with reasonable promptness.”

The Contractor’s Superintendents
Both the 1997 and 2007 A201 requires that the Contractor disclose the names of its subcontractors, and to allow the Owner/Architect a specific amount of time to offer any reaonsable objections to the selected sub. The 1997 document, however, did not provide the Owner/Architect the same opportunity to be advised of and make objections to the Contractor’s superintendent.

The 2007 documents, through §3.9, does give the Owner / Architect this right and ability.

Contractor Construction Schedule
Similar to the heightened requirement in §3.9 for a Contractor to advise and seek approval from the Owner and Architect of its potential superintendents, the following section §3.10 escalates what is required by the Contractor in the way of schedules.

While the 1997 version of the A201 merely required the production of a schedule that was coordinated with the construction of the project, the new 2007 provision is more detailed and strict. The contract documents are now much more specific about what should be submitted, about when it is required, and about the penalties to the contractor in the event it defaults under this provision.

Conclusion
The 2007 Version of the AIA Contract Documents is now out in the marketplace, and if you work with the documents you want to be familiar with the new revisions. There are clear differences between these editions, and a mistaken belief that you are operating under the 1997 edition when the alternative is true could prove costly for your organization.

In general, the changes to the A201 are improvements to the industry-standard document. Most noticeably, the ADR provisions are a breath of fresh air to those who have met some frustration in dealing with the ADR provisions of the ’97 edition.

As discussed, the 2007 changes are a reflection of the alterations to the construction industry, the world in general and even the American Institute of Architects over the past decade. It will be interesting to see what comes next for the AIA documents, and how they will continue to change with the rapid technological advancements in society, as well as the competition in the contract documents market.

This article presents a summary of some of the changes made to the A201 in its 2007 edition. It does not cover all of the changes to the document, and its important to review the document in full with the assistance of counsel to best understand the ramifications of its terms. Furthermore, the authors’ commentary herein is the viewpoint of the author, and an opinion only.

Related Articles:
Construction Contracts 101: Use of Standardized Forms