Legal Solutions for Contractors in Troubled Times Proactive & Reactive Tips – a 2 Part Series

The current financial crisis in America is hitting national organizations, banking intuitions and Wall Street – but it is not a recent phenomenon for those who earn a living in the construction industry.
While the 90s and early 2000s saw unprecedented growth in the construction sector, 2007 and 2008 has presented difficulties to the oversized industry as residential building plummetedand commercial construction exposed its vulnerabilities.Most predictions on the economy and the construction industry are not as gloom and doom as the current press may indicate, but with the instant credit and cash crunch, its unanimous that these are challenging times for all businesses, large and small.

It’s prudent for those in the construction industry to make allowances for their company’s legal needs in these trouble times. This article series presents the contractor with some tips on how to be legally proactive and reactive in 2008 and 2009 without breaking the bank.

Over the next two weeks, Wolfe Law Group will publish the following two articles in this two part series:

Part One: An Apple A Day… Three Simple Proactive Steps Your Company Can Take To Weather the Economical Storm.

Part Two: Now What? Three Simple Principals To Mind When Your Involved with a costly dispute.

Economic Woes Highlight Importance of Quality Collection Practices

The past two weeks have presented turbulent times for the United States economy, but the “panic” is not without complications and mixed signals. While the economic crisis will certainly effect large corporations and banking institutions, it’s not quite clear yet how the small business owner or the construction industry will fare.

Some have warned that we are facing an “economic pearl harbor,” while others have cautioned Americans to avoid panic.

From a legal perspective, it seems clear that while the economic situations may not turn small business owners upside down, we are facing a time where cash flow is tight and accounts receivables should be kept as low as possible.

We have previously written about the importance of good collection practices in avoiding high accounts receivables and noncollectable – you can read these articles here. As clients and customers are becoming slower and slower in paying their bills, and credit is tight, it’s now more important than ever for your business to have good collection procedures.

Wolfe Law Group has published a “Collections Toolkit” for contractors that discusses collection laws relevant to the industry, information on filing construction liens and even form letters and templates to use in your accounting department.

See a preview of the book here: http://www.lulu.com/content/3854624

Purchase a copy of the book in ebook ($69) or print ($139) format here:
http://www.lulu.com/wolfelaw

What Builders Need to Know About Hurricanes


HGTV Pro has a Hurricane data center on their website.

Essentially, the website provides a wealth of information (including informational articles and videos) about what builders need to know about preparing their job sites for the hurricane season.

Contractors and property owners alike will find the information useful. The data center also provides information about how to prepare a job site for an impending storm, and how to recover after the storm passes.

View the Hurricane Videos now, including videos on the following:

  • Shear Wall Bracing
  • Garage Doors in Hurricanes
  • Hurricane Water Intrusion
  • Hurricane Resistant Design
  • Drying Out After a Hurricane

Gustav’s Aftermath: Post-Storm Scams (A Three Part Series)

This is part of a three part series about Gustav’s legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

Valuable lessons about post-disaster scams were learned by New Orleans residents post-Katrina. It’s with first-hand knowledge and recent memory, therefore, that we echo an alert of the Louisiana Attorney General’s office post-Katrina to victims of the Gustav hurricane: Beware of Scams.

If you were affected by the recent storm, 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 adjuster’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, 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 millions or 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 s
ome 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 Louisiana State Board of Contractors at http://www.lslbc.louisiana.gov/.

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 Louisiana State Board of Contractors at http://www.lslbc.louisiana.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 and 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 eng
ineers 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.

Gustav’s Aftermath: Increased Construction Demand (A Three Part Series)

This is part of a three part series about Gustav’s legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

The lessons of Hurricane Katrina were many for the construction industry. After Katrina, there was a significant demand for construction services, roofing work, property gutting and more. Contractors who were doing business in the city before the storm found many post-Katrina challenges, including the shortage of quality labor, high material costs and competition from unlicensed and uninsured contractors.

Furthermore, even though insurance proceeds were plenty across the region, they were sometimes delayed or tied up by mortgage companies and government programs – frequently creating cash crunches for contractors.


Things to Expect in the Construction Industry Post-Gustav

  • Storm Chasers: It happened post-Katrina, and after the 2007 floods in Washington, and recently again in Iowa…post-Gustav, Southeast Louisiana should be prepared for a re-population of so-called “storm-chasers” who make a career out of providing services to disaster victims.

While the term “storm-chaser” has a negative connotation – it’s not necessarily bad thing. After all, the services are in demand and its good to have people who are experienced in the area. However, there are some negative side effects.

Oftentimes, storm-chasers are not licensed or qualified by the disaster state, and all too often these “storm-chasers” are experienced in skimming disaster money…and not necessarily helping. In regards to the construction industry, storm-chasers shake up the market, challenging prices and taking advantage of increased demand.

  • Short-Term Material and Labor Shortages: In the event of mass destruction by Hurricane Gustav, the Southeast Louisiana region should expect a temporary shortage of material and labor shortages.
  • Fast Paced Contracting: Unfortunately, with the increased demand in the construction industry comes increased work, and contractors and those in the industry often find themselves moving at a thousand miles per hour. While the abundance of work is good, it’s also problematic, and contractors are challenged to (1) Keep providing a high quality work product; (2) Enter into written agreements to ensure that work is defined and appropriately priced; and (3) Collect money owed to it, rather than bouncing unintentionally from receivable to receivable.

Warnings to Heed – Where Contractors Got in Trouble Post-Katrina
Post-Katrina, facing some of the above described challenges, contractors often found themselves in difficult legal scenarios. Here are some “warnings” of touchy legal issues that contractors face in post-disaster environments:

  • Mixing Funds. Louisiana R.S. 9:4818 addresses the circumstance of contractors “misapplying” construction payments. Essentially, according to this statute, if a contractor receives payment on a project, it must apply those payments to its subcontractors and material suppliers. Failure to do this, may result in statutory penalties charged against the contractor.

While under normal circumstances not necessarily a difficult task, post-Katrina contractors suddenly found themselves handling 4, 5…10 projects at a time. Project management really became an enormous component of the construction business, and R.S. 9:4818 was certainly more of a challenge.

In the post-Gustav market, be careful not to get behind your receivables and labor force. The 9:4818 penalties can be fatal to your business.

  • Proper Licensing. Once again, the increase in construction demand created situations where those in the construction industry are doing more than usual…and sometimes different types of tasks. In the whirlwind of post-disaster construction, however, be careful that you are not overstepping your licensing boundaries. The Louisiana State Board of Contractorsprovides the licensing rules for contractors in the State of Louisiana. If you are doing work on a project that cost more than $7,500.00, you’ll likely be required to have some type of Louisiana construction license.Working without a license subjects you to penalties, attorneys fees and contractual complexities. Further, after Hurricane Katrina the Louisiana State Board of Contractors very aggressively pursued unlicensed contractors in the state, and even fined some of its licensed contractors for doing work with unlicensed entities. Even when you are licensed, therefore, you should be careful who you associate with post-Gustav.
  • Contract, Contract, Contract.Post-Gustav, expect construction work to come, go and move with speed. Do not let the hustle and bustle of post-disaster work lead your company into projects without a written contract.Written contracts are not only required under certain circumstances under Louisiana law, but its also a really, really good idea. In post-disaster environments, there are a number of unpredictable variables: (a) scope of work; (b) timeframe for completion of work; (c) cost of materials and labor…

    Good quality contracts are the only effective means for contractors and those in the construction industry to temper these unpredictables. Failing to enter into written contracts can be a significant risk for your organization. Learn more about construction contracts right here at the Wolfe Law Group website by going here: Construction Contracts.

  • Prepare for Non-Payment. A post-disaster environment can be a recipe for a business catastrophe. Cash flow can become tight, legal disputes can be rampant, and if your company doesn’t properly prepare for non-paying situations it can be devastating.Aside from the tips already provided in this post, here are a few other things that can help you prepare for non-paying projects:

    (1) Stay behind payments. Put well-worded progress payment provisions in your contract, and follow the schedule to ensure that you don’t perform work without payment.

    (2) Preserve Your Lien Rights! This is very important, as your company in a post-disaster environment can get sucked dry with accounts receivables. Construction liens are an extraordinary effect collections tool, but in Louisiana you’re required to preserve your lien rights (sometimes, even before work begins). Learn more about Construction Liens, and check out Zlien.Com, which is a service that helps you file liens and take advantage of the lien process. Visit Wolfe Law Group’s Construction Lien Center.

    (3) Establish Good Collection Practices. Collection practices are a discipline, and you should stay ahead of your accounts receivables to ensure the most success at collecting them. Learn about Collection Practices on our website. Wolfe Law Group has authored a “Collections Toolkit” for contractors, with information about collection laws and even a set of collection letter templates for various legal scenarios. Buy it here.