Saturday, April 7, 2012

The World of Construction in 2012: Protect Yourself or Say Goodbye

Well, its April and the first quarter of 2012 is already behind us.  The good news is that its not 2010 anymore.  The construction industry is healing itself but its by no means healthy.  The bad news is we're not that far from 2010.  While those in the construction industry are still hanging on, and some are still even making a decent profit, we're a long way from prosperity across the board.  In a few years maybe the recession will be looked at as a good thing for the construction industry.  Unhealthy contractors and suppliers have mostly, by this point in 2012, gone out of business.  Those who survived have tightened up their controls and hopefully have put measures in place to keep them healthy and growing.  Part of getting and staying healthy is making sure you have all the proper legal protocols in place to prevent problems and address problems promptly and efficiently when they do arise.  So as we venture into the second quarter of 2012, here are my tips for maintaining a healthy growing construction business in 2012 and beyond (in no particular order):

Know Your Contract

Former President Bill Clinton once ran on the famous campaign slogan "its the economy stupid."  In the construction world "its your contract stupid."  With few exceptions, my answer to every question I have ever been asked by anyone in the construction industry, whether they were a contractor, subcontractor, materialman, supplier, architect owner or developer, has been "it depends on your contract."  The construction industry relies on contracts for every transaction.  Not every transaction involves a full blown 200 page agreement, but that doesn't mean your one page proposal is any less of a contract.  Just ordered 2 tons of steel on a purchase order?  That's a contract.  Just ordered 10 gallons of paint?  That's a contract.  With so many in the construction industry relying on contracts on a day-to-day basis, it is nothing less than shocking that many do not read or understand the contracts they enter into.

There are a few particular issues you should always look at, and understand, before you sign your contract:

  • Payment terms (including payment schedule)
  • Timing requirements
  • Venue provisions (note that in New York a provision requiring the contract to be subject to the law of a state other than New York is void under the Prompt Payment Act)
  • Dispute resolution provisions
  • Scope of work (I know, its obvious, but you do have to read it)
  • Attorneys fees provisions
  • Waivers of consequential damages
  • Change order provisions and procedures
  • Site cleaning obligations
This is by no means an exhaustive list.  But the above items are some of the most common ones to cause problems.  Ideally, you should review each contract you enter into with your legal counsel before signing it.  As the saying goes, an ounce of prevention is worth a pound of cure.  

Its OK to Ask for Documents and Information

Not sure if there is a payment bond on the project?  Worse yet, know there is a payment bond but you don't have a copy or any idea who the surety is?  Do yourself a favor - at the beginning of the project when all is well and everyone is still getting along, ask.  Ask your client if there is a payment bond.  If there is a bond, ask if you can have a copy.  Odds are you are not offending anybody.  Tell them it is just part of your standard procedure to ask at the beginning of every project.  If you get a copy, keep it in a safe place.  

Not sure who the owner is?  Ask.  It is really just that simple.  More likely than not, the general contractor is going to know who the owner is.  Maybe first tier subcontractors will even know who the owner is.  But second and third tier subcontractors may have absolutely no clue who the owner (or even general contractor) is and material suppliers probably don't have a clue.  Find out who the owner of the project is and keep the information in your project file.  The same goes for identifying the general/prime contractor, the project architect and the project engineer.  You need to know who is in the contract chain and who is in charge on the site.  

Know The Construction Team

You should know everybody above you and everybody below you.  You don't need to be their best friend but you should have the information in your project file (names, address and phone numbers).  You should also know the full design team,  Know the engineers and architects.  At some point in the project there is going to be headbutting.  Knowing your team will make it easier for you to work the process, work the problem out and keep the job moving.  Knowing the team before the contract is signed is even better.  You may recognize someone from past run-ins and be able to predict problems that you may encounter on the job.  

READ Lien Waivers

The capital letters above are not a typo.  All lien waivers are not created equally.  How often have you seen a lien waiver that is longer than one page?  Have you ever seen a lien waiver that is longer than two pages?  My point is you can probably read the entire waiver in 5 minutes.  Its really not that much to ask.  Read it with your morning coffee.  Make sure that partial lien waivers are just that - partial.  If its a final lien waiver, make sure that you intend it to be a final waiver.  Look for things that were snuck in that don't belong there.  You never know what you will find in a lien waiver.  If it doesn't belong there, or you think it doesn't belong there, call your attorney and have her take a look.  I don't care if she charges you $500.000 an hour; if she looks at it for 5 minutes to make sure its OK then you are only paying her $50.00.  Is your piece of mind not worth $50?  

Know Your Lien Rights

This ties in with the above regarding knowing what your lien waivers say but there is much more.   First, know that New York law prohibits a contract from requiring you to waive your right to file a mechanic's lien before you have even done the work.  Second, know what kind of project you are working on.  A different type of mechanic's lien is filed against a public project than against a private project.  If its  a hybrid project where the owner is public and the developer that hired you is privately building on public land it is probably that rare project where you have no lien rights.  Third, know your lien deadlines.  You have 4 months to file a mechanic's lien on a single family dwelling.  You have 8 months to file a mechanic's lien on a commercial project.  You have 30 days from completion and acceptance of the project to file a public lien.  If your lien is for retainage only, you have 90 days from the day that the retainage became due to file the lien.  

Keep Your Books and Records Straight

Lien Law Article 3-A is becoming much more widely known in New York but it is still not part of everyone's common knowledge.  Don't get caught up in trust violations.  Remember, lack of intent to divert trust funds is not a defense.  The trust laws do not require you to maintain separate bank accounts for each project but you do have to maintain separate books and records.  Let's say you have projects A, B, C and D going on at the same time.  You should have a ledger for A, a ledger for B, a ledger for C and a ledger for D.  Each project's books should show every penny that came in and show where every penny that went out went.  Before any money goes to a different project or back to you as profit, make sure all proper trust expenditures have been satisfied first or you are risking a trust fund diversion.  

Have a Good Support Team

Everyone in the construction industry needs to surround themselves with three crucial people.  It doesn't matter if you are a contractor, subcontractor, materialman, engineer or owner, you need a good team.  Everyone in construction should have a good attorney on call that knows construction (don't hire a personal injury attorney to review your contracts).  Everyone in the construction industry should have a good accountant on call that knows construction (especially the trust laws).  Finally, everyone should have a good insurance broker.  A catastrophic injury can put you out of business.  Make sure you have the proper insurance in place and the proper certificates have been issued, notices provided and protocols followed.  

There are, of course, many, many,other important issues that must be addressed to run a successful construction business in 2012.  The items mentioned here are just a few of my personal suggestions based on my own experiences and the common pitfalls that I have seen.  2012 may have come in like a lamb but let's hope it goes out like a lion.  

Vincent T. Pallaci is a partner in the New York law firm of Kushnick Pallaci, PLLC.  His practice focuses mainly on the construction industry.  Mr. Pallaci can be reached at (631) 752-7100 or  You can also visit our firm site at  

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