Take Steps to Minimize the Pain of Litigation

Even in the best economic circumstances it’s easy for contractors and developers/owners to find reasons to sue each other. In fact many think of litigation as one of the costs of doing business. No more than ever it’s important to be prepared.

Under these economic circumstances everyone gets nervous. The increased anxiety leads to more careful reviews of draw requests and more probing questions. Everyone is monitoring their cash flow and attempting to cut costs as much as possible. This has raised the importance of accurate and thorough documentation. Without proper record keeping any discrepancy can easily turn into litigation.

Whether you are the target of a suit or decide to initiate legal action litigation may be inevitable. Here are a few steps you should take to minimize your pain.

Know the condition of your lenders.
If you anticipate a need for a line of credit apply early = before you have to have it, as lenders are more likely to extend credit to those with strong cash positions. Check on the financial health and stability of the lender. Consider the amount of flexibility they’ll give you with deadlines and their recent track record for commercial loans.

If they’ve recently called healthy and current loans because of a low risk tolerance they may not be the best choice. Inquire about their level of capitalization. If you request cash because of an unforeseen circumstance you’ll want a lender who can meet your needs.

There are Web sites such as bankrate.com an unaffiliated and objective bank rating site that will provide key insight about your lender. It will also be helpful to search for recent headlines or news about their dealings. Get a clear idea of the state of a lender now to help you avoid litigation and cash flow problems later.

It has become increasingly important to understand how projects are being funded. Be sure that healthy lender is committed to funding the project and that they have the wherewithal to pay for it.

Get to know your client
Look into past dealings and projects that they worked on. Talk to people who have worked with them. What is their history with payment performance? Is it a priority to be on time or are they frequently late? Do they tend to hold back money until the last possible second? Take note of how strict they are with draw requests and how hard they will fight change orders. If you know what you’re getting into before a deal your expectations will be in line with reality.

Pre-qualify your subs
Pre-qualification can minimize risk for contractor developer and bank. It’s very costly to lose a sub in the middle of a job because they weren’t qualified to handle the size or type of project. Thorough pre-qualification processes ask for more than license numbers and the project size desired. Evidence of the size and type of projects completed recently plus references should be part of the process.

Search online to see samples of other contractors’ pre-qualification forms. When appropriate require your subs to be bonded to add another layer of protection.

Make sure to keep an updated and detailed list of your pre-qualified subcontractors.

Be smart about staff turnover
One of the most common cost-cutting techniques is layoffs. Yet to function properly key people will need to be retained. Even if the goal is to operate with a bare bones crew evaluate your ability to retain and engage your most valuable employees. Evaluate your team. Who can’t you afford to lose? Then consider how you can afford to keep them.

Adjusting hours changing benefits and offering extras that are valued but not costly can help. In this market some key players may be willing to accept salary reductions to maintain employment. Considering how closely builders and contractors work together maintaining effective relationships can be beneficial.

Install and maintain a good job costing system
It is important to have organized and detailed draw requests and expense tracking systems to increase effective communication. A good job costing system will break costs down by cost code change order and cost type. Without good record keeping any questions that arise will be costly and difficult to research.

Neat and accurate documents are essential and will be a tremendous aid in the event of litigation. Be very thorough and list all vendors sub-contractors and all other relevant data. This can help prevent unauthorized or unnecessary payments and ultimately increase your efficiency.

Managing change orders in a contract is extremely important as you must track all of the incurred costs. The changes should be approved by the proper authority before moving forward. Otherwise you may never be paid for your work.

Be careful about your agreements
Work with a good attorney to make sure you’re protected against discrepancies in all contracts and subsequent documentation. A develop may want fixed price or guaranteed maximum price agreements while you may need cost plus so be explicit.

Be mindful of penalty provisions for delays or late completion. Make sure that the terms are attainable and fair to avoid tarnishing your reputation with a late completion or a lawsuit. Also make sure the developer’s agreements with the bank are consistent with his agreement with you.

Consider using joint checks to make sure that subs pay suppliers; clarify in every contract so that all parties are aware. You may want to request a release of lien rights as payments are made to subs. As long as you have a provision in the contract then this will be enforceable. A Notice to Owner will need to be filed by anyone doing work on the project who wishes to reserve lien rights.

Don’t accept losers to stay in the game
Desperate times can lead to desperate negotiations. So before accepting anything make sure it’s a smart decision. If you know it’s a stretch to complete a project at the specified cost don’t agree just to get the job.

In an attempt to produce cash flow some companies have been bidding below cost just to keep their crews working leading to a negative gross profit job. This is bad business; it will only put your business further behind.

You may not be able to avoid litigation entirely but taking these precautionary steps will put you in a better position in the event that a dispute arises. It’s smart to begin each project with the realization that litigation is a strong possibility and act accordingly.

Make sure to keep a clean and organized house throughout the life of a project to minimize the required time and effort if a suit does arise. If you develop good habits now business will operate much more efficiently.

Steve Demar is an accounting principal at Kaufman Rossin, one of the top accounting firms in the Southeast. He can be reached through www.kaufmanrossin.com.