Protecting Your Company’s Financial Interests During Tough Times

In today's construction market, contractors face increasing challenges thanks to a slowdown in construction projects, problems in obtaining credit, fewer investors for projects, high construction costs, and slow payment or nonpayment by clients. All of this can impact a contractor's ability to obtain payment. This article is intended to provide some guidance to contractors on how to protect their interests in dealing with owners, general contractors, and suppliers in the present market.

Do your homework: Require Personal Guarantees, Deposits or Bonds if Necessary.

Before entering into contracts, it is important to evaluate potential clients to assure they are capable of performing their contractual obligations.

Contractors should first determine whether the party they are considering working with is financially sound. If there are any questions in this regard, it is important to obtain financial information, check references, and ask questions of both project owner(s) and general contractors about recent projects. If applicable, you should also request information regarding project financing. These inquiries are particularly necessary if you have not worked with the client in the past.

If owners or contractors are reluctant to provide this information, that hesitance should raise a red flag and call into question whether you really want to be working with this customer. If the answers received in regard to your financial inquiries still leave concerns, it is appropriate to request larger deposits, bonds, or personal guarantees to assure that you get paid for the work. Remember the axiom that having no work is better than not getting paid for work performed.

Include Contractual Payment Terms which Protect Your Interests.

To the extent possible, subcontractors should attempt to negotiate payment provisions to protect themselves in their subcontracts.

An example of a key provision which subcontractors should always include in their contracts is a work-suspension provision. A properly drafted work-suspension provision will provide for an absolute right to stop work if a progress payment is more than a specified period of time late. The provision should provide that in the event of a work stoppage due to late payment, the subcontractor is entitled to additional costs, demobilization and remobilization expenses, and additional time to complete the contract. And in the event that the payment default is not cured, that the contractor can terminate the contract and seek past due payments and lost profits on unperformed work.

While it is always advisable to include such provisions in contracts, understanding, including, and enforcing such provisions in contracts is essential to protect contractors in the present economy.

Secure your Lien Rights.

Equally important to protecting your interest is knowing the rules of lien and other payment-security rights, which may exist.

The most common payment-security device utilized by subcontractors is the private construction lien, also known as a "mechanic's lien." Mechanic’s liens create statutory rights that attach to real property on private projects for the benefit of anybody providing labor, services, materials, or equipment to the project. If a party has lien rights, it can foreclose the lien subject to any other senior interests in the property (e.g., a deed of trust encumbering the property before the contractor commenced work) and be paid from the project proceeds. In order to preserve lien rights, contractors are required to follow strict statutory guidelines and provide pre-lien notices, which makes it important to know the applicable lien laws and/or consult legal counsel when liens may come into play. Successfully protecting lien rights and securing a proper lien are often a valuable payment tool, but unfortunately, the value of liens may be limited in the current economy where the equity in property is more and more often very limited.

Subcontractors should also familiarize themselves with the statutory procedures relating to "stop notice" rights. Stop notices are essentially "liens" on construction funds which exist on any private project in Arizona. When properly prepared and served, the stop notice “lien” attaches directly to the project funds and requires the lender to withhold payment of the funds or be subordinated to the entity providing the stop notice which has not been paid. The stop notice is an extremely effective, though often underutilized, collection tool.

Bond rights may also exist to assure payment to subcontractors and suppliers. Which entities may take advantage of a private-payment bond depends upon the language of the particular bond involved. At the onset of any project, subcontractors should ask what bonds have been provided to the project and review the terms of the bond.

Subcontractors should familiarize themselves with all requirements of lien, stop notice, and bond claims and consult an attorney early on should issues arise on a project. Most importantly, be diligent in pursuing collections when not timely paid and be careful with whom you do business to assure that other parties’ financial difficulties do not become your own resulting in nonpayment for your work.

Editor's Note: The original version of this article was published in the Associated General Contractors of Washington Newsletter, AGC Works.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

Lien Law: Using Templates to Anticipate and Control Litigation Costs

Michael Hyatt (CEO of Thomas Nelson Publishing) has posted several excellent recommendations about using templates for greater efficiency on tasks that are often repeated. Mr. Hyatt has written: “For years, I have used the concept of ‘templating’ to improve my productivity. The idea is that you create a template for any task that you find yourself doing repeatedly. So instead of ‘reinventing the wheel’ every time, you do it once, save it as a template, and then reuse it.”

In my construction litigation practice, I have used various templates to make my life easier during various stages of construction disputes.

One of the templates that I use is a mechanic’s lien information sheet that outlines the background information that is needed for me to file a Notice of Lien or Lien on behalf of a client. The type of information that I need to file a lien includes the following:

• Is the project residential or commercial?
• Is the project public or private?
• Is the Contract with the owner of the property or the prime contractor?
• Was a 20-Day Preliminary Lien Notice filed? If so, when?
• Name and address of property owner, prime contractor, and lender, if any.
• Name of project/subdivision; property location map; and property address and/or lot number.
• Type of service/material/labor supplied to the project.
• Commencement date (ground breaking) of the project.
• Beginning date of your work on the project.
• Total amount invoiced to date with a copies of the invoices.
• Amount owed or unpaid on the project.
• Last date of your work on the project.
• Date entire project was completed.
• Any “Notice of Completion” recorded?
• Any payment bonds issued?

While this information appears to be a no-brainer request for those contractors who file liens on a regular basis, I have found over the years that my clients appreciate the template that I send them. This way, there is no confusion about what information I need from them and I am able to more efficiently help my clients pursue their rights.

Using templates in the manner suggested by Mr. Hyatt has also allowed me to be able to provide my clients with a Flat-Fee Cost Sheet for lien litigation. The Flat-Fee Cost Sheet “fixes” costs for repetitive tasks that are part of lien litigation like filing liens, stop notices, foreclosure complaints, and basic motions for summary judgment related to lien litigation and foreclosure. And it allows clients to anticipate costs and feel more comfortable with costs associated with protecting their rights through the lien process. If you are interested in obtaining a copy of my Flat-Fee Cost sheet for lien litigation, please feel free to contact me by phone or email.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

ROC Highlights Licensing Requirements for Solar Contracting

By Jessica A. Jackson

With over 300 days of sunshine per year, Arizona is becoming a leader in the solar industry. More and more people are now going green and looking for ways to make their homes energy efficient. Contractors in Arizona are likely eager to become a part of this growing industry—but you must make sure you are properly licensed. The Arizona Registrar of Contractors recently posted on its website the latest on its solar licensing requirements. Depending on the type of solar installations you are performing, there are different license classifications. The website contains a table of each of the different classifications, details on the different testing requirements, and even links to the statutes governing solar contracting in Arizona. Residential and commercial general contracting and remodeling licenses may contract for solar installations—but beware—all work pertaining to solar products must be subcontracted to a properly licensed solar plumbing, air conditioning, boiler, electrical, or swimming pool contractor! There are several exceptions and details noted on the website, so be sure to check it out here.

Please contact Jessica Jackson at jjackson@holmwright.com or (480) 477-8593 for additional information

Arizona Supreme Court Imposes Major Restriction on Tort Claims in Construction Cases

By Kirk H. Hays

The Arizona Supreme Court recently handed down a landmark decision limiting both an owner and contractor’s rights to sue design professionals for malpractice. In Flagstaff Affordable Housing L.P. v. Design Alliance, Inc. (SCt. CV-09-0117-PR), Flagstaff contracted with Design Alliance to design eight apartment buildings. The plans were allegedly defective because they did not provide for ADA access and the cost of correcting the all-ready built defective work was significant. Flagstaff sued Design Alliance for professional malpractice in tort and for breach of contract but then dismissed the contract claim because it was outside the statute of repose.

The Supreme Court extended the “Economic Loss Doctrine” to construction cases. The Doctrine says that you cannot recover in tort for a negligence claim unless there is some accompanying personal injury or property damage. In other words there has to be some damage to something other than the building itself. For example, if a chimney falls down the cost of repairing it is not recoverable in tort. But if the chimney hits your car, then there is some other property damage and you can sue in tort for negligence. To recover economic damages you must sue in contract. The Court reasoned that negotiated contracts better allocate risks between the parties than the implied at law default rules of tort.

This decision has some important ramifications. First, it may limit recoverability in cases where the building is older than 8 years. The statute of repose prevents bringing a contract claim concerning most buildings older than that, but a tort claim can still be brought. After Flagstaff the type of damages recoverable in cases concerning older buildings is now limited to secondary property damage.

Second, it may have serious implications for insurance coverage. Generally, tort claims are covered by insurance but contract claims are not. By forcing some damages to be recovered only in contract, the decision may make it easier for insurers to deny coverage for construction defect claims.

Third, the Supreme Court invited parties to contract around the case by including a provision in their contracts making wholly economic damages recoverable in tort. Owners should consider modifying their contracts to do so.

For more information on these cases contact Kirk H. Hays khays@holmwright.com or (480) 961-0586.

Tax Warning to all Federal Contractors

The Federal Contracting Law Blog reports that in January President Obama signed a presidential memorandum instructing the IRS to audit all federal contractors. The audit will prevent companies that owe back taxes from obtaining more federal work.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

An Ounce of Prevention: Consistent Contract Drafting Can Prevent Litigation in Multiple Forums

Opinions regarding whether arbitration of project disputes is better than litigation really are like noses—everyone has one and they all seem to be different. There are certainly benefits and drawbacks to both forms of dispute resolution. But prudent contractors should decide which forum is appropriate based on the project and make sure all contracts within that project are consistent. Otherwise, you run the risk of having to fight the same battle in both litigation and arbitration at the same time.

For example, in a current case involving a local residential community, the general contractor entered into subcontracts that contained arbitration clauses that either gave the general contractor the election of dispute resolution forums or were ambiguous regarding dispute resolution. At the same time, the general contractor issued purchase contracts to the homeowners that require arbitration for dispute resolution, but some of the contracts allowed consolidated arbitration—more than one homeowner can participate in the arbitration proceedings—and some contained non-consolidation clauses—every arbitration must be separate and distinct.

When some of the homeowners brought claims for alleged construction defects in their homes, the error of the general contractor’s failure to maintain consistent contracts was uncovered. Some of the cases are in a consolidated arbitration, but more than 60 are lined up for separate non-consolidated arbitrations. And even more subsequent purchasers—who have no contract with the general contractor—have brought claims in Superior Court.

Additionally, the homeowners are arguing that, based on their contracts with the general contractor, the subcontractors are not allowed to participate in their arbitrations. The general contractor, on the other hand, claims that the subcontractors will be bound by the arbitrator(s)’ rulings, which could spawn yet more separate litigation in another county.

All of this could have been avoided by good planning at the contracting stage. Contractors—and their lawyers—should keep a close eye on the dispute resolution forums in their contracts. If the contract is silent on this issue, then that means any dispute will be traditionally litigated through the courts. If there is a valid arbitration agreement, then any disputes will likely be arbitrated.

To prevent being dragged into both arbitration and litigation at the same time, make sure all of your contracts on every project are consistent regarding the dispute resolution forum. If one contract has an arbitration clause, make sure all your contracts contain a consistently-similar provision. Conversely, if the "upstream contract" makes no mention of arbitration (meaning litigation would be the dispute resolution forum), keep your "downstream contracts" silent as well.

As with any construction project, the key is good advance planning. An ounce of prevention will help avoid being sued in multiple forums later should disputes arise.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

Putting the ‘Pay’ Back into Paycheck

Are you using Textura? If not—and you execute or require lien waivers on your projects—then you might want to consider it. Textura is considered the bill-pay site of the construction industry, and uses the internet to remove the physical—and painfully repetitive—exchanges of paper that take place when contractors receive paychecks and issue lien waivers. Basically, it eliminates the inefficiencies of the construction payment and management process by replacing the mountains of paper payment documents with an internet-based computer program. Using the computer program, it electronically connects everyone involved in the payment process, including owners, general contractors, and subcontractors. According to http://www.texturallc.com/, it reduces the process of filling out forms, obtaining signatures, and transporting documents that used to take days, into a few simple clicks on the computer.

Textura claims to serve more than 25% of the top 400 contractors in the United States, thousands more subcontractors, and a growing list of owners. More than 20,000 firms are using it to get paid faster and save as much as 20,000 per project.

Some industry insiders also believe that Textura may eventually become a new kind of social network. Textura’s chairman and CEO, Patrick Allin, says that “Textura has the potential to explode like Facebook.” And already, a dozen general contractors and 6,000 subcontractors are using it as such.

Just something to keep in mind if you’re interested in getting paid faster, saving thousands of dollars in back-office costs, or networking with thousands of other contractors—all through your computer.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

VA HOSPITALS IN ARIZONA TO RECEIVE SOLAR PANELS

REC Solar—a San Luis Obispo, CA solar company—has announced that it will provide the means to renewable energy at Veterans Affairs hospitals in Arizona and two other states.

VA hospitals in Phoenix and Tucson will join facilities in California and Nevada as REC installs about 1.7 megawatts of solar panels on the roofs. That is enough electricity to power about 3,600 homes.

The REC/VA projects will result in about 60 jobs in the three states, but if successful, could be the beginning of a trend—similar to cell phone towers—where solar panels are placed on the expansive roofs of local facilities in order to serve people in those areas and create many more job opportunities in the local market. To some, this is a more attractive proposition then creating solar fields of solar panels in rural areas and wiring it into urban areas.

REC Solar expects the work to be done by the end of spring. The system will be the largest for the Department of Veterans Affairs.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

TEN POINTS TO KEEP IN MIND IN TODAY’S CONSTRUCTION MARKET

10. Know with whom you’re contracting, and make sure they are financially viable (or at least that they have bonding or insurance companies that are).

9. Prevent costly personnel ambiguities by having well-defined, fair, written, and well-communicated employment policies in place before problems arise.

8. The best defense to an OSHA investigation is to prevent an OSHA investigation.

7. Don’t agree to any indemnity provision unless you’re willing to financially be on the hook for another party’s negligence.

6. On the other hand, if you negotiate indemnity from another party, make sure the indemnity provision in the contract is actually enforceable.

5. Do not include heavy-handed and/or punitive liquidated damages provisions in your contracts–courts will not enforce them.

4. Remember that old emails never die–if you wouldn’t put something on paper, don’t send it in an email.

3. Limitations of liability are serious–if you use them in your contracts, use them correctly to ensure enforceability.

2. Have good billing practices. Know your lien deadlines and stick to them!

And #1...drumroll please....

1. Read your contracts. Understand your contracts. Enforce your contracts!

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.

What's New at the ROC

By Jessica A. Jackson

I recently attended a seminar highlighting what we can expect to see changing at the Arizona Registrar of Contractors (“ROC”) in the near future. The Chief of the ROC’s Legal Department, Jessica Fotinos, spoke about some changes within the agency that is likely going to have an impact on contractors and those in the construction industry.

Because the ROC is a state agency, budget issues are a big motivator behind some of the changes that we may see at the ROC. For example, the ROC’s recovery fund is severely depleted due to reduced funding by the state, and one of the legislative changes would give the Director of the ROC the authority to order an assessment against each licensed contractor to keep the recovery fund intact. This would mean even more fees for Arizona contractors in tough economic times.

Not all of the proposals regarding budget issues are reactive, however. The ROC has examined several areas within the agency that seem to be running inefficiently, and has come up with a few changes that will hopefully result in some cost-savings to the agency in the long run. Aside from cutting back on mailing everything via certified mail to save costs, a mediation and/or arbitration option is being explored at the recovery fund stage. Ms. Fotinos explained that approximately 20% of all claims paid out of the recovery fund are less than $2,000 per claim. To speed up the recovery fund review process, a mediation and/or arbitration program is being explored for claims under a certain dollar amount so that the agency becomes more efficient at processing these claims.

The ROC is also evaluating the types and scope of existing license classifications. Apparently the ROC spends a lot of time reviewing what the appropriate license classification should be on a project-by-project basis. To eliminate these inefficiencies, we can expect to see more policy statements issued by the ROC explaining how to select the appropriate classifications. We may even see amendments to the classifications themselves.

Lastly, Ms. Fotinos mentioned that a big concern at the ROC is the number of complaints they receive from contractors regarding how the agency reports complaints filed against a contractor on the website. The ROC said that they are currently examining a more accurate way of reporting complaints on the website so that they can be as clear as possible in conveying to the public the status and resolution of the complaint.

Please contact Jessica Jackson at jjackson@holmwright.com or (480) 477-8593 for additional information.

A Basic Checklist of Documents to Maintain from a Construction Project, Part 1 of 2

By Suzette S. Doody

Maintaining complete business records is critical to prove or disprove a construction claim. More often than not, parties do not begin to record and document a project until after problems arise, but it is critical to establish a written record of all fundamental agreements at the outset of any construction project. You may be asking yourself, “Aren’t we busy enough without having to worry about adequately documenting a project’s construction in anticipation of a lawsuit for construction related issues?” However, after a claim presents itself is not the time to try and gather the necessary construction project documentation to support a claim or defense. Written agreements and documentation will outweigh any oral evidence and alleged verbal agreements. A lack of complete business records can result in additional costs in proving or disproving a construction claim.

Before any construction project is commenced, however, a contractor should implement a project documentation policy. The following checklist includes the basic project documentation commonly necessary to assist with either proving or disproving a construction claim. The amount of documentation that will be maintained for each project is dependent on the size and type of a project. Bigger projects will obviously require more care in both the preparation and maintenance of project documents, while it is not economically feasible on smaller scale projects to retain such extensive documentation. Throughout the course of a project, it is crucial to maintain the following documents:

1. Construction Contract(s)
The construction contract(s) provide the framework by which the risks inherent in the construction process are allocated between the parties, i.e. each of the parties’ rights and obligations, proper notification of any claim, and what, if any, clauses limit a contractor’s ability to recover any costs created by the claim.

2. Bid Documents
Generally speaking, bid documents detail the scope of work performed and set forth the detailed specifications required under the contract. Bid documentation should include any takeoffs, pricing, subcontractor and supplier bids, overhead and profit mark-ups, and mark-ups for labor burdens.

3. Construction Schedule
In the event of a delay claim by an owner or developer, copies of all construction schedules are crucial. A claimant must prove three elements to prevail: that the delay was excusable, compensable and critical. Evaluation of a delay claim requires comparing the initial project schedule (which was the basis for the project bid) with the as-built schedules over the course of the project.

For more information contact sdoody@holmwright.com.

“Cash for Caulkers”—The Construction Industry’s Version of Cash for Clunkers?

By Jared M. Scarbrough


You’ve likely heard of “Cash for Clunkers”—a federal government program where a potential purchaser of certain new cars at participating dealerships could trade in an older car for an unusually-high trade-in rebate—but have you heard of “Cash for Caulkers”? Cash for Caulkers is President Obama’s proposal that calls for greater incentives—perhaps amounting to thousands of dollars—for homeowners to get new energy-efficient appliances, windows, and other such items.

The proposal will likely be patterned after New York State’s home energy efficiency program. Essentially, a homeowner seeking to take advantage of the program locates a participating contractor to schedule an energy audit—available on a designated website or by calling a toll-free number. Then, for about $500, the contractor will meet the homeowner at his or her residence and figure out how much energy the house wastes by placing a huge fan in the doorway that will suck outside air into the house, highlighting leaks in windows, doors, and walls. Among other things, the contractor will also test each appliance to see how much energy they use, and check the thickness of insulation and windows.

After the inspection, all of the information from the inspection is fed into a computer model that generates a checklist with everything that could be replaced, how much it will cost, and how much energy savings can be expected out of it. The homeowner decides how much work to do, and negotiates a price with the contractor. When the work is complete, the homeowner pays the contractor, and the contractor submits the paid invoice to the federal agency that runs the program. The homeowner then gets a reimbursement check from the agency of up to 50% of the project cost—with a maximum reimbursement of $12,000—usually within 30 days.

What does this mean for the construction industry? Well, for contractors hit hard by the recession and collapse in homebuilding, this program would be a godsend as it is expected to create over 250,000 construction jobs nationwide.

The proposal is currently in the early stages of development and there is no timetable for its implementation. But with the cost to the government a “mere” $10 billion, experts expect the proposal to be approved once the kinks are worked out and for the program to be initiated later this year.

For more information contact jscarbrough@holmwright.com/.

Legislative Updates: Arizona Registrar of Contractors

By Jessica A. Jackson

Effective October 1, 2009, a number of statutes have been revised that pertain to licensed contractors in Arizona. One major change involves an amendment to A.R.S. § 12-1365 regarding the notice that must appear in contracts for the sale of newly constructed homes. This statute mandates that the sale contract contain a notice to the homebuyer of their right to file a complaint with the Arizona Registrar of Contractors (“ROC”) against a homebuilder. This statute has now been amended to allow for a claim within two years after the close of escrow on the home or actual occupancy of the home, whichever occurs first—instead of two years after the commission of an act that would constitute grounds for suspension or revocation of a license, as the statute previously read. This change now gives homebuyers more time to file complaints with the ROC than before.

Additionally, a number of other amendments are now in place that should be highlighted:

• A.R.S. § 32-1124 was amended to require that the acronym “ROC” followed by the contractor’s license number be placed on all “broadcast, published, Internet or billboard advertising, letterhead and other documents” used by the contractor to correspond with customers or potential customers.
• A.R.S. § 32-1154 now lists as a ground for suspension or revocation of a license the “doing of a fraudulent act” resulting in another person being substantially injured, instead of the doing of a “wrongful or fraudulent act.” The act now must be fraudulent, and no longer includes “wrongful” acts.
• A.R.S. § 32-1158 deals with required elements for contracts over $1,000.00 between a contractor and an owner of property to be improved. It was amended to say that the required notice to the owner regarding their right to file a complaint with the ROC shall be in “at least 10-point font” instead of requiring that it be in exactly 10-point font as the statute used to require.
• A.R.S. § 41-1080 deals with providing proof of citizenship or alien status before obtaining a contractor’s license. It was amended to provide two clarifications concerning when documentation needs to be provided upon renewal or reinstatement of a license:

i) Where an individual has affirmatively established citizenship of the U.S. or a form of non-expiring work authorization issued by the federal government, the person is not required to provide subsequent documentation upon renewal or reinstatement of a license; and

ii) Where a person holds a limited form of work authorization issued by the federal government and it has expired, the person is required to provide documentation of that status.

For a copy of the ROC statute booklet that contains the relevant Arizona Statutes (including the amendments above) click here. Please contact Jessica Jackson at jjackson@holmwright.com or (480) 477-8593 for additional information.