Top Ten Risk Management Tips for Contractors

Here is our top ten list of tips available to contractors to help minimize risk on construction projects.

1. Second Set of Eyes on Bid Documents:   Often contractors rely on a single person to estimate jobs and prepare bids. This is where mistakes happen.  Having a second set of eyes on your bid helps minimize costly errors and bid busts.  If you are posting a bond for the project, ensure the party who signed the indemnity agreement to secure the bonds has a role in the bidding process. After all, they are personally liable for that bid in the end.
2. Peer Review/Constructability Reviews:   On particularly risky projects, or new areas of construction, consider third-party peer reviews and constructability reviews to minimize risk. Often a third-set of eyes on a set of drawings (peer review) or a third set of eyes on the overall construction of the project (constructability review) can catch things that you may have otherwise missed.  While there are costs associated with this exercise, these costs may be outweighed by catching costly problems before construction commences.
3. Protecting your Job Rights:   Ensure that you perfect your job rights at the beginning of every project. Timely serve a preliminary notice whether the project is public or private. On private works jobs, this ensures your mechanics lien rights. On public works jobs, this serves as notice in order to claim on any labor and material payment bond. Even if you have worked with this customer before, serve a preliminary notice.  Upon issues with payment, consider issuing a stop payment notice to get attention and payment.  If there are bonds on the project, get bonding information before you sign the contract.  It is often more difficult to obtain this information once the job has started.
4. Negotiating Contracts:   With the exception of hard-bid prime contracts (which are often part of the bid solicitation package) all contracts are negotiable. Make sure you are reviewing and negotiating all construction contracts, from subcontract agreements and purchase orders, to vendor agreements, careful review and mark-up of unfavorable contract terms can you save you a lot of money during construction.  It doesn’t hurt to ask.  The worst the other side can say is no.
5. Indemnity/Insurance:   Ensure that all of your contract documents downstream include indemnification obligations and insurance. Indemnity and insurance are typically flow-down responsibilities. You need to ensure that your subcontractors and vendors are indemnifying you and providing the requisite insurance to cover their work.
6. Bonds and Security:   Minimizing project risk includes gaining payment and performance security. Consider bonding-back your subcontractors and sub-subcontractors. These bonds can guarantee that these parties pay their obligations and perform their work. This helps to ensure the project finishes on time and on budget. If the subcontractor cannot bond-back, consider taking alternative security, such as a letter of credit from a bank, or a trust deed (mortgage) on piece of real property.  In the absence of that, will the subcontractor personally guarantee their contract?  If they cannot/will not provide any form of security, should you be using them on your project?
7. Daily Reports/Meeting Minutes:   Successful contractors excel at paperwork. Contemporaneous project documents are worth their weight in gold. Ensure your project managers and superintendents are preparing detailed daily reports reflecting what happened at the jobsite- work, man-counts, weather, delays. etc. Use weekly meeting minutes to raise issues of concerns, delays, change orders. outstanding RFI’s, etc. The documents tell the story.  If you are not getting fair and accurate weekly meeting minutes from the owner, consider preparing and circulating your own meeting minutes to accurately reflect the facts of the project.  There is nothing that precludes you from preparing your own meeting minutes.
8. Conditioning Payments:   Require your subcontractors and vendors to provide documentation before issuing payment. Ensure you are staying current on statutory releases and if applicable, certified payroll requirements.  No paperwork, no payment. Ensure your contract documents with your subcontractors and vendors allows you to withhold payment if proper payment documentation is not timely provided.  Do not pay subcontractors and vendors that do not provide required paperwork no matter how much they ask.
9. Timely Notice of Problems:   Nearly every contract obligates you to timely notify your client of any problems. Failure to issue timely notice can lead to a complete bar to the claim. Comply strictly with the notice requirements in the contract. Utilize RFI’s, change orders and other contract vehicles to identify problems on the project and create a record. When in doubt, issue a formal notice in writing, alerting your customer. Do not rely on casual emails or phone calls. Again, contemporaneous documents are worth their weight in gold.
10. Promptly Process Close-Out Documents:   Many project payment delays are the result of the failure of the parties to provide complete closeout documents. Releases, as-built drawings, operations and maintenance manuals, warranties, commissioning and other items can often delay progress payments, and most certainly project retention. Remember, the project is not done until all closeout documents are provided. Formally closing out the project is critical to not only receiving retention payment, but to the owner formally accepting the project and recording the all-important notice of completion.  Do not consider a job “complete” unless and until a notice of completion has been filed by the owner.

For more information about the surety’s obligation to arbitrate a dispute please contact Principal Attorney Colin K. McCarthy, [email protected].

The information contained in this Newsletter has been prepared by Lanak & Hanna, P.C. for educational and informational purposes only. It does not constitute legal advice, nor does it substitute for legal advice.

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