by Mark A. Cobb
I just read a very insightful and accurate description of what it means to be a contractor:
We design and construct buildings but the reality is we are risk managers. Virtually anyone could design or construct a project if it had no risk. The reality is that owners hire and pay “experienced” designers and contractors to manage project risk. We are risk managers and the better we manage, the better our profit and final product. [emphasis in original].
This description of a contractor’s responsibilities comes from BIM and Virtual Construction: Where is the Money by Damon Socka and Jennifer Lanzetti recently published in Constructor: The Magazine of the Associated General Contractors of America (July / August 2014). This definition reminds us of the realities of working in the construction industry in the 21st century.
As a law firm committed solely to issues related to construction law, we have a very diverse client base. Newer clients are frequently caught off-guard when risk stares them squarely in the face–and that’s why they call us for the first time. When we meet these new owners and project managers, they often comment about the volume of paperwork–they thought that entering the field of construction work would let them spend a lot of time outside working with their hands; instead, they find themselves poring over contracts, drafting emails and letters to address problems, delays or weather-related re-scheduling issues.
Although a contractor’s sole role may not be risk manger, it is a significant part of every project manger’s and every contractor’s (or subcontractor’s) business. The finest of these are able to avoid most of the risks or greatly minimize the risks; when this isn’t possible, then owners, contractors and subcontractor’s engage in a dance to transfer risk from themselves to another party. Here is a short list of ideas that help eliminate, reduce or transfer risk:
- work only with responsible owners
- verify owner’s credit worthiness
- require payment bonds and/or performance bonds (it shows the credit worthiness of your subcontractors)
- build relationships (with GC’s, subcontractors, sureties, banks, project developers, construction lawyers)
- make honesty a hallmark of your work
- written construction contracts should spell out the goals, the responsibilities, the payment, and have a dispute resolution plan waiting in the wings in case it is needed
- use the best subcontractors and suppliers (which may not be the lowest bid)
- keep detailed, daily logs
- run efficient but meaningful weekly meetings
- document subcontractor issues in writing, with photos, etc.
- know your construction contract’s deadlines and communication methods for problems
- take responsibility
- stay on top of payment issues and, if necessary, file materialmen’s liens or make payment bond claims
- if materials are difficult to source, make certain that a back-up source is available
- budget properly for time and money
- pay your bills on time (and pay your subcontractors & suppliers promptly)
- don’t sweat the little stuff
There are many different ways to avoid construction risks or eliminate them completely, please share your favorite tips for reducing risks on construction projects with us by leaving a comment below.
by: Mark A. Cobb
Although it is not a scientific representation, we get the sense from our contractor clients that the construction industry is picking up throughout Georgia. One measure that we use is the number of Notices of Commencement that we have been asked to prepare, and this number has steadily increased which, hopefully, means that more construction projects are starting this year!
In previous blog posts, we have discussed the technical requirements in order to have a valid Georgia Notice of Commencement before, but many contractors, project owners, project developers, and apartment complex managers think they need only meet the legal requirements. They forget that filing a Notice of Commencement at the start of each project is a very good idea as, properly used, it can limit (or even prevent) Claims of Lien being filed or payment bond claims being made against your project for nonpayment. And there are some very easy, useful steps the filer of the Notice of Commencement can take in order to better take advantage of the law.
The Purpose of the Notice of Commencement Scheme in Georgia: Before plunging into some practical tips for contractors working in Georgia, let’s review the purpose of the Notice of Commencement statutes. Historically, Georgia’s lien laws (and similarly Georgia’s law on payment bonds) allowed virtually anyone working on the project to be a potential lien or bond claimant. As projects were nearing the end, owners and General contractors were surprised to find that subcontractors which had been paid, had not, in turn, paid their sub-subcontractors, equipment suppliers, or materialmen. The projects were having materialmen’s liens filed and payment bond claims made frequently from companies that the owner or the GC did not know had been working on the project. Thus, Georgia adopted the statutory scheme for Notices of Commencement:
- How the Scheme Works if the GC / Owner files a Notice of Commencement: If the prime contractor, property owner, or project manager files a valid Notice of Commencement, then, in order to preserve lien rights in Georgia, all third tier parties (i.e., those NOT in privity of contract with either the general contractor or the property owner) must give a valid Notice to Owner and Notice to Contractor within 30 days of the first day in which they begin working on the project or begin supplying to the project. (Please note that Notices to Owners are frequently referred to as “NTOs” and Notices to Contractor are frequently called “NTCs”.)
- How the Scheme Works if the GC / Owner Does Not File a Notice of Commencement: If the general contractor, real estate owner or project manager chooses not to file a Notice of Commencement (or, if they file a Notice but it is deemed invalid), then no one on the job is required to give a Notice to Owner or a Notice to Contractor. It basically reverts to the old scheme where an unknown sub-subcontractor and virtually all suppliers have lien rights even if the owner or prime contractor does not know they are on the job.
How Can the Notice of Commencement Scheme Help GC’s and Owners? If properly used, Georgia’s notice requirements can be very helpful. Some of the advantages to property owners or contractors to file a proper Notice include the following:
- It lets you know who is working on your job site;
- If a third-tier party fails to provide an NTO/NTC, then they lose their lien and payment bond rights;
- You know from whom to require a Georgia lien waiver;
PRACTICAL TIPS FOR FILING A NOTICE OF COMMENCEMENT:
The mechanics lien lawyers at the Cobb Law Group have reviewed thousands of Notices of Commencements in Georgia, and we are constantly surprised that–while they may meet the technical requirements under Georgia law–they almost always fail to help the owner/general contractor with the practical application of these documents.
- TIP ONE: Include the Project Manager’s Name on the Notice: Third tier subcontractors and suppliers must send their NTOs to the address of the GC and the Owner as set forth in the Notice of Commencement. Virtually, everyone just lists their addresses without designating a proper employee to handle/review/log the notices. Thus, a proper NTO may end up (and stay on) the desk of a receptionist who doesn’t know where to send it. If you add the appropriate person’s name as an ATTENTION line (perhaps the project manager), then the proper NTO will be received and you’ll know from whom to require lien waivers;
- TIP TWO: Include a Specific Recipient at the Owner’s Office: Similarly, proper NTOs are sent to the owner of the real estate at the address set forth in the Notice of Commencement; even more frequently these remain on a receptionist’s desk and are not given to the person who will be responsible for checking to make sure that the general contractor has received all of its proper lien waivers from the lower-tier subs and suppliers;
- TIP THREE: List the Management Company or Construction Manager as a Third Party: Georgia’s Notice of Commencement form requires the name, if any, of a third party who is requesting the improvement to be made to the real estate if they are not the owner. Frequently, on apartment construction projects or apartment remodels, the apartment management company is the party requesting the work and in charge of making payments. If they are listed on the Notice of Commencement, then it will help them track payments and prevent construction lien and payment bond claims.
These three very easy, very practical tips turn the Georgia Notice of Commencement requirement into an advantage for contractors and owners; it allows you to effectively track the NTOs which are received so that you, in turn, can easily ensure that payments flows downstream to everyone working on the project. Instead of looking at the Notice of Commencement scheme as a burden or as a means for a subcontractor to preserve its lien rights, look at it as a means to limit materialmen’s liens and as a way to create a list of entities from whom to require executed lien waivers. Use Georgia’s statutory scheme to PREVENT problems not CAUSE problems.
If you need to file a Notice of Commencement anywhere in Georgia, the construction lawyers of the Cobb Law Group are able to help. We offer different types of Notice services depending upon your needs. To schedule our “traditional” legal services, please call us at 770-886-5890 or email us today. If you are familiar with Notices of Commencement, but you only need help preparing the document and filing it, please check out our virtual law firm where you can enter the information on-line and let us prepare the document for you! For more information on this service, please click here > >
Every construction project, whether large or small, comes with risks. Contractors, subcontractors and materialmen worry whether payment will be made; conversely, project owners, developers and general contractors worry that subs and suppliers will properly perform. Fortunately, there are several statutory and common law rights which help alleviate some of these stresses including mechanics and materialmen’s liens, payment bonds and performance bonds.
Payment bonds (sometimes also called surety bonds or construction bonds) and performance bonds are essentially insurance contracts between three parties:
- the Obligee (the project owner which is often a governmental agency)
- the Principal (the purchaser of the policy which is often the general contractor
- the Surety (the underwriter which is usually an insurance company)
Payment bonds offer assurances to those on lower tiers (such as subcontractors and suppliers) that they will be paid for the work or the materials which they supply; performance bonds offer assurance to those on higher tiers (such as owners or prime contractors) that the work will be completed. On private projects, payment bonds and performance bonds are optional; however, on State of Georgia public works projects and federal public works projects, payment bonds and performance bonds may be mandatory.
There are new, additional types of insurance products which are increasingly becoming available. There are several different names by which these new products are known, but two of the more common names are ConstructAssure and Subguard.
These insurance products are sold by the surety to general contracts (so there are only two parties involved), and it functions as subcontractor default insurance which offers protection to the general contractor against unbonded first tier subcontractors. In other words, it can be seen as an indemnification policy wherein the surety agrees to indemnify the general contractor in the event that a subcontractor fails to perform.
As with all insurance policies, there are advantages and disadvantages to their use. Often cited examples of the advantages include the following:
- general contractors appreciate that their indirect losses (office, overhead, mobilization, etc.) as well as their direct losses can be included in the claim;
- the policy may stipulate that indirect costs are a percentage of the direct costs (for example 10% or 20%); thus, the claimant does not have to prove their indirect losses;
- claims are paid quickly which helps the contractor as well as the project;
- the contractors pre-qualify the subcontractors;
- these policies tend to be much less expensive because they have a high deductible (frequently ranging from $250,000 to $1,000,000 whereas there are no deductibles with payment bonds or surety bonding; and
- a policy may be issued for a specific project or it may cover all of a general contractor’s project for a year (or renewal term).
Does These Subcontractor Indemnification Policies Replace Payment Bonds? Most Georgia state and municipal public works projects and most federal public works projects require payment bonds and have set minimum standards for the bonds. Subguard and similar policies do not meet these minimum requirements, thus, public works projects still require payment bonds. This does not, however, preclude a general contractor from having a Subguard policy in place on a public project.
If you have any questions about bonding on private construction projects in Georgia or state or federal projects in Georgia, please feel free to contact the construction bond attorneys at the Cobb Law Group via email or by calling toll free 1-866-960-9539
by Mark A. Cobb
Our construction law colleagues at Kaplin Stewart maintain a very good Pennsylvania construction law blog, and a recent posting by them gives a very important warning to architects, engineers and builders who consider cutting corners to save money. Apparently, an owner/designer of luxury house in Hollywood Hills, California has been charged with involuntary manslaughter after his house caught fire resulting in the death of a firefighter. The builder’s negligent construction technique has been alleged as the proximate cause of the fireman’s tragic death.
The home’s owner, who was also the designer and general contractor, was building the California house in order to shoot the television show “Germany’s Next Top Model”. During the building process, however, he apparently (i) lied about his intentions to install fireplaces in his new home and, subsequently, (ii) used fireplaces designed exclusively for exterior use for his interior. The misappropriated fireplaces, consequently, caused the fire, and, tragically, a fireman was killed trying to put out the inferno.
Los Angeles County prosecutors allege that “grossly negligent construction” led to the fire and the firefighter’s death. Thus, they decided to prosecute the builder/owner.
The warnings conjured by these events are obvious, but they bear repeating.
First, defective construction can harm and even kill innocent people. In this case, a brave firefighter’s life was lost unnecessarily, and this loss, no doubt, impacts the firefighter’s family and friends tremendously. There are too many similar scenarios where defective building techniques have lead to collapses, cave-ins, fires, floods, and other calamities.
Second, efforts to cut-corners and save money at the beginning of a project frequently result in significant damages down the road. In this case, the property has been destroyed, the shooting location of the tv series has been changed, and, the owner/builder faces serious criminal charges and the incumbent attorneys fees surrounding his defense. In addition, the owner may face civil damages in the event that the fireman’s family pursues their own claim against him.
Third, products have individual and specific uses. Do not misuse your construction materials. Do not skimp on quality or quantity if you want to have a building with integrity.
Fourth, do not lie or mislead building inspectors. Although many people quickly tire of government involvement and fees, the inspector’s job is ultimately to ensure safety and quality. This is particularly important in historic states like Georgia. We have many historic houses from the antebellum and Victorian eras, and, thankfully, there are many Georgia communities where these architectural treasures are cherished and restored. There are times, however, when an inspector’s goal and a preservationist’s goal differ, and an inspector might be shown an allegedly completed project which, subsequently, gets changed after the inspector’s departure. Be careful! And, know that you might be liable for these subsequent alterations.
Please, build safely and responsibly.
by: Mark A. Cobb
A recent development from the United States Supreme Court may have profound repercussions affecting almost everyone in the design, build and construction industries.
This case stems from the 2007 collapse of the I-35W bridge in Minnesota which killed 13 people. The bridge, which had been designed by the engineering firm of Sverdrup & Parcel and Associates, Inc., was completed in 1967. Forty years of use later, the bridge collapsed; although the causes of the bridge’s collapse are still contested, many professionals point to (i) design flaws caused by the original engineers and (ii) Minnesota’s Department of Transportation’s failure to adequately maintain the bridge.
Based upon fairness and foreseeability doctrines, every jurisdiction has a Statute of Repose, Statute of Limitations, Doctrine of Laches or similar concept which limits liability after a certain amount of time. Perhaps this is an extreme example, but if the Roman Colosseum were to collapse, no one would expect to make the original builders liable. It’s just been too long!
1964–Minnesota’s Statute of Repose: In 1964, the State of Minnesota enacted a Statute of Repose which limited actions arising from construction projects to ten years. In other words, the engineers and builders could not be held liable for claims arising from their work after ten years from the completion of the construction. In our example, the builders of the bridge could not be liable for any claims arising from their work after 1977 (tens years from the bridge’s completion). In 1980, Minnesota amended its Statute of Repose to extend liability for an additional 5 years; thus, if this amendment were applied retroactively, those designing and constructing the bridge would not have any liability after 1982 (fifteen years from the bridge’s completion).
2008–Minnesota’s Enacts Compensation Statute: After the collapse of the bridge in 2007, Minnesota enacted new legislation in 2008 known as the “compensation statute”. This legislation allows Minnesota to recoup any payments which the state made to the victims of the collapse from the builders and contractors who worked on the bridge. Thus, although the state’s Statute of Repose limited the contractors’ liabilities after 15 years, a statute enacted 41 years after the bridge’s completion sought to retroactively impose liability on the engineers and builders! In fact, the original designers of the bridge (Sverdrup & Parcel and Associates, Inc.) is no longer intact and has become a part of Jacobs Engineering Group, Inc.
2012–Impact on Contractors: So what has been happening since the enactment of the 2008 statute? It has been in litigation. At the state level, Jacobs Engineering (the successor entity to the bridge’s original design group) has been arguing the unconstitutionality of the 2008 legislation. As the case has worked its way through the state court system, the new compensation statute has been upheld by the Minnesota courts. Finally, after the statute was upheld by the Minnesota Supreme Court, Jacobs Engineering filed a writ of certiorari to the United State’s Supreme Court which asked the high court to review the 2008 legislation and its applicability to construction work completed in 1967 (Jacobs Engineering Group Inc., v. State of Minnesota). Last week, the Supreme Court denied Jacobs Engineering’s request and refused to hear the case.
The impact of this case has wide implications involving contractor liability, retroactive legislation, inability to assess risks; not only that, it opens the field for other states to re-establish liability on construction professionals long after fairness–or even state statute!–allows.
This is a general information article and should not be construed as legal advice or a legal opinion. The content above has been edited for conciseness and additional relevant points are omitted for space constraints. Readers are encouraged to seek counsel from a construction lawyer for advice on a particular circumstance.