by Mark Cobb
This is the first in a series of articles to assist project owners in planning for and achieving a successful construction project. This series will address the three phases of project planning, project bidding, and project management to provide practical solutions to avoid problems and promote the likelihood of a timely, better completed project.
It doesn’t matter whether you are a new entrepreneur or an established business with decades of experience–building a new facility can be challenging. There are many factors which you have to balance including financing, location, scale, insurance, costs, and potential delays to name a few. It does not matter what the project is–whether it is a small retail establishment or a large manufacturing facility–the goal is the same for every owner–to have a smooth, cost-effective, construction project finished in a timely manner so that the building can begin generating revenue for the business.
I don’t believe in Murphy’s Law that “whatever can go wrong, will go wrong.” Instead, it is better to subscribe to a mantra that follows the theory that a project will end in the same manner as it was begun. In other words, a project that begins professionally will end professionally, and a project that begins sloppy will end sloppy. Thus, in order to reach for a successful conclusion to your new project, we believe that it is imperative that you begin each project thoughtfully and intentionally. Thus, in some regards, the planning phase is your most important step.
Begin Building A Good Team:
When I first began practicing law, a partner with whom I worked always lamented that seldom was he invited to participate in putting together a letter of intent; instead, he was asked to join the project after the letter of intent had been circulated and agreed upon. Thus, he had limited opportunity to negotiate such issues as costs, payments, terminations, and default and cure periods. In other words, he was being paid to be a scribe for the transaction when it could have been better for the client if he had acted as a negotiator as well. Thus, before you put pen to paper, bring together a team of trusted individuals to help you throughout the project.
Building a strong team includes lawyers, but it can also include tax advisors, engineers, design professionals, a key operations employee, or a representative from the franchiser. Every owner’s team will be different and every project may be different, but relying upon the advice of seasoned professionals from the beginning can add immeasurably to the smoothness of the project.
Create a Single-Purpose Entity for Each Construction Project:
The Great Recession reminded everyone of the uncertainty of the economy. Everyone saw large and small businesses suffer which, in turn, had a domino effect on those who relied upon them. One problem on a construction project could jeopardize all of a general contractor’s projects negatively (and devastatingly) thus having an immediate impact on their employees, subcontractors, suppliers and their ability to perform as a company. Unless checked, these problems cascade to difficulties for the investors, banks, and even local municipalities who relied upon the tax base for the improved real estate values.
Most business professionals are familiar with the insulation of personal liability which a registered entity such as an S-Corporation or an LLC can provide. When the individual(s) takes advantage of such an entity, it can shield them from becoming personally obligated for the entity’s debts. (There are exceptions to this and requirements which must be met in order to avoid personal exposure for corporate debt, but that will be for another blog article.)
Fortunately for the project owner, there are no limitations on the number of entities in which they may involve; thus, one option available to owners that can mitigate the possibility of a wholesale disaster spreading from one project to another is to consider using a single-purpose entity for each commercial construction project. By establishing a single-purpose entity (and maintaining its requirements), then the individual owner(s) will be more likely to shield themselves in the event of a financial disaster on one project.
For owners involved in multiple project this can insulate and protect their other investments; general contractors, however are not so fortunate. Although there may be opportunities for a general contractor to use separate entities for protection, their licensing and bonding requirements often prevent this.
Learn from Every Project:
Commercial developers, hotel owners, franchiser/franchisee developers and many other industries are “repeat” owners of construction projects; in the commercial world, there can be economies of scale associated with building similar projects over and over again. Thus, it is likely that an owner with a proven track-record will continue to build using its model. Thus, the information that is gained by each project is useful and practical for every future project.
Some of this is intuitive; however, we are talking about taking a more formal, intentional, and professional approach to this process. After a project’s completion, an Owner (or its designee) should review the project from start to finish. There should be a review of planning phase, the bidding phase, and the construction phase. Interviews should be conducted with the principal employees, contractors and subcontractors. Items to be considered should include ones which positively impact the project, issues which can be avoided or resolved more quickly, and the lessons which can be taken away and implemented on future projects. The lessons can then be incorporated into goals, employee training, jobsite meetings, bid documents, contracts, etc.
It is important to note that a project which is or may become subject to any litigation should be discussed with your attorney prior to putting anything in writing. If, for example, an Owner discusses construction delays with its project manager and then commits something to writing, that writing may be discoverable in the litigation. So, be careful!
Apply Professional & Fair Business Practices from the Beginning:
Your business has a culture and an ethic, it is important that values extend to your construction projects. For example, your HR department may be allowed to choose the best applicant for a position rather than choosing the cheapest applicant. That similar value should extend to the professionals whom you hire and the contractors and subcontractors with whom you contract. Being fair and being honest are values which are vital to successful construction project completion, and when an owner embraces these values and brings them to the project, it is far more likely that the project will be better than anticipated.
Do Your Homework:
The more time and effort an owner puts into the project, then the more likely the finished product will be exactly what they wanted. Start with a sound idea, bring in the people and the processes to make it happen.