Construction Lawyers Learn the Business of Construction

by Mark A. Cobb

Every year, we attend on or more of the construction law seminars hosted by the American Bar Association’s Forum on Construction Law. In January, Stephanie Dougherty and I attended the Forum’s session on laws impacting material suppliers and subcontractors (click here to learn more) which was great. Last week, however, I attended the Forum’s Annual Meeting where we heard some of the top construction professionals in the country. True to the Forum’s motto “Building the Best Construction Lawyers”, this year’s seminar was called “Talking Care of Business: A Mini-MBA Program for the Construction Lawyer” where the attendees learned a great deal about construction accounting, risk assessment, and other topics vital to contractors and developers.

Here is a summary of some of the highlights which I recall:

1. The Economics of Construction: This session reminded us all that construction attorney’s are strategic partners with their clients, and that stand-out construction lawyers understand the business of construction. A panel of industry experts lead us thorough discussions of current construction-industry trends, considerations for engaging outside counsel, the key economic forces driving owners, architects, engineers, contractors, subcontractors and suppliers. Some facts which resonated with me include the following:

• It is estimated that 1.6 million construction jobs will be created in the next 10 years
• Alternative delivery methods account for almost 50% of construction contracts, and that percentage is anticipated to increase in the future
• Contractors choose their projects based upon (i) profit and (ii) risk
• Common lending terms for contractors and the need to collect receivables before they hit the 120 day mark
• How to put together a risk analysis matrix for clients
• Owner controlled insurance programs
• Contractor controlled insurance programs
  Horizontal Exhaustion v. Vertical Exhaustion
• How to address the key sections of a construction contract including consequential damages, indemnifications, limitations of liability, and payments & retainage
• How retention affects contractors and subcontractors’ cash-flow
• How Overtime for construction labor impacts project

2. Risk Management: Risk on construction projects cannot be effectively managed unless it can be identified and then avoided, allocated, transferred, mitigated, retained and priced, or insured, and this session dealt with hidden risk factors, emerging risks and enterprise-level risks which are difficult to identify and manage. Some specific points which stood out for me include the following:

• Although there are many more options, risk management typically leaves three options for the contractor: avoid the risk, accept the risk (and manage it), or transfer the risk to other parties
• Insurance is a back-stop–it is not always first choice

3. Construction Industry’s Use of Blockchain Technology and Smart Contracts: We heard a fascinating discussion regarding blockchain technology and the many ways it which it might impact construction law, owners & developers, contractors, subcontractors and suppliers. (To hear an introduction on blockchain technology in generally, please click here) More specifically, Blockchain technology is very compatible with Smart Contracts, and Smart Contractors, which are beginning to be used in a few states, could be easily adapted for all of the various contractors used by the construction industry. They are basically “If/Then” contracts which state the premise of construction which, in simple terms, states something like “If the grading is complete, then Contractor will pay Subcontractor.” In more technical terms, the construction industry will likely be using a Decentralized Autonomous Organization (DAO) for each project/contract.

4. Corporate Structure: Attendees learned about the various forms of corporate structure available to our construction clients as well as the inner-structure of various sizes of contractors. Thus, we spent a great deal of time looking at actual businesses, their divisions, geographical sites, and hierarchy, and this, in turn, included details about project manager training, expectations, and income-expectations.

5. How to Prepare for another Party’s Bankruptcy During a Construction Project: The lecture included a detailed discussion of the rights of the parties in a bankruptcy proceeding, the remedies which are available, and the proactive steps which someone might consider. We looked at various situations where a subcontractor files bankruptcy during a project as well as when an owner or general contractor seek bankruptcy protection. We discussed executory contracts, non-plan sales and reclamation claims.

6. Joint Employer Issues Impacting Contractors: Another session of interest to every contractor included a detailed discussion of employment issues including how to distinguish between contract labor (W-9 workers) and employees (1099 employees) and the dangers of miscatagorizing your workers. We also discussed overtime –when it is required and what overtime pay may actually include. Davis-Bacon Act payment issues. And, how contractors using employment firms to supply their labor may still be considered “employers.”

7. Indemnities and Third Party Insurance: The language of business is financial accounting and this workshop reminded us of basic accounting principles, concepts and terminology relevant to the construction industry. It addressed how to interpret financial statements, audit reports, balance sheets, income statements, cash-flow statements and work-in-progress statement to help identify troublesome areas and billing issues between the parties to a construction project. Key areas on which the workshop focused include:

• Home office overhead
• Field office overhead
• Equipment pricing
• Labor Inefficiencies
• Termination and Total Cost Claims
• Loss of Bonding Capacity

8. Contracting Outside of the United States: When involved in international transactions or disputes, construction attorneys are faced with a number of unique challenges; during this workshop, we learned about some of the key concepts as well as practical tips to navigate the international arena. The speakers addressed such topics as

• Subcontracting and procurements in foreign countries
• the Foreign Corrupt Practices Act
• International Mediation / Arbitration

9. Succession Planning for Construction Companies: Many construction companies are closely-held businesses and often owned by multi-generations of the same family. This session featured topics necessary for most companies to stay viable as times and technology change.

10. Business Considerations When Forming Construction Teams: Construction professionals approach a joint venture and other types of teaming agreements differently. This seminar addressed the different avenues available to the contractor and their business and legal implications.

Many of these topics are worthy of a blog article all unto themselves. In the coming weeks, I hope to expand upon these bullet-points to pass along some of the great information shared at the Forum on Construction Law.