Risk is an inherent part of any business, including contracting. The difference between the risk associated with other businesses (e.g., a small retail store) and a contracting company is the that contractors face a much greater risk of exposure due to the amount of money and “moving parts” associated with construction projects.
Contractors generally accept risk as part of the job and deal with situations as they arise. However, there is a better way to handle claims. The way to handle risk is to limit it by being proactive.
The most important factor in limiting risk is through pre-project preparations. In other words, if a contractor wants to save money by limiting labor, contract and negligence claims during the course of the project, it must spend more time, effort and money upfront.
Many businesses, including contracting companies, take a reactionary approach to legal disputes and claims. They wait for the claims to develop and then bring in their lawyers and insurance carriers to try to deal with the situations. By this point, contractors should resign themselves to the fact that they are going to be spending a significant amount of money to resolve the dispute. In fact, many experienced construction attorneys, especially those in large cities, will charge between $275 and $425 per hour to handle contract disputes or litigation.
Being a reactionary business is not the best approach for limiting risk and liability. Many contractors will argue that they would rather wait for something to happen because they don’t want to spend the money upfront. This is flawed thinking because it is always cheaper to pay a lawyer to prepare documents and strategies to limit risk than it is to pay them to defend an arbitration or lawsuit.
Taking a proactive approach means spending time before the project begins analyzing the possible areas where risk can grow. Following are suggested actions contractors should take in order to limit risk.
Nothing can reduce risk more than a properly draft contract. Contractors should have their own subcontractor agreements that they use to protect themselves in the event that the subcontractor fails to perform or creates liability. Investing in a set of solid contracts should be one of the first things contractors do before taking a job.
Contractors that are established and have contracts should have their attorney review the contract before large projects and ensure that the contract language will protect them. Keep in mind that a contract should be a “living” document and often needs to be adjusted to handle risk associated with different projects, jobs and circumstances. Contractors should retain an experienced contract and construction attorney to create and review their contracts. Do not use forms found on the Internet or from a book or colleague.
Before each job, the contractor, its attorney and/or its insurance agent should review the company’s insurance coverage to ensure that it meets the requirements of the job and is sufficient to protect the company in the event of a claim. At the very least, contractors should review their insurance coverage on an annual basis. Failing to review insurance policies can create a significant risk. In fact, there is a case involving a contractor that was issuing certificates of insurance with a particular amount of coverage. However, the contractor was actually insured for half of the coverage listed on the certificate of insurance. Had the contractor been reviewing its coverage on a regular basis, this error, which led to liability, would not have occurred.
Contractors should analyze the size of the project and review the strengths and weaknesses of their team to ensure their workers can handle the requirements of the job. Far too many contractors start the job with less than enough workers and end up trying to add people once the job has started. This often creates an increased risk of liability due to the urgent nature of adding workers and a lack of time to properly screen them.
It is often a good idea to do some due diligence concerning the client or developer with whom the contractor will be working. Contractors should look at other projects that the developer is working on or has completed. There are a number of lawsuits involving contractors that began working for a developer that was teetering on the edge of bankruptcy or had other projects it could not finish. The contractors spent hours working and generating large bills that the developer ultimately could not pay. While there is no sure-fire way to anticipate financial issues with clients or developers, doing a little due diligence can help limit risk.
Contractors can significantly reduce risk by taking a proactive approach to their operations and projects. Investing time and money into an attorney before the project begins can ultimately save the contractor tens of thousands of dollars in hourly billing if the lawyer is forced to defend a claim or lawsuit.