Good clients drive any successful construction business not good contracts. But construction is an inherently risky business and sound risk management practices separate firms that endure from firms that disappear into history. Internally consistent contracting forms and standard form letters are a best risk management practice, but one that contractors often ignore.
Every construction project has this characteristic: the opportunity for profit is limited while the exposure to loss is limited only by the equity in your firm. Put simply every contract represents a roll of the dice with the wager being all the assets of your firm. It is a truism in the construction world that the best contract is the one that you never have to refer to after signing. If only there was a way to guarantee that all projects run smoothly, then the terms and conditions and rights and responsibilities outlined in the contracts you are asked to sign might not be of concern. And, if every subcontractor could be counted on to always meet its obligations for the full scope of its contract, with respect to schedule and quality of workmanship, then the proverbial handshake would be enough. But in an increasingly competitive market, where more often than not it is the low bid that dictates the make-up of the team on a given project, well-crafted contracts are an essential tool for your business. A coherent contract form, understood by everyone involved in executing your project, from your superintendents and foremen, project managers and project engineers, to project executives and company leadership, is a best practice that every firm should implement.
Another best practice involves the preparation of monthly cost-to-completes that involve a thorough review of actual costs versus budget, and the development of an updated projected final cost-at-completion. Monthly cost-to-complete reviews should be standard practice at every firm. These will highlight issues as soon as possible when there often is time to minimize or mitigate any threatened financial affect on profitability. The best way to avoid litigation as a plaintiff is not to need it.
Finally, all too often a legitimate claim founders on the lack of timely notice. Too many project managers lack confidence in their ability to write effectively and, consequently, avoid sending the required notice necessary to preserve rights to additional compensation, a schedule extension or other contractual relief. Develop some basic form letters to help your project managers communicate more effectively and protect the interests of your firm.
If you want to discuss these ideas, please call me.