What Contractors Should Know Before Projects Go South

At the start of every construction project, owners, contractors and surety companies all share the same goal: finishing the project on time and on budget.

An owner wants the project completed correctly, on time, within budget and without liens. The contractor is looking to complete the work on schedule without defect, receive payment for his/her work and make a reasonable profit. The surety relies upon the contractor to complete the contract on time, without defect and to pay all labor, subcontractor and supplier expenses. Logically, the goal of all parties is the successful completion of the project.

But despite the common goal, contactors and owners can end up in difficult and even adversarial positions when it comes to successful project completion. In these situations, early proactive dispute resolution procedures can prevent construction disputes from bringing a project to a halt. Surety involvement can play an important role in the dispute resolution process, and the surety can facilitate a mutually workable solution for the project. While the vast majority of contractors will never see a default on a project, sureties have significant experience working with contractors and owners to resolve construction disputes.

When a surety becomes involved in a construction project dispute, the source of the problem often depends on the source of the opinion. In other words, contractors and owners rarely agree on the source of the problem on a construction project.

Owners often cite the following reasons as the source of project problems:

• Incompetent project manager and/or jobsite supervisory personnel
• Inability to adhere to the project schedule due to poor coordination of subcontractors, failure to timely order material, especially long lead time items and lack of skilled personnel and/or insufficient labor
• Failure to read, understand or interpret contract documents
• Disagreements on original scope versus change order work
• Quality control problems
• Mechanic’s liens, whether filed by subcontractors and/or vendors
• OSHA and related safety problems

Contractors often cite the following reasons as the source of project problems:

• Contract reflects unrealistic terms and conditions
• Incomplete and/or flawed project designs and specifications (leads to numerous disputes affecting job progress, payments, extra costs, etc.)
• Owner’s failure to provide timely payment (or provide payment at all)
• Failure of owner or representative to respond timely to requests for information (RFIs), submittals and like documentation
• Owner’s refusal to grant legitimate change orders and/or time extensions
• Over-inspection of project by owner representatives
• Failure of a construction manager to coordinate co-primes

A surety is required to balance its obligations to the owner and the contractor. Upon its investigation, a surety often finds a combination of many of the factors cited above and occasionally some additional factors that are likely unknown to the owner, including:

• Contractor estimating and costing systems are inadequate or poorly utilized
• Contractor lacks financial resources to cash flow backlog
• Contractor overextends by taking the largest job relative to prior work
• Contractor diversifies into new types of construction without the necessary experienced staff or resources to perform new type of work
• Contractor pursues work out-of-state or in new areas where he/she lacks experience with local labor issues, regulatory oversight and supply resources

Construction projects rarely proceed without any disputes, and therefore, contractors and owners should be prepared to address disputes when they arise. It is also rare that project difficulties are attributable to a single cause that sits solely with a contractor or an owner. In most situations, project difficulties are attributable to multiple causes with shared responsibility between contractors and owners.

Through partnering and good communication, owners and contractors can work together to develop achievable contract schedules, quickly identify and address emerging problems and collaboratively establish solutions to unanticipated challenges in project scope and design. Owners, contractors and sureties mutually benefit from having a process where project managers in real time promptly understand emerging problems, can communicate the issues between the parties  and jointly develop efficient, workable solutions. If needed, the parties can engage the surety’s broader resources if initial dispute resolution attempts are unproductive. Again, proactive dispute resolution allows the project to productively continue while disputes are resolved.

Contractors who quickly identify problems and offer solutions to get projects back on track increase the probabilities of avoiding defaults. Disputes will inevitably arise on projects, and good communication is critical to effective dispute resolution. Contractors and owners should surface potential issues and problems early and work to find mutually-acceptable solutions. Ultimately, proactive dispute resolution can prevent disputes from evolving into defaults. Sureties can play an important role in the dispute resolution process and stand prepared to help contractors and owners mediate disputes and thereby achieve the parties’ shared goal: successful project completion.

Construction Business Owner, August 2007