OP-ED: In Construction These Days, It’s "Return of the Payment Wars"
Every stage of the construction cycle has its telltale signs. Two years ago the market was sizzling and we were providing tips to manage this surge. Last year many feel we saw the peak of the cycle, and we were offering tips to improve team performance and margins. And now that the market appears to have crested, we are seeing a return of that all-too-familiar place in the cycle: prices have risen, margins have narrowed, and the stress of an overheated market has inevitably led to administration issues and, well, claims. It is this stage that I call “Return of the Payment Wars.” Many industry businesses now are dealing with an escalation of lightsaber battles, either justifying nonpayment determinations or refuting excuses for nonpayment. Resources tied to contract administration, whether in house or retained externally, are on the rise. To avoid (or at least reduce) the wars in 2019, consider these five ideas:
1. Read your contract(s)
Oh I know you have heard this a thousand times, maybe more. And you use the same form contract time and again. You think you have it memorized. But every time I am called, and I ask for “that old form,” I read it. And generally I find something that is useful in guiding me to administration and resolution of a problem. You will too. Too many times when I ask for a copy of the contract after being consulted on a payment war, I hear either: (a) “I am not sure where it is”; or (b) “I am not sure what it says.” If you don’t read your contract, you could lose an opportunity to avoid the dark side. Just last week I saw a message from an old client friend who was sharing some pearls of wisdom he received from one of our retiring attorney partners. The client said the number-one bit of guidance he cherished in his interactions with my retiring partner was: “Read your contract, Harry.” That’s good advice.
2. Pay attention to time
We all know that time is money. But too many times we are seeing issues because time is not adequately considered during negotiations on extra and/or changed work over the course of a project. It is not enough in your administration programs to fill in that empty “time” blank on the change order form, the one where you add or subtract the number of days you have to get the job done. There are many other administration processes that are also affected by time issues. For example, in today’s construction world, nearly everyone is asked to sign a conditional lien release before getting paid. If there are pending time issues over a disputed change or extra work problem, the good old form conditional lien release may impair rights (or may not shield against additional claims). We seem to be seeing an escalation of these issues, likely again because we are in that phase in the cycle where overheating is causing stresses on administration teams. If you encounter a major deviation in scope of work that will alter time, sit down with your team (and advisors) and discuss globally how time will be managed, from negotiation of the change, through payment cycles, until project closeout.
3. Have coffee with contracting partners
This advice likely dates me, but it is so much more important today than it was 10 or 20 years ago. We all are moving too fast, have too much on our plates, and cannot keep up with the stream of emails, texts, tweets, etc. Much of contract administration, particularly management of payment and payment-related issues, is managed through email. And many of the war declarations occur without any in-person contact or discussion. Researchers tell us that 80 percent of communication between individuals is nonverbal, so we lose the majority of the social content when we use those electronics. Even local rules guiding attorney behavior in litigation require lawyers to have personal interaction before filing their motions. There is a good reason – it is much more difficult to be difficult if you are looking someone in the eye. Remarkably, there is no similar conferral rule between contractors – notices of claim and notices of cure, along with other war declarations, fly most often without any in-person discussion. All too often when our firm is engaged, and we ask folks if they have sat down with the dark side to see if a solution can be reached, the answer is no. And remarkably, over 50 percent of the problems we see are resolved with a simple, in-person discussion. Over 90 percent of all commercial disputes are resolved once a professional facilitator is brought in to broker the conversation. Why not develop a pattern of in-person discussion early, and work out these problems before they fester?
4. Be sure your team is playing fair
Have you asked your contracting partners to assess your team? There are those out there who create problems and there are those who fix the problems. It is uncomfortable when I have to have that candid conversation with an owner and advise that I think it is his or her team who is the problem. Asking trade partners if your team is solution-oriented will help you identify problems early.
5. Work with those you trust
I know it’s easier said than done. But the contracting partners that are successfully navigating these payment wars today are those who work with trading partners they trust. If you are anxious about that new bid opportunity or that language in the new contract, trust your gut. And if you are adventuring into new territory and do not have a relationship to judge, do your homework and find out if your new trading partner uses a lightsaber or a handshake to resolve a problem. Reach out to accountants, insurance brokers and attorneys and ask if the prospect has warts. Word gets around, and we all figure out quickly who is the dark side. How many times have you heard “the best projects I have had are those I turned away?”
Column first appeared in the Daily Journal of Commerce on January 22, 2019.