Construction Law Blog

What Legal Advice Do Contractors Need When Times are Good?

The real estate market cycle typically includes four phases:

Predicting the exact timing of these phases is near impossible.  For example, who can tell how the contentious elections will affect the local market in the upcoming years!?  Even if we can’t foresee market changes, we can gauge the market’s current phase.  It is striking how the different phases of the cycle will affect contractors’ legal needs.  Understanding the needs of each cycle will keep you ahead of the curve and keep your legal fees down.

1.        Expansion:  A healthy market invites new participants and new opportunities.  The equity and availability of projects leads to fewer legal disputes.

            •   Review your contract forms. The uptick in new work and new environment in which this work is performed will require revisions to your traditional contract forms.  Don’t put “new wine in   old  wineskins” and risk missing the benefit of enhanced profits that are spent on unnecessary contract disputes. Spend time reviewing your contract forms – the small investment will pay off.

            •   Get creative.  Use the newfound equity in projects as a cushion to experiment with innovative, cost-saving, or other new approaches that will provide a competitive edge for years to come.  Review these new approaches with counsel to limit the impact of unanticipated consequences.

2.        Saturation: An unhealthy level of comfort and increase of inexperienced market participants create an atmosphere of increased growth and competition.  Typical legal disputes involve complex litigation where parties are willing to pursue their rights through lengthy legal battles in lieu of quick settlement.

            •    Develop relationships.  The good times never roll forever.  Although outside of the realm of daily construction practice, ensure you are investing in relationships with clients, lenders and sureties that will continue support in the lean times. 

            •     Protect assets.  Balance the temptation to leverage assets to compete in a larger market with a measured approach that protects personal assets through estate planning in the event of unanticipated financial crises. 

3.        Recession:  Contractors who are caught overextended or overleveraged at this time will collapse.  The legal focus will turn to collection of the limited available money on projects.  Contractors will consistently underbid projects, fail to meet these estimates, and further jeopardize projects.

              •     Secure payment.  Mechanic’s liens and payment bond claims become routine on every project.  Ensure you understand the timelines for all requisite notices to protect your rights to payment.

              •     Anticipate insolvency.  At least one contractor, subcontractors, or suppliers will cease work or stop payment during almost every complex project.  Understanding how insolvency and bankruptcy affects contracts, payments, and performance before a crisis is a must.

4.        Recovery:  Contractors that escape the recession take prime position to capitalize on new opportunities.  The legal focus turns to resolving outstanding collections litigation.

          •      Review corporate structure.  The financial impact of the recession will have modified the way you do business.  Changes to your employment practices, ownership, corporate partners merit a review of your corporate structure to properly limit legal and tax liability.