In this special edition of The Wright Toolbox:
- Lean Times: How to Prepare Your Company – read now
Lean Times: How to Prepare Your Company
On March 12th, the Maryland Daily Record printed not one, but two articles, lamenting the impacts of COVID-19 on the construction industry (“How Md.’s construction industry can deal with a post-pandemic future” by Todd Feuerman and “Construction industry faces another tough year” by Adam Bednar). The reality presented in these pieces, as well as anecdotally by our clients, is that pipelines are rapidly drying up. Projects are being canceled or deferred. As the demand for commercial real estate hangs in the balance of remote work and shuttered hospitality, new projects are fewer and further between.
With interest rates still low and residential demand high as white collar workers have largely been able to maintain their incomes working from home, the downturn we face in 2021 looks much less scary, in terms of breadth, depth, and length, than the recession earlier this century. Still, with a year of COVID-19 on the books, it would be imprudent to forge ahead without some preparation and analysis.
Mind Your Contracts
As most players in the construction industry learned last spring, the wake of a pandemic or other disaster is decidedly not the right time to investigate whether your contracts contain a force majeure clause and if they do, what it says. Invest in a thorough review of your form contract documents and update your processes for reviewing contracts presented to your company. It is likely that some changes are in order as a result of lessons learned through the pandemic and other changes in your business that slipped by when work was steady.
Mind Your Receivables
In the flourishing market our industry enjoyed over the past several years, payment security was of little concern on most contracts. Surely, the flow down to subcontractors slowed to a trickle but payment was typically a matter of when rather than if. As owners and upper tier contractors alike struggle with cash flow, it is imperative that contractors, subcontractors, and suppliers be diligent in preserving and enforcing their payment rights in the tight and unforgiving timeframes prescribed by the payment bond and mechanic’s lien statutes.
For example, in Maryland, a subcontractor has only 120 days (not 4 months) to serve notice of its intent to claim a mechanic’s lien on the owner of the project. Serving notice itself can be a large task with title work that can be complex (tenant fit-outs in leased space are an added problem) and locating appropriate parties to serve. Certified mail is no longer reliable and people working from home thwart private process servers. That same subcontractor has only 180 days (not 6 months) to file a petition to establish the lien. The petition must include all of the relevant papers including change orders and subcontract documents. If you sleep on these deadlines, you may find yourself without a remedy and taking a substantial loss.
Payment bond claims are some of the most valuable collections tools available in this industry, but to make a bond claim, you must first have a copy of the bond. This means, of course, that you need to know that your project is bonded. Public projects typically are, although ownership and coverage under the Miller Act or a state Little Miller Act can be obscured with public-private partnerships or agency ownership. Private projects are less likely to be covered and the terms of those bonds control in the absence of applicable statutes. In my experience, obtaining bond copies is always easier at the start of a project and can be nearly impossible once disputes arise. Requests can be made to the government contracting authority, but they take so long that it’s rarely worthwhile.
Mind Your Location
When work dries up in one sector or location, the natural inclination is to pivot towards the work available. Warehouses and data centers, along with suburban housing and life sciences, are in demand right now, and jumping on them may be a viable strategy. Be mindful, however, of crossing borders into jurisdictions where you are not licensed or familiar with the terrain. In Virginia, for example, you cannot file for a mechanic’s lien unless you carry the applicable license for the type and volume of work you are performing and put that license number on the lien form. With competition heating up, you can expect that locals will be looking to protect their territory and are unlikely to be forgiving when you err outside of your home base. It may be worthwhile to team up with someone in the vicinity if both companies can work productively and profitably together, supplementing each other’s weaknesses with their own strengths.