Masonry Magazine June 1994 Page. 11
Prepare for Litigation,
But Try to Avoid It
Collectability is determined before the project starts. Contractors should do their homework to assure that the owner has the surety and financing needed to complete the project.
By SHEILA WERTZ
Berkshire Consulting Group
LITIGATION is a risk. A contractor shouldn't get into litigation unless he and his advisers are sure they have a reasonable, supportable claim. Litigation can be both time consuming and expensive, and there is no assurance that it will succeed. The parties have no control over each other, the opposition attorneys, or the judge. It's best to prepare for litigation but avoid the process, if possible, according to two attorneys who spoke at the Illinois CPA Society Construction Contractors Conference.
Ira Gould, a partner in Holleb and Coff, described a litigation-oriented recordkeeping system. He said it should include financial records (statements, payroll, invoices, other documents needed for a claim); a separate file including plan specifications and bid documents; prebid information and minutes of meetings; schedules, barcharts, and CPM schedules; and contemporaneous documents such as job diaries and foremen's daily reports.
Since money is the driving force for a claim, it's important for financial records to prove there is a loss, Gould said. Financial statements ought to reflect progress of projects and should show claim amounts the contractor believes it's owed. Contractors should also have a "witness list" and keep track of people who have knowledge of any situation that might be litigated, he said.
Stanley P. Sklar, of Pretzel and Stouffer, emphasized the importance of contemporaneous documents. He suggested that contractors should give their foremen mini-recorders for making notes; transcripts made at the office should be corrected and signed later by the foreman who made the notes. Always respond to letters in writing, rather than by phone, to make a record of your response, he said.
Typically, claims occur when the contractor has lost money due to delays or extra work or when the owner believes the work was defective. Accounting records will be critical in proving a loss, the attorneys said. Contractors with solid claims usually can recover direct damages they can prove by actual cost methods showing actual costs and expenses. Consequential damages may be recoverable, but contract provisions often eliminate this type of claim. Punitive damages usually will not apply to contractor claims, the attorneys said.
A contractor should file a mechanics' lien claim in addition to filing suit on a claim. The mechanics' lien is security to make sure that the judgment is collectible. "A judgment that you cannot collect on is useless," noted Sklar. The lien must be filed on a timely basis to be valid. In the case Continued on Page 44
Sureties Fear Losses In 1994
CONTRACTORS are doing less work and frequently are doing different types of work to survive. That's why industry sources are predicting more surety losses in the coming years, according to Robert N. Ortbal, regional contract manager for Safeco Insurance Companies, one of the top thirty sureties in the marketplace today. "Contractors must downsize and reduce expenses," said Örtbal, "and that means there's a low margin for error."
Banks are looking for bonded contractors, Ortbal said at the Construction Contractors Conference sponsored by the Illinois CPA Society. Because they have less money to lend, banks are offering tighter credit and terms to both contractors and owner/developers.
Owners are also looking for bonds. "A prequalification process can be helpful to contractors because they know that competitive bidders will be good companies," Ortbal noted.
Most sureties will do a profitability analysis based on job performance. Therefore, sureties need interim financial data of good quality. Job schedules are an important part of the package. They like to see job schedules organized by period so that they reconcile to the financial statements. They like to see adequate footnotes, especially on potential losses. It's important for the surety to know about other entities the contractor owns. Most sureties are not concerned about "S" Corporation status, although Ortbal said he thinks equity doesn't grow as quickly in an "S" Corporation as it does in a "C" Corporation.
"A contractor rarely errs by giving too much information in writing to a surety," Ortbal concluded.