Construction Contracts: A Primer on Pre-Contract Due Diligence By: Jere C. Smith, Esq., Partner, and Ryan S. Robinson, Esq. Moore Ingram Johnson & Steele, LLP Emerson Overlook 326 Roswell Street Marietta, Georgia 30060 Tel: 770-429-1499 Prior to entering into a contractual relationship of any sort with a customer in the construction industry, it is imperative that a high level of due diligence be conducted so as to become educated about your company’s customer, avoid unnecessary hassles, and actually save your company attorney's fees in expensive litigation battles. The simple steps listed below, if followed, can greatly increase your company's profits and lead to a more pleasurable construction and completion of any project: Vet and get to know your customer by having it complete a “customer information” document, which should contain at least the following: the true and correct legal, corporate name of the customer, the full and proper legal description of real estate which will receive the benefit of your company's labor, services, and materials, the customer's Federal Tax Identification number (or the customer's Social Security Number if an individual), the customer's bank and trade references, the identity of the person or persons who, on your customer's behalf, maintains the legal authority to enter into a contract with your company, your customer's contact person, as well as information to whom any notices with regard to the contract shall be forwarded. Also, within the above-referenced “customer information” document, ensure that your company receives written permission from your customer to run a credit report on its behalf, and permission that your company may contact the customer’s above-referenced bank and trade references. Assuming that you have received your customer's permission, conduct a Dunn and Bradstreet investigation on your customer. Also, contact your customer’s bank and trade references to ensure their creditworthiness and financial standing. Know and understand your customer’s source(s) of funding for the amounts which will ultimately be owed to your company on the project. Determine whether or not the project to which you will supply your labor, services, or materials is a private or public (government owned) project. The identification of this information is critical for materialmen's lien filing or payment bond claims in the event your customer does not pay amounts owed to your company on the project. Visit the project and investigate all conditions associated with your company’s work to be performed. Understand the project's site conditions. A good question to ask yourself is "what's behind the walls?" By performing this task, your company is more likely to fully understand its true scope of work on the project. Your company is also less likely to underbid the project and more likely to maximize profits. Fully familiarize yourself with the Owner’s, Architect's and General Contractor's plans, drawings, specifications and directives for the project. Fully read and familiarize yourself with your customer's (most often the General Contractor's) contract with the project Owner. Most often these days, your company’s contract with the General Contractor will incorporate the Owner/General Contract by express reference. Not familiarizing yourself with this information will most probably land your company into costly and time-consuming litigation. Most contracts between General Contractors and Subcontractors contain what is called a "pay when paid" provision. In other words, the General Contractor is contractually not obligated to pay your company until such time as it receives its monies from the Owner. Such provisions are enforced by Georgia law and can, if payment is not received by the General Contractor from the Owner, have a significant negative impact on your company. Research and investigate all local laws, building codes, and other ordinances of the county or municipality within which the project is located, as well as the impact that these laws may have upon the contract. Adequately and properly estimate your company’s time for completion. Do not underestimate your company’s completion date. Provide your company with adequate leeway to complete the project and be very careful about substantial completion dates which are at, or close to, the time that the owner needs to be "open for business". For the reason that your company may be subject to a "pay when paid" provision within the Owner/General Contractor’s contract, as well as within the contract which your company maintains with your customer (the General Contractor), consider utilizing these same provisions within your company’s sub-subcontracts and your vendor agreements. Read and understand each and every provision of the General Conditions, Exhibits, and Supplemental Conditions contained not only in your contract with the General Contractor but also within the Owner/General Contractor contract as well. These documents ALL form a part of the contract and can also lead to expensive litigation if not followed. Familiarize yourself with the materialmen's lien and payment bond laws of the state within which your company will conduct its business. No one specific state's laws are similar. Materialmen's liens and payment bond claims provide the very best assurance that you will be paid for the labor, services, and materials provided by your company to the project. With regard to materialmen's liens and payment bonds, fully familiarize yourself with pre-lien notice requirements such as Notices of Commencements and Notices to Contractor. If you do not, you will cause your company to forfeit substantial sums of money owed on the project. Whether the project is public or private, a payment bond may very well exist which can greatly increase your company's chances of recovery for the amounts owed on the project. Accordingly, identify whether any such payment bond exists prior to the execution of the contract and obtain a copy of any such payment bond from the customer. Prior to performing work in any foreign state (other than your own), spend the money on a local attorney so that he or she may assist you in familiarizing yourself with the "unique" laws of that state. For example, did you know that if an out-of-state "contractor" (a term that is very broadly defined) fails to comply with the Georgia Non-Resident Contractors Act (O.C.G.A. § 48-13-30 et seq., which requires, among other things, licensure by the out of state contractor, procurement of a sales and use tax bond, and payment of all sales and use taxes), not only may the contractor not file a lawsuit seeking monies owed to it, the contractor may also be charged with a misdemeanor for failure to comply with the Act? Should your company find itself in a position that it must walk off the project or terminate its relationship with its customer, make absolute certain that you fully understand (and follow) the procedures for any such termination as contained within the contract. For example, if termination under the contract calls for a ten (10) day notice to the customer via regular and certified mail, do not forward the notice on day nine (9) via regular mail. Prepare to maintain a daily job diary. A job diary is essential to document and maintain records of all communications on the project, weather days, delay causes, and other relevant information. To the extent possible, once the performance of the contract has begun, it is strongly recommended that you also photograph and videotape your company's progress on the project as well. Does your company maintain adequate insurance coverage, including both Worker’s Compensation and General Liability, for the project? Are your subcontractors (if any) adequately insured on the project? Please note that a contractor, (who is subject to Georgia’s Workers’ Compensation Laws) which subcontracts any part of its contract work to a subcontractor, may be liable for coverage for the employees of the subcontractor if the subcontractor has not obtained workers’ compensation insurance coverage. Be sure to fully understand your company’s policies and limits, as well as any additional insurance requirements pursuant to the terms of the contract, prior to entering into the contract. Please note that the foregoing steps are not exhaustive but instead are steps which, when not taken, can lead to costly and protracted litigation. Therefore, in order to save your company time, hassle, and money, be sure that you cross your “t's” and dot your “i's” when negotiating your company’s next construction contract. If you do, your project experience, as well as your relationship with your customer, will be far better.