While Ben Franklin was actually referencing fire-fighting in Philadelphia when he said “An ounce of prevention is worth a pound of cure,” the same rings true for general contractors and subcontractors getting ready to start a construction project. At a minimum, I would encourage clients to consider the following three items before starting a project.
- A written contract: The importance of a written contract cannot be emphasized enough!
- Insurance: At the very least, each contractor needs to have Workers’ Compensation Insurance and a Commercial General Liability policy.
- Due diligence: Do your research on the companies you are working with or bidding against.
The Written Contract
Having a written contract in place is critical! The rights and obligations of the contractors are dependent upon the contract. Without a contract in writing, General Contractors and Subcontractors leave themselves open to disagreements, at best, and expensive lawsuits, at worst. It is also wise for construction contractors to carefully read the fine print in the contracts and/or contact an attorney to review and explain the terms. For example, do you have an obligation to get written approval from the owner on all change orders? Do you have any rights if there is a breach of contract by the other party? What constitutes a material breach compared to a minor breach of the contract and what are the consequences for remedies? What procedures must you follow if you have questions about the plans or specifications?
At the very least, each contractor needs to have Workers’ Compensation Insurance and a Commercial General Liability policy. Companies with 3 or more employees (including the owner or owners) must obtain workers’ compensation insurance by law in North Carolina, even if the owner(s) opts out of coverage. General liability insurance generally* provides coverage for other contractors, customers, visitors, owners, and other workers against injuries or property damage. Consider also, Builders Risk Insurance for a term of 6 – 12 months, which generally* covers damage to the insured structure from fire, wind, theft, lightening, explosions, etc. Also, determine whether you need a performance bond, which acts as insurance or a surety. (*Please always consult your own specific policy for coverage. If you have insurance questions, we can assist you with connecting with a licensed construction broker to review your project risks and needs.)
Do Your Homework
Parties are wise to “do their homework,” meaning research the other companies you are working with or bidding against, before a project starts. If you are signing a contract with a general contractor, learn about their business history and which subcontractors they have worked for in the past to gauge your risk of potential delay of or non-payment of funds after the work is performed. Likewise, if you are signing a contract with a subcontractor, find out what other general contractors they have worked for to gauge your risk of whether the work will be performed sufficiently and on time, whether they were “kicked off the job,” whether they have complied with the required insurance laws, whether they have the manpower to complete the job and whether they appear to be able to make payroll. We can also discuss these issues with you as you are in the decision making process and assist with gauging your risks before signing a new contract.
If you are getting ready to start a new construction project, I am happy to speak with you about making sure you are prepared. You can contact me at email@example.com.