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New Job Pitfalls & Hazards: Owners and Developers BEWARE !

Over 40 years in this wonderful construction business, and I am still amazed, at how naive owners and developers are, when it comes to awarding new projects to contractors. I have been in the trenches, occupied by contractors that are paying me a salary, and have witnessed, first hand, what occurs in many instances, when a new job is awarded to a particular type of contractor.

I think it is important for owners as well as developers to understand the PITFALLS that could occur, when awarding a job to the improper contractor.

1.) If the price for the project is too good to be true, it is! This is a statement that I have made regarding the hiring of subcontractors, the selection of material vendors, as well as any other purchasing that occurs on the construction site. If the price is too good to be true, it is!!

2.) It is vitally important, that owners and developers check the financial status of the selected contractor. This does not mean, calling the contractors bank or favorite subcontractors. Do not call any entity that has a vested interest in the financial status of the contractor. If you call the favorite subcontractor, that has accumulated a huge balance with the contractor, the subcontractor will give a glowing report, regarding the contractor. Why? because the contractor owes the subcontractor substantial money, and the subcontractor understands the business enough to realize, that his money, may very well be in the proceeds from this current job that you are calling to check on . In addition, the bank or financial institution that supplies the contractor funding, is probably owed substantial money by this contractor, and does not want to jeopardize their portion of this new pie.

3.) In similar fashion as the Federal Government, the term ” kick the can down the road ” characterizes many contractors that have a tendency to low ball a quotation, to merely secure the project. The debts incurred on previous projects, are simply kicked down the road, to the next project. So if the contractor has past financial debts, the establishment of a new cash flow, via a new project no matter how low the bid is, will allow them to finance their past debts for the time being.

4.) The fundamental problem with this entire scenario, is that the project has been quoted too low to start with, and there will not be enough money to complete the project that is currently being awarded to the contractor. Therefore, there certainly is NOT enough money available to finance the past debts of previous projects, as well as properly perform the new job.

5.) This entire scenario is a set up for substantial change orders as well as additional work tickets, once the project advances. Common sense will indicate, that if the contract value is too low and the contractor has substantial past due balances already on the books, the only survival for this contractor is to manufacture change orders and additional work tickets to financially improve their position. The project will end up in litigation for sure!

6.) It is imperative that owners and developers perform financial investigations on contractors prior to contract award. In addition, it is recommended that any public projects that the contractor has performed have legally available records that identify the financial status of this contractor. Please take the time to perform the due diligence required to properly investigate, and determine if the contractor has any financial credibility whatsoever.

7.) Many lawyers in the construction industry will inform their clients that their only means of survival is to keep all the balls in the air. Money will allow all the balls to remain in the air. Without money, the balls will come crashing down. Therefore the contractors will do anything to keep the financial wheels rolling. This is an important truth, that all owners and developers must understand, to properly select the contractors that will complete their projects.

Remember / If the price is too low to be true / it is!!

For additional insight into the thoughts and aspirations of this type of contractor I summarize the following observations;

1.) The concept of, if you don’t get the job, there is no chance to make any money, therefore get the project, no matter what the price, is a very common objective. No matter what it takes, bribes, corruption, seduction, whatever it takes, get the job!

2.) Upper management insistence that a certain percentage of each monthly billing consist of change orders, is also a very common objective, as well as company policy. Change orders, change orders, is the constant battle cry of many contractors. Owners and developers beware of this type of contractor, the project will be a long and tedious one with this attitude!

3.) I have literally been in organizations that have policies that state, whatever it takes, as a motto for their organization. When I was involved with this specific organization, I asked, even if it was illegal, and the answer was, whatever it takes. Believe it or not, there is an actual management concept, that is being promoted through the construction industry, that specifically supports this logic and attitude. Can you imagine if the world was managed on that concept?

4.) There are many contractors that identify very underhanded and unscrupulous behavior, as simply business as usual. Owners and developers must be aware of this situation. The behavior parallels the concept of ” whatever it takes”.

5.) I know of three general contractors at the current time, that I have been involved with, that are salivating at the prospects of new projects.   In all three cases, the new projects will be required to financially bail these contractors out of previous financial commitments, and will have nothing to do with the new projects contracted for. There is not enough money to take care of previous financial obligations as well as properly perform the new project being awarded to this contractor.

6.) Owners and developers must be aware, that the first requisitions submitted by contractors with this mentality, will be overstated substantially. The first requisitions are needed to immediately to reduce the financial stress and burden of previous commitments. Do not allow overbilling by these contractors.

7.) The contractor will front load the requisitions. What this means, is the requisition will have line items that are initially billed, for example, erosion control. This is the first item that a site work contractor will bill. I guarantee that this line item will be valued at least double, what it is really worth. This allows the contractor to receive this overstated money during the first requisition, allowing them to fulfill some of their past financial obligations.

8.) Do not be surprised if the contractors in these financial dire situations, are insistent upon down payments, prior to the actual start of work. Down payments must be carefully evaluated to ensure that the money is spent on the new project, and not used for other financial commitments.

The financial moral and ethical behavior of contractors is an amazing story. I have seen contractors promise payment to vendors and other contractors on a Friday just to get them to perform overtime work over the weekend. When Monday comes, there is no recollection of this promise of payment, and the vendor is now owed the entire weekend of overtime work, as well as the past due invoicing. I have witnessed contractors give checks, with no signature, and mail them to gain another week of work by a contractor on a project. I have witnessed contractors take the first requisition on a new project and pay nothing towards the financial commitments for that project. They simply take the money, and pay past invoicing for other projects. I have even witnessed a contractor take a $175,000.00 check, go to the local boat show and pay cash for a new yacht, while the vendors and subcontractors they owe, remain without payment. I have seen it all!

This is the reason that I caution all owners and developers, that have been seduced by the unscrupulous contractor with the price that is too low to be true! Understand that It is! The acceptance of this proposal, and the award to this type of contractor, will end in disaster for the owner, developer as well as the entire project.

I have been there, seen it, and must caution all, to the hazards of an award to a desperate contractor!