The Dotted Line: Taking over construction mid-project
Circumstances can change quickly in any business environment, construction included. Contractors can take on a project that looks profitable on paper but ends up being a time and money pit because of something they overlooked during the bid process, unanticipated material increases, skilled worker shortages or other trades falling behind — the list goes on and on.
Sometimes, job conditions, relationships or circumstances deteriorate to the point that the general contractor or subcontractor must be replaced.
“It can be anything,” said attorney Jordan Nadel, partner at Mark Migdal & Hayden in South Florida.
The contractor could be underwater financially and not able to fund the job, he said, even if it is receiving on-time contractual payments. Or the owner could have dismissed the contractor for defective work or delays. Disagreements over the agreed-upon scope of work or any other project issue could escalate to the point that an amicable resolution is impossible.
So, what does a contractor need to think about before stepping into a role that another contractor has failed to fulfill?
Why did they leave?
Whether the original contractor pulled out of the job or was terminated, the incoming contractor needs to know the cause of the breakup before deciding whether or not to take on the project.
On a larger job, said Michael Rune II with Carlton Fields P.A. in South Florida, there might be an element of excitement on the part of the contractor about to step in that could cloud its decision.
“Usually, these higher dollar projects have some prestige associated with them, so a lot of times people will jump in before they really understand what they’re jumping into,” he said.
If the original contractor was overwhelmed, either by the financial requirements of the project or by the schedule and just decided to walk away, those issues might not present a challenge for the new contractor, Nadel said. However, if the first contractor walked away because the customer became delinquent on payments or demanded work that exceeds the contractual scope, then that might be a reason to reconsider, depending on the depth of the problem.
If the owner took a construction loan on the project, Rune said, one of the most important pieces of information incoming contractors need to know is how much money is left to be paid by the lender for the entire project, in the case of a general contractor, or for a subcontractor’s scope of work.
“You may get in and think that you have $1 million of work to do, and the bank may think you have $100,000 of work to do,” he said.
Ideally, said attorney Laura Brunasso, senior counsel in Clark Hill PLC’s construction practice group, potential replacement contractors should try to talk to both the original contractor and customer in order to get both sides of the story.
“You’re going to have to try and piece things together to figure out the true answers,” she said.
Make sure to do a thorough assessment of the existing work
Taking over for another contractor is one thing but assuming responsibility for what could be defective or shoddy work is another.
“If you’re going to step into the shoes of somebody else, you need to make sure you document everything [the original contractor] has already done,” Brunasso said. “Most likely, you’re not going to be starting from scratch.”
Contractors that end up taking over for another company, she said, need to know what work has already been completed so that’s it is not included in their new bid, but also to make sure it’s excluded from the new contract.
In the case of a subcontractor, it’s possible that the new company will simply be picking up where the first contractor left off, but it is more common that the project will require the replacement contractor to go back and perform crossover work to correct what is already in place, Nadel said. For a general contractor, it will likely be the same but on a larger scale.
New contracts, he said, should memorialize exactly what work the contractor will perform and for which segments the replacement contractor will be held responsible.
Before signing the contract, Brunasso said, contractors should check with their insurance companies to find out what they will cover on such projects. If the new firm is required to assume liability for its predecessor’s work, it’s very possible that the already-completed work will not be covered under the new contractor’s policy.
And if the project is nearing completion when the original contractor leaves, Rune said, a potential replacement should think twice before taking on the project.
For example, he said, if a new HVAC contractor comes in at the 90% completion mark, the owner will most likely require that the new HVAC contractor assume responsibility for the entire system.
“For 10% of the contract price, you’re assuming 100% of the responsibility potentially,” Rune said.
Make sure the contract covers extra costs and schedule time
Contractors, Brunasso said, must realize that it is more expensive to take on an in-progress job than it is a new one.
If the change itself or events leading up to the change in contractors has taken a significant amount of time, the new contractor could be faced with a lot of work and a short amount of time left on the schedule, she said. This could require double shifts or double crews or even more complex staffing arrangements given the restrictions imposed by social distancing and the possibility that some administrative staff will be working at home.
“You have to assume that you are going to need to staff that project with field personnel more heavily than your average project, because you have to make that deadline,” Brunasso said.
It is also likely, she said, that while the amount of materials will not change, the delivery schedule will be compressed in order to make up for lost time, which means more money spent upfront. It’s also possible that the specified materials are either not available or will be delayed because of COVID-19 related supply chain or lead-time issues, and alternatives might be more expensive as well.
If the incoming contractor previously submitted a bid on the project, Brunasso said, then they need to rebid it factoring in the additional job-specific and administrative costs, including insurance.
The ultimate decider of whether a contractor will step in for another typically depends on how much risk they are willing to assume, Rune said.
“Inherently, there’s more risk, but you can also price that in as well,” he said. “You may be getting a premium price to come in and take over someone else’s work. People aren’t taking over out of the goodness of their hearts, they’re taking over because they think ultimately it will be profitable.”
This article was originally written by Kim Slowey and appeared here.