Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

Earlier this week I attended the AGC of Middle Tennessee's membership lunch.  Everything was right on!   I love chicken ... they served chicken!  I have 5 kids ... the guy next to me had 9 kids!  And I like to follow construction industry trends ... and the speaker loves to follow construction industry trends.

David Wells, a senior equity analyst for Thompson Research Group, spoke about the 2010 economic outlook for the construction industry.  Some key talking points:

• There is no longer a drag on residential construction and we may see some improvement in the upcoming year
• As to non-residential or commercial construction, we have not yet bottomed out ... which may occur mid-late 2010
• Finally, as you can expect, public construction is "the only game in town"

Given the increased investment in public construction, there remains some challenges in this arena.  For example, U.S. government (and other public) borrowing has replaced private borrowing.  This creates a public debt crisis at the federal level, resulting in federal deficit projections of unparalleled amounts.  At the state level, the budget crises stem from the same economic conditions coupled with the requirement to maintain a balanced budget.

This may be new information to some of you.  It is probably old news to many others.  But what does it mean practically?  Here are some of David's concluding recommendations:

1. Take cost cuts now, if necessary.  The uncertainty of work significantly impacts employee productivity.  If you are going to need to make cuts, make them now, and reassure your remaining team that they are part of the team.
2. De-lever your balance sheets.  Use the time now to analyze your debt structures in place and attempt to de-leverage your company as much as possible.
3. Watch out for opportunities.  Weaker companies will be looking for solutions to their problems.  Stronger companies should be on the watch for opportunities to build and expand through acquisition or partnership.

Question: Any recommendations for improving your 2010 economic outlook?

Graph: Council on Foreign Relations

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Two months ago I reported about a new "just holding hands" partnership between Associated General Contractors (AGC) and the Associated Builders and Contractors (ABC) in Tennessee.  Although not a partnership, AGC established a task force in early 1999 with members from AGC,  the American Subcontractors Association (ASA) and the Associated Specialty Contractors (ASC).  Last week, the powerhouse group released its updated Guide to Construction Financing: Second Edition (pdf).

The 26-page publication explains the construction financing process while addressing both the opportunities and pitfalls for the contractor.  According to the AGC, it is "intended to serve as a reference to get contractors thinking about the risks associated with project financing."  

How does the contractor get involved in construction financing?  Easy.  It is not unreasonable to come across the contractor who, looking to expand its business, agrees to reduce its fee for an interest in the project.  Nor is it unreasonable to find the developer who goes into default and the bank takes over the project, ordering the contractor back to work.  Or what about the contractor who decides to change the project delivery method to Construction Management At-Risk and consequently helps the owner get financing?  In each of these examples, the contractor becomes entangled in the construction financing process.

The Guide is a must-read for contractors.  Some of the best practices for contractors include:

• Know your owner-developer and the structure of their organization
• Review the "pay when paid" or "pay if paid" laws in the states you are conducting business.  (For a fee, there is a AGC State Law Matrix that outlines this information.)
• Be aware of "creative financing" practices
• Be cautious of an owner's request for upfront deposits or "investments" in the the project
• Know and understand the default terms of the loan documents
• Perform title and lien searches at the onset and periodically throughout the project

Finally, some of the red flags that you should be worried about include: incomplete plans and specifications; owner caused delays at the front end; payment slow-down or defaults; inexperienced owners; change in lender involvement; and abnormal invoicing requests.

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