Originally posted 2014-11-24 08:00:53.
As I looked through my weekly piles of mail, an article in Constructor Magazine caught my attention. The article was in the insurance commentary section of the magazine and is entitled “Avoiding Common Causes of Contractor Failure.” While this article is written from an insurance perspective, many of the same principles that are found in the article apply from a legal perspective as well.
Essentially, the article breaks down into two main points: stick with what you know and don’t squeeze yourself to death. Both of these are great points and got me thinking about them from my perspective as a construction attorney here in Virginia. I agree with the author in almost every way.
Stick with What You Know
Contractors (and lawyers for that matter) need to keep projects in their wheelhouse. Site contractors should not be trying to do masonry and drywall folks shouldn’t do asbestos abatement. Unfortunately, the present economy puts pressure on all of us to push the boundaries of our expertise in order to make a buck. The problem with doing this is two fold: 1. Without an expertise in a particular construction trade, a contractor in Virginia (or anywhere else for that matter) will have a tough time accurately bidding the work (more on this later) and 2. You, as a construction professional will be more likely to make costly (in a monetary and possibly safety sense) errors. In either of these two instances, what margin you may have had will be narrowed. The first changes the top line (i. e. the amount of profit you put into the job). The second eats into the margin due to unexpected costs (including attorney fees should the construction claim get that far).
Sticking with your expertise will keep your bids more accurate and hopefully avoid missteps born at the fringes (or outside of the fringes) of the construction trade that you’ve worked in for years. If your business model worked for years, don’t change it now.
Don’t Kill Your Company to Get the Work
I’ve discussed the ever shrinking margins and their legal ramifications in past posts here at Construction Law Musings. However the Constructor Magazine article puts a different spin on it that I hadn’t explored. Aside from the pressure to cut corners or potentially squeeze yourself so tightly that you can’t effectively perform the work, leading to liability, the financial implications of cutting your margins too tightly are staggering.
As I see it, you’re better off passing on the construction job with too small a margin than being awarded the work and losing your shirt. Remember. . . Murphy was an optimist and something will go wrong (how big that something is depends on you). Outside of the obvious impact on the bottom line of the money losing project, the impact on bonding capacity, borrowing and insurance alone can be enough to keep the downward spiral going for much longer than it could.
As a construction attorney, I see myself as a consultant (and occasional warrior) who can help construction clients work to grow their business. To do this, I need to work with the client and its whole team of advisers (accountants, bonding and insurance companies, etc.). This philosophy is why I like this article. I recommend it to those in the construction industry as well as those who advise them.
Both of these ideas can and should be implemented by construction firms on a daily basis, even in the face of the financial pressures of a tough economy. By monitoring yourself and making sure that you follow this advice, you will more than survive as a contractor or subcontractor (if not prosper beyond your wildest dreams).
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
