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Recently, Lendlease reportedly exited the $1 billion Oceanwide Plaza project in Los Angeles. While the future of that particular development remains in question, a new contractor will someday need to complete the work if the project is to be finished.
A contractor stepping into that job or any other partially completed one will face many hidden challenges, according to Randy Heller, a partner at Gallet Dreyer & Berkey, a law firm in New York City.
"From the perspective of a new contractor coming in, there are a whole different bucket of risks," Heller said.
Many of the risks center around one thing: fixing the previous contractor's mistakes. "They are going to be blamed for things that they did not do that preceded them," Heller said.
To avoid being stuck with someone else’s errors and protect yourself from other potential problems, here are five things every contractor needs to do.
1. Take photos. For starters, bring your camera (or your phone). Contractors need to "take a gazillion photographs and videos of the condition of the work," according to Heller.
"The contractor will be protected from false accusations of things they didn't do by taking good pictures and videos and recording exactly the state of the job before it even starts," Heller said.
Incoming contractors should also realize that the project's owners will be taking precisely the same pictures.
"The first people on-site for both sides are going to be videographers and end drone operators who are going to be recording the status," Heller said.
In a perfect world, the photos should help resolve disputes around work that the replacement contractor needs to do to fix existing problems, assuming that work isn't built into the contract.
"The owner doesn’t want to be finger-pointing with a new contract that points to the previous contractor and the previous contractor points to the new [contractor]," Heller said. "So the photographs are going to help with some of that. But the owner is going to want the replacement contractor to assume all risks and all of the problems that it encounters."
2. Do your due diligence. Often in cases where new contractors leave a job shortly after taking over, the issues might center around defects in the original construction, according to Carol Sigmond, a partner at Greenspoon Marder.
To avoid these issues, Sigmond recommends that contractors ask for a full disclosure of the project with representations and warranties, meeting notes, financial status, schedules, estimates, job records, building department files and regulatory status. For instance, if there is a plumbing issue, it will show up in change orders and meeting notes.
"You have got to compare the drawings, the requisitions and the actual payments," Sigmond said. "You have got to make sure that everything aligns because you're going to buy a lot of headaches no matter what you do."
Sigmond warns incoming contractors to not just rely on what the owner or a previous contractor tells them. They need to do their own digging.
"I would insist on the right to inspect and I would bring in a forensic engineering expert," Sigmond said.
Sigmond would also ask for a representation and warranty from an architect on what, if any, defective work they found.
"Let's say that the original contractor was having trouble with his plumber," she said. "I would want to be able to open some plumbing chase walls to make sure the plumbing is actually the way it's supposed to be. So I would do a pretty intensive physical inspection."
3. Specify who pays. If issues are found, Sigmond recommends assigning the liability for those issues to the owner. "He has a relationship with a contractor that made the original mistake," she said. "I don't want to pay to fix the mistake."
While Heller agrees that the incoming contractor "can refuse to accept responsibility for the things that it doesn't know about," the owner will push hard to have the new contractor cover any issues that come up.
"The owner will say, 'Whenever you think is necessary, you come on-site, and you do a deep dive into the existing condition,'" Heller said. "'Because when this job is done, and I turn on the switch and it doesn't work, I want to be able to blame you for everything.'"
If the contractor does accept that responsibility to fix previous mistakes, they need to protect themselves financially. "The replacement contractor really needs to cushion its bid to include the possible liability for what it doesn't know about," he said.
4. Use your leverage. In traditional contracting situations, Heller's experience is that the owner usually has the power in the relationship. "Typical contracts are a ladder," Heller said. "People up the ladder are constantly oppressing people down the ladder with contractual provisions. So an owner hands its custom contract to a contractor and imposes on that contractor 100 obligations. The only obligation of the owner is to pay that."
But when an owner is looking for a replacement contractor, the situation can shift. Often, owners can have a heightened sense of urgency to finish a project.
"The contractor has a little bit stronger bargaining power because now the owner is a little more desperate," Heller said. "People don't want to come into a job that's a problem job. It's already running late. Banks and lenders are already breathing down people's necks."
With these issues, attracting quality contractors can be difficult.
"New contractors don't want to come on the scene," Heller said. "So when they do, they have a little bit stronger bargaining power."
5. Talk to your insurer. As a contractor is negotiating with the owner, it also needs to check in with its insurance company, according to Joseph Ferrentino, a partner at Newmeyer Dillion. He advises contractors to explain to their insurer that they're taking over someone’s project.
"Make sure that your coverage is such that you're not going to have a dispute with the insurance company over being responsible for the prior contractor’s work," Ferrentino said.
Ferrentino said the incoming contractor needs to try to get assurances that it is covered in the event of a lawsuit, regardless of whether somebody alleges it was their work or the prior contractor's work.
"Then, if I were the contractor, I want to find out as much as possible about the insurance program of the previous contractor," Ferrentino said. "So if there is a dispute, you want to have information about that."
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