Mind your Ps and Qs!
Why good construction lawyers can be worth their weight in rebar

By David Silva

If you are a developer or contractor who does not want to see your profits converted into litigation costs, you should follow these key rules: Know your rights and obligations, get your financial house in order before breaking ground, organize your time well and be mindful of emerging technology.

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Top attorneys in the field of construction law will tell you that these and other hard-learned lessons boil down to basic good business practice. But, they quickly add, you'd be surprised at how often construction professionals find themselves in legal hot water by failing to either read a contract or by not thinking through their financial situation before the heavy equipment arrives.



"I would say the No. 1 problem that gets contractors and developers into legal trouble is not engaging in legal contract review and assistance in negotiating favorable terms and conditions," says Lisa Dal Gallo, a partner with Pekar and Abramson, P.C. The San Francisco-based firm specializes in construction, government contracts, labor and employment law.

"The construction market is actually very good right now, and so there is really no reason to accept unfavorable terms and conditions or risky deals," Dal Gallo adds.

That otherwise conscientious developers would forgo such elementary, cost-saving practices is something that both baffles and enriches construction lawyers. Neither Dal Gallo nor other attorneys interviewed for this article would give actual examples of this phenomenon, citing client confidentiality, but they say if they did, they say, the examples would be legion.




Whether plainly stated or couched in legalese, the bottom line among
California construction attorneys is the same:
The primary reason why they're so busy is because developers and contractors are so bad at reading their contracts.










"Nothing is worse than finding out after the fact that what you assumed had been your rights and obligations in a contract are not, but in fact are either defined by others or defined by the courts as contrary to your expectations," says Bruce Cohen of Los Angeles-based Cohen & Lord, which focuses on construction, real estate, employment and business law.

"That's not unique to the construction industry, but because construction relies so heavily on documents, it underscores the need for common understanding, terms and conditions, clarity of statements and accuracy of agreement.

"Nothing is more likely to quell an incipient dispute than a good set of contract terms and conditions and contract documents. Conversely, nothing is more likely to promote a contract dispute than the absence of that. I've seen it over and over in the industry."

Another problem Cohen and others witness over and over is the failure of the construction professional to hedge what, in the end, amounts to an enormously expensive bet. For all their demographics research and cost analyses, developers and contractors are essentially at the mercy of forces beyond their control. Material costs rise. Labor disputes flare up.


"You have to understand financing construction projects and risk management," says attorney Michael Baker, an expert in construction claims and partner at Atkinson, Andelson, Loya, Ruud & Romo, headquartered in Cerritos.
"Contractors take on a lot of risk, and there are ways
of mitigating those risks."


Robert Roginson, Baker's colleague at Atkinson who specializes in labor law, agreed.

"One of the things that the construction industry has done -- because it's smarter now -- is to insert price escalators in contracts," Roginson says. "This is a provision that would allow an increase in the payments of the contracts as material costs go up."

Another way to minimize uncertainty - read here as liability - is to figure out well in advance of groundbreaking the best business entity to assume. Because different business entities have their different pluses and minuses depending on the project in question, here is where good construction attorneys are worth their weight in rebar.

"The most popular form of entity for development is formation of a limited liability company, or LLC, because an LLC is easy to form and offers a lot of flexibility and protection from liability," says Dal Gallo. "Formation of an LLC only requires two members, and those members are provided the same protection from personal liability as officers of a corporation. Also, the LLC can choose whether it wants to be taxed as a partnership -- gains and loses flow through to members and are taxed as personal income -- or a corporation.

"General and limited partnerships are not as common because they do not offer the same protection against personal liability and also do not offer flexibility of a tax option."

Assuming that a developer, contractor or architect has closely scrutinized the contract and formed the right partnership, he or she is still at the mercy of what Dal Gallo describes as the No. 2 killer of construction profit: cost overruns brought on by unanticipated delays.

Baker and Roginson, whose firm specializes in large-scale public-sector projects, agree that a delay of just a couple of days on a $100-million project can be enormous.

Here is where staying abreast of new technologies in one's field becomes invaluable.

"There are some amazing technological innovations coming on line geared toward reducing claims," Baker says. "In California, public contractors only bill for what's in the contract plans. We have this new technology emerging called building information modeling. It takes real-time drawings and allows you, in 3D and against time, to plot against interferences before construction starts. It has the potential for saving a lot of money, but it's also more expensive technology."

As any successful developer will tell you, choosing the right construction law firm can mean the difference between spending your day counting profits or testifying in a deposition.

But what, exactly, should you look for in selecting a firm? According to several top attorneys in the field of construction law, the answer is simple:
Choose a firm that has lot of experience, knows the industry inside and out, has lots of experience, can provide expertise in more than just one field, and has lots of experience.

"Developers and contractors alike should look for firms that specialize in construction and can provide full service, meaning contract negotiation and review, project support during construction, resolution of environmental issues, labor issues, and claims and dispute resolution," says Lisa Dal Gallo, a partner with the San Francisco law firm of Pekar and Abramson. "Ideally, you want a lawyer who really understands the construction business from legal, business and technical viewpoints."

Bruce Cohen, a partner and shareholder in the law firm of Cohen & Lord, based in Los Angeles, says the best construction lawyer is one with strong ties to the industry and who plays well with other lawyers.

"Ideally, the law firm should have close relations with construction consultants, architects, engineers and contractors," Cohen adds. "It should be a firm that works, not on an intermittent basis, but on a regular basis with counsel, where there is a fluid interchange of ideas between the various professions."

And did we mention the importance of experience?

"You certainly want attorneys or a law firm in general that has significant experience in the industry," Cohen says. "By experience, I mean not simply knowledge in the law - that's mandatory -- but experience with significant construction projects on the front end, such as acquisition or the development of design contracts. The best attorneys drafting front-end documents are those who have a good understanding of how they're litigated.

"You want an attorney who's old enough to have been around the block, but young enough to have fire in the belly. Litigation is a serious matter best undertaken by those who have experience in that arena."

Robert Roginson and Michael Baker, attorneys with the Cerritos law firm of Atkinson, Andelson, Loya, Ruud & Romo, say the reason experience is so important in construction law is because the industry is so multifaceted.

"Experience and knowledge of the industry is so important because you're working as one cog in the wheel - ultimately, you'll be working with a lot of partners," says Roginson. "A business lawyer won't necessarily know what goes into the development of a contract. That's where experience is necessary."

Baker adds: "You have to have someone familiar with the process, from the dirt up." What, for example, does an architect really do? You'd be surprised how few people really know what different people are responsible for."

-- David Silva

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