Monday, October 11, 2010

Lessons The Construction Industry Can Learn From The Foreclosure Crisis

One of the major headlines in the news lately has been the moratoriums banks have put on foreclosures. Some of the major lenders, including JP Morgan Chase, Bank of America, and GMAC, have voluntarily stopped foreclosing on residential properties due to questionable underlying documentation. Many state attorneys general have also come forward demanding that banks stop foreclosures until they can provide proof that they have all the proper paperwork on the properties in question.

No doubt, many of the properties subject to foreclosure formed the basis of the boom period for residential construction companies. But apart from the macroeconomics of supply and demand, are there any lessons the construction industry in general can learn from watching the banks?

Absolutely. The biggest problem I see with the banks was carelessness or sloppiness in their documentation and record-keeping.

Lenders relied heavily on forms with a few blanks to be filled in with the details of each transaction. With as many mortgages as were being sold, contracts, assignments, deeds of trust, and other critical documents were completed by unskilled employees who did not appreciate the significance of the documents they were creating or, more importantly, the consequences if they were not done correctly.

Unfortunately, I have seen these themes rear their ugly heads in the construction industry all too often.

Anyone who has spent any time in construction can tell you how critically important good record-keeping is. It is key in submitting payment applications, documenting compliance with scopes of work and code requirements, and proving claims or defenses if litigation arises.

When it comes to protecting your rights to payment through liens, accurate and proper documentation is indispensable. Liens are easy enough to perfect. However, they are also highly technical, and a failure to comply with the statutory requirements of your particular jurisdiction can render your lien unenforceable.

Of course, the most egregious sin of poor record-keeping in the construction industry–at least in my opinion–is the handshake contract. (A close second is the two-line purchase order that doubles as the contract for your major construction project.) In a perfect world, a handshake agreement would be fine. Unfortunately, we don’t live or work in that imaginary place. What happens when there is a question about scope of work? Or about how long construction will take? How are payments to be made, and what happens if there is a dispute about defects? When will as-built drawings be provided, and what happens if they aren’t?

The beauty of contracts is that they clearly define the duties and obligations of all the parties and eliminate ambiguity. Obviously, the larger the contract value and more complex the construction project, the more detailed the contract should be to address–in advance–all the potential ambiguities.

Banks and residential lenders have gotten themselves in trouble because they did not accurately document their transactions. Now they are paying the price by having difficulty foreclosing when borrowers have defaulted.

Contractors can learn a valuable lesson. Avoid headaches down the road such as payment delays, liquidated damages, or even litigation, by having good practices in place and accurately documenting your work.


Hi Vis said...

Detailed record keeping is so very important. Its easy to get caught up in the day to day activities of running the construction and let the record keeping slide, - but that's a big mistake. Small changes to the project, if not documented, can add up to big bucks. Even isues like the daily weather and construction safety meetings can have future impact. Put as much into the contract as possible. It can go a long way to winning, or possibly avoiding litigation.

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Unknown said...

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Unknown said...

If you are going to buy a foreclosure you have to make sure all the paperwork is in order. But I think it's better to hire a general contractor and build your own house.

Unknown said...

I have been looking into a construction law. I want to make sure that everything is in order before I move on with my next project. I do not know what I would do without having a construction law around.

Unknown said...

The right paperwork is so important. If you're signing a contact or an insurance quote for a construction job, you've made a commitment. Like you said, "handshake agreements" just don't have the same longevity. Always make sure you have the agreement in writing that both parties understand.

Unknown said...

Absolutely, proper documentation, meticulously preparing contract, accounting for all the duties, responsibilities and contingencies is not entertaining at all but most rewarding at the end, keeps you on a strong footing.

Ronny McNamara

Vivek Patel said...

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