3 Tips for Avoiding Lawsuits in the Construction Industry

Avoiding Constructions Lawsuits

The construction industry faces unique challenges. Disputes over quality, timing and non-payment are common between project owners and contractors. But, the good news is there are several strategies your company can use to avoid costly lawsuits. Review the list below to learn how you can protect your construction company.

1 – Clear Communication is Key 

If you want to avoid disputes with clients, employees and competitors, good communication is essential. You should always take time to clarify expectations and make a habit of doing the following.

  • Never over promise.
  • Keep the promises that you make. However, if you cannot keep your promise for some reason, let the person know. Offer a plan on how you will resolve the issue and make it right. Call first, then follow up with an email detailing the agreed-upon terms to resolve the issues.
  • Don’t avoid difficult situations or conversations. Avoidance is more likely to cause the problem to escalate.
  • Evaluate how your tone may be perceived. And remember that email or text messages can make it difficult to effectively convey your desired tone.
  • Don’t be afraid to swallow your pride. Doing so could help you resolve an issue before it becomes a legal matter.
  • Evaluate and enforce best practices regarding how your employees should communicate.

2 – Make Documentation a Priority – especially when it comes to change orders

To help protect yourself and your business, take time to document important communications and commitments. A few best practice tips for keeping appropriate documentation:

  • Don’t do handshake deals. All contracts should be committed to writing – even if it’s a simply one-page agreement setting forth the most basic terms, like price, scope and timing.  In particular, when dealing with change orders, it is especially important to get everyone’s approval in writing.
  • Be sure to have key customer contracts reviewed by counsel, in order to help you understand the relevant provisions. It is also best to hire legal counsel for, at a minimum, reviewing and/or drafting of custom deal contracts, settlement agreements, employee handbooks, document retention policies, sexual harassment policies, and non-compete agreements.
  • Be sure to have counsel review your company’s standard contracts every 2 to 3 years.
  • Save only what is important, such as contracts, loan documents, key documents underlying contracts and relevant negotiations, proof of payment, calendars, and tax information.

Important note – If you are anticipating business litigation, you must implement a litigation hold (also known as a preservation order or hold order).  Once you know of the existence of a dispute or even a potential dispute, save all information. The loss of relevant evidence because of failure to institute a litigation hold can result in negative sanctions against you by the Court in any related litigation.

3 – Protect Yourself: Review your insurance, business formation and employee classifications regularly. 

Insurance isn’t a popular topic of conversation, but it is an important aspect of risk mitigation especially in the construction industry. Review the following points to help ensure your business is accurately covered.

  • Make sure that all current policies are correct and appropriate for your organization.
  • Investigate your options with multiple brokers.
  • Determine if the insurance company you are working with focuses on your niche business needs. Are they industry-specific to you?
  • Understand your potential need for multiple types of policies, including general commercial liability, errors and omissions, auto, property, workers comp, product liability, and other riders/endorsements.
  • Understand the obligations you owe to your insurance company, such as notice requirements, providing documents and cooperating fully in any investigation. Don’t settle with the other side without first getting your insurance company involved if you expect your insurance company to contribute funds toward the settlement.

Business Formation – Occasionally, business owners are surprised to learn their business structure is not aligned with their type of work. To help minimize liability, you should engage counsel to help determine the appropriate corporate entity for your business. You will also want to keep corporate records, annual reports and minutes if your business formation requires it. Make sure to follow all the formalities of your business structure in order to ensure protection from personal liability. And don’t commingle funds or use the company bank accounts as your personal piggy bank!

Employee classifications and wage issues – The Fair Labor Standards Act and the US Department of Labor (DOL) have established strict criteria for determining how your employees must be paid. On January 1, 2020 the DOL announced an updated overtime and salary level threshold. It’s important your company stays up-to-date and adheres to all labor laws.  Unfortunately, many employers (especially in the construction industry) haven’t correctly classified their independent contractors and employees or are engaging in “banking” of hours that directly violates the overtime laws. Often employees are thought to be exempt from receiving overtime pay when they actually should have non-exempt status and be paid 1.5 times for any overtime hours earned each week. Payroll errors can lead to potential lawsuits (including class actions) from either past or present employees.

To learn more about business litigation and how you can proactively protect your construction business, you can contact us here or call us at 920-996-000.