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Show Me The Money!
Given the unprecedented tough economic times, contractors should take prudent measures to protect their balance sheet. Before undertaking any project in the private sector, either as a prime contractor or subcontractor, it is critical to obtain evidence of financing prior to starting the job.
The credit markets remain in complete disarray despite the federal government's attempt to shore-up and stabilize financial institutions. Credit remains exceptionally tight and construction loans are as difficult to obtain as they ever have been. The last thing a contractor needs is to start work on a project and find out the owner does not have the funds to complete the job.
The result of completing the work and not getting paid is called a "hung" receivable, which, depending on how much work has been completed, and how much is owed, could dramatically impact a contractor's cash flow and balance sheet. When surety underwriters perform their financial analysis they will subtract "hung" receivables from both working capital and net worth, negatively impacting the amount of surety capacity they are willing to provide.
The days of assuming financing is in place are over. Many private owners are struggling financially and may not have complete financing prior to starting a project. Believe it or not, many contractors do not confirm financing and fall victim to an owner who does not have adequate funds to pay them for their work. A contractor does not want to insult a client they have worked for in the past who has always paid them as agreed, however, all feelings aside; it's prudent to request evidence of financing prior to starting a project to protect your balance sheet.
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This issue of the Punch List is sponsored by
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Chinese Drywall - A New Legal Problem For America's Builders
Claims for construction defects, breach of contract, and personal injuries arising from the use of Chinese drywall in recently built homes are the newest type of litigation involving the residential construction industry. This litigation has emerged in Florida and may soon spread throughout the Country.
Chinese drywall was first introduced to the United States in 2000 or early 2001. The use of this material increased markedly between 2004 and 2006 as the result of a shortage of domestically produced drywall.
Chinese drywall allegedly emits sulfur-based gases with a "rotten egg" odor. Plaintiffs claim that these gases corrode air-conditioner coils, computer wiring and metal picture frames. The Florida Department of Health says tests show that the emissions levels from the drywall pose no immediate health hazard. Similarly, Lennar Corp., the nation's second largest builder by volume, tested air quality in at least 50 homes built with Chinese drywall and found no health threats. United States Senator Bill Nelson, a democrat from Florida, sent letters to the Environmental Protection Agency and the Consumer Product Safety Commission (CPSC) asking these federal agencies to investigate whether the drywall is toxic. Currently the CPSC does not have any product safety standards regulating drywall or gypsum-based building products.
One lawsuit claims that impurities in the Chinese drywall react during periods of high humidity, releasing sulfur. Some experts hypothesize that exposure to humidity on the drywall's trip across the ocean from China could be a problem. There are also allegations that some drywall was made with waste material from scrubbers on coal-fired plants, called "fly ash," which can emit sulfur compounds into the air.
There are at least four current suits in Florida involving Chinese drywall. One class action lawsuit in Florida alleges that 10 million square feet, about 200,000 sheets, of Chinese drywall was used in Florida homes. The lawsuit charges that the defendants negligently manufactured and sold defective drywall, which was unreasonably dangerous in normal use because it corroded air-conditioner coils and electrical components. This lawsuit also claims that the emissions cause residents of homes where the drywall was installed to suffer from coughing and irritation of the sinuses, eyes and throat. Lawyers for the class action suit say that home builders are not going to be "let off the hook."
This may be just the beginning of lawsuits against Chinese drywall manufacturers and the home builders that used this material. Some believe the issue could be larger than the wave of mold lawsuits that started early this decade. While home builders may have some recourse against the subcontractors who installed the material and the Chinese drywall manufacturers, home builders could be left without insurance coverage to defend the lawsuits. Insurance carriers may cite pollution exclusions in their policies as the basis to deny coverage to their insureds for Chinese drywall-related issues.
Issues regarding Chinese drywall are just beginning to emerge. We expect to see an increase in lawsuits in the very near future, filed in jurisdictions across the Country. It is recommended that home builders that may have used Chinese drywall compile documents such as subcontracts, purchase agreements, insurance policies, warranties and builders risk policies in order to ascertain the extent of the potential problem and possible mechanisms of risk transfer.
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Assumption Of Liability Via A Change Order - Part II
In the last edition of the Punch List Newsletter we began a three part series titled Assumption of Liability via a Change Order. We discussed the concept of legal liability and claim scenarios that trigger your general liability insurance policy.
The fact that something goes wrong on a job site does not mean you as the contractor are legally liable. In some cases ultimate liability is not determined until the end of a trial when a decision is rendered by a judge or jury.
It is important to understand that a business decision to sign a change order to repair property damage or pay for expenses associated with bodily injury does not obligate your general liability carrier to reimburse you.
Many contracts today contain requirements for the owner to take out property insurance for "the work". Not only is this coverage for the benefit of the owner, it may also include you, the prime contractor, and all subcontractors as additional insured's. Furthermore, these contracts may contain a waiver of subrogation provision, which bars the insurance carrier from subrogating against the prime contractor or any of the subcontractors.
Therefore, it is imperative the contract be closely reviewed when a claim scenario occurs. And when one does occur, the owner and the owner's insurance carrier should be placed on notice of the claim. It is also recommended you place your insurance carrier on notice. Although immediate action may need to be taken to repair or replace property, it should not be done via a change order or under the assumption of legal liability.
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Certificates Of Insurance And Specifications Trends!
The importance of reviewing job specifications for insurance requirements during a project's bidding process cannot be understated. Since project owners have leverage to make demands, contractors should carefully review everything prior to signing a contract. Unfortunately, it is commonplace for a contractor to put themselves in a precarious situation by not considering compliance of their insurance obligations until after a project begins.
When a contractor is awarded a project they'll request a certificate of insurance. This is an important and common task. However, since the certificate only shows the actual terms of a policy, problems arise when the insurance coverage doesn't match the insurance requirements in the job specs. To make matters worse, the current trend by project owners is to request a broader scope of coverage than ever before.
One common area of conflict happens when the project owner requires notification of policy cancellation, nonrenewal, or modification within 30 days. This is a problem since certificates only show the actual terms of the policy and most policy language is limited to 30 days with 10 days for nonpayment of premium.
Another area of concern is when a project owner asks for the certificate to show that completed operations coverage will be maintained for a specified period of time. The certificate is only meant to show coverage at a specific point in time and offers no guarantees for future coverage. A completed operations warranty cannot be provided on a certificate of insurance.
Project owners are now incorporating primary and noncontributory terminology in their request for additional insured status on contractor's general liability policies. Oddly enough, the question of whether a policy will be primary does not depend on the terminology of the contractor's policy but on how the additional insured's general liability policy addresses other insurance. To make matters more complicated, the term "noncontributory" is not typically included or defined in a policy or in the additional insured endorsement. So not only can the term not appear on the certificate of insurance if it's not included in the policy, the contractor's policy itself may not be the primary at all.
In light of the enactment of harsher state penalties for misrepresentations made by insurance certificates, insurance brokers are now more careful to accurately reflect the actual policy terms and conditions. Brokers often opt to provide a copy of the policy and its endorsements for project owners to review in lieu of using unauthorized terminology. Your broker should be willing to initiate discussions with project owners on your behalf to provide education and alternative solutions to the limited information that can be provided on a certificate of insurance.
The best way to avoid this situation is to request a spec analysis from Gibson's construction team before you submit your bid for a project.
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Crane Safety
The use of tower cranes has increased considerably in the past twenty years. Tower cranes have become popular because they work well in crowded spaces, allow for great lifting heights and spans, and they can grow with the building.
Catastrophic losses due to crane-related incidents are also on the rise. The Specialized Carriers & Rigging Association estimates more than 2,100 tower cranes are currently in use in North America and it is estimated that cranes are involved in up to 33% of all construction deaths.
Tower crane erection, jumping, and dismantling are some of the most hazardous operations in the construction industry. In order to lessen the potential for such catastrophic loss, it is important to properly choose, assemble, use, jump, and disassemble the crane and perform adequate inspections by a trained, certified inspector after each step.
Because there is a wide variety in the type and configuration of cranes, selecting the proper one for the job is a critical component to crane safety. Factors to consider when selecting a crane include: weight of load, height of lift, distance of movement, number of lifts, length of time the crane will be needed, site conditions, and special operational/conditional requirements.
While assembling, jumping, tying back, and disassembling the crane, it is essential that the correct procedures, parts, and sequences are used. All crane operations should follow the procedures outlined by the crane manufacturer. It is also important to monitor the wind speed at the construction site and stop operations immediately if the wind exceeds the limit specified by the crane manufacturer.
All construction personnel must be made aware of their roles and responsibilities regarding the crane operations and should be adequately trained and prepared for emergencies should they arise. Safety precautions should be implemented and competent personnel, such as a professional engineer, should be involved in the entire process.
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