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Blogs | Ginn & Crosby, LLP
1. Serve Notice of Mechanic's Lien. The first requirement is that you have to serve the mechanic's lien and a new form entitled a "Notice of Mechanic's Lien" upon the Owner by registered mail, certified mail, or first class mail with a certificate of mailing. The "Notice of Mechanic's Lien" that must accompany the Mechanic's Lien, reads as follows:
Link to KPIX Piece on Construction Loans
Published by dginn on Fri, 08/28/2009 - 12:47
David Ginn was quoted in an article on construction loans.
Here is the link: http://cbs5.com/consumer/construction.loan.crackdown.2.1145216.html
Here is the video: http://cbs5.com/video/?id=54623@kpix.dayport.com
Understanding and Dealing with Construction Loans
Published by dginn on Tue, 08/25/2009 - 19:27
A construction loan is money borrowed from a lender to construct a building. It is different from a normal loan in a few ways.
(1) The lender does not lend all of the money to you at once. Instead, there is a construction fund from which the lender will pay for the construction based on the progress of construction.
(2) Part of the loan includes a contingency fund to account for change orders and other unanticipated expenses.
(3) The contingency fund typically includes an interest reserve, that is intended to account for the interest on the loan during the course of construction.
(4) After the construction is finished, the amount of money that has been loaned is then converted into what is called a permanent loan, which is usually for a longer term, and closely resembles the typical homeowner's mortgage.
What are the important points to negotiating a Construction Loan?
(1) Employ a lender who has a lot of experience in providing Construction Loans.
(2) Find out what kind of support the lender will provide during the construction process. Most lenders will conduct periodic inspections to determine the progress of construction, and will handle progress payment requests from the contractor.
(3) The planned duration of a construction loan is critical. Always request more time than you think it is going to take. Construction is a very uncertain process, and is subject to many events that can delay the progress of work. You can also ask the lender to provide you with agreed upon extensions of the time on the loan. You need to do this up front. It is much more difficult and expensive to request an extension of a construction loan beyond the agreed upon time. For example, extending the term of a construction loan will usually require a new appraisal. Particularly if market conditions are in decline, this can result in increased loan costs, reduced loan amounts, and even a demand that the borrower contribute more money to the construction project.
What can the Borrower Do to Ensure a Successful Project? (1) Know your contractor. The contractor is the keystone to supporting a successful project. You need an experienced contractor with a record of reliability, financial stability and quality workmanship.
(a.) Get a list of references and visit with the owners. Ask how construction went and what they would have done differently. Ask how much the construction cost varied from the amount originally promised. Inspect the quality of the construction carefully to see if it meets your expectations.
(b.) There are also resources online that will help you. In California, the Contractors State Licensing Board has guides to hiring contractors, and an easy way to search for your contractor's licensing history. The website is www.clsb.ca.gov. You can also check the local court records to see if your contractor has been involved in any lawsuits about construction defects or making payments to subcontractors.
(2) Make decisions on what your project is going to be like before construction starts. Most consumers allow a construction project to start with very general design drawings. They do not consider things like finishes, hardware, appliances, flooring and other items that can greatly affect the total cost of a project. When it comes time to make these selections, the number of decisions can be overwhelming to most consumers. It is not unusual for consumers to stop making decisions at some point during a project because there are so many decisions to be made. This can greatly impact the completion of a project.
(3) Watch out for "allowances" in your construction contract. If you have not told a contractor specifically what type of flooring or appliances you want to use, contractors often put in their bids an "allowance" for the item that will change based on what you ultimately select. Many times, these allowances are used to make the contract price seem much lower than it actually will be. The result is that the actual construction price will be much higher than anticipated.
(4) Try to avoid changes in the work. It is very common for consumers to change their mind in the middle of construction about the location of a wall, expanding a room, or other changes. Changes during the course of construction are usually very expensive, and can result in unintended consequences. Moving a wall, for example, may require a structural engineer's approval, and may affect the routing of electrical, plumbing or other items.
(5) Make sure everyone is getting paid on your project. Contractors usually hire subcontractor to perform specialty work, such as electrical, plumbing, and roofing. They also order a lot of supplies, like lumber, concrete, windows and siding. All of the people providing services or supplies potentially have the right to record a lien on your home to compel payment. If a contractor runs into financial problems in the middle of a project, the consumer can be caught having to pay again for work he or she thought was already paid for. It is a good practice for consumers to keep track of any notices received, and make periodic calls to subcontractors and materials suppliers to find out the status of payment. Also, there is a process for receiving lien releases that can greatly reduce a consumer's exposure to claims.
(6) Hire an expert to observe construction. Mistakes in construction are common, and can happen for a variety of reasons. Correcting a mistake after construction is finished is much more costly than catching it early. Hiring an experienced contractor to help observe construction can save a tremendous amount of money. In addition, a contractor who is on your side can help you decide whether a request for additional money from a contractor is reasonable.
(7) Consider obtaining a Performance and Payment Bond. A performance bond is a promise from a third party surety that the construction project will be completed. A payment bond is a promise from a surety that the people providing work, labor or service to a project will get paid. Obtaining a Performance and Payment Bond (they are usually provided for a single premium) protects an owner against the risks presented by a contractor failing to complete construction or making payments to his or her subcontractors.
1. Maintain Your List of Potential Claimants. Whenever you receive a twenty day preliminary lien notice, put it into a single file, and have a list on the front page with the contact information for each potential claimant. This will provide you with a list that you can readily access to ensure that you are receiving lien releases from anyone who may be a potential claimant. This is also a good way to have an easy way to check on subcontractors and material suppliers to make sure they are getting paid.
Part 18 of Our Series on Construction Project Management Skills XVIII. Innovative Strategies for the Contractor in Default
17 of 19: Addressing Stop Notices, Liens and Contractor Claims
Published by dginn on Sun, 12/03/2006 - 08:53
Part 17 of Our Series on Construction Project Management Skills
XVII. Addressing Stop Notices, Liens and Contractor Claims
A. Dealing with the Unbonded Stop Notice on a Private Project
On both public and private projects, stop notices are used by subcontractors and material suppliers to place a claim upon the construction fund, such as the money that a public entity sets aside for construction, or, on a private project, the amount set aside by the construction lender for the construction.
A significant difference between stop notices on public and private projects is the issue of bonding. On public projects, bonding is not required. Once a valid stop notice is received, the public entity cannot pay the funds that have been set aside until the stop notice is released. Civil Code section 3186.
On private projects, however, the construction lender is not obliged to set aside funds due to the contractor upon receipt of a stop notice, unless the claimant has posted a stop notice bond. The cost of stop notice bonds is usually a percentage of the claim amount. Many claimants find the cost of a stop notice bond to be prohibitive, particularly with large claims. If an unbonded stop notice is received by the construction lender, the construction lender has the right to ignore the stop notice entirely.
The issue for project managers on private projects is whether unbonded stop notices should be ignored. In most cases, the answer is emphatically, "no." A stop notice is a signal to a project manager that at least one of the participants in the project is having trouble getting paid. Project managers should contact the prime contractor immediately upon receipt of any stop notice, and demand to know why it is that a stop notice was received. Progress payment requests should be reviewed to determine whether payment for the claimant's work has already been paid to the contractor.
The reason why stop notices require project managers immediate attention is that stop notices are one of the early indicators of a contractor going into default.
B. Amounts Withheld Under Stop Notice
On receipt of a stop notice, the public entity is required to set aside sufficient funds to address the claim and anticipated litigation costs. Civil Code section 3186 The majority of public entities set aside125% of the amount of the claim. This amount comes from Civil Code section 3196, which references the amount that a stop notice release bond must be.
Where there are multiple claims and limited funds, the amount retained in stop notice funds are distributed on a pro rata basis to each of the claimants, based on the size of the claim presented. For example, if there is a claim for $150,000, a claim for $100,000, and a claim for $50,000, but only $100,000 left in the construction fund, the $150,000 claimant would receive half of the fund, or $50,000, the $100,000 claimant would receive one third, or $33,333 and the $50,000 claimant would receive one-sixth, or 16,666. See Civil Code section 3190.
C. Challenges to Stop Notices
Claimants may sometimes present stop notices that are subject to challenge by the contractor. There is a procedure that a contractor may use to challenge a stop notice in court on an expedited basis. If a contractor elects to use this procedure, the owner will receive notification that papers have been filed with the Court. In response, the has no obligation to do anything other than to set aside funds under the stop notice until the owner receives a Court order, directing the owner whether to maintain the stop notice or release the money. See Civil Code section 3196-3205.
D. Strategies to Release Project Liens
When liens or stop notices are recorded against a project, there are several immediate concerns that should be addressed. The receipt of liens or stop notices may be the first indication that a contractor is in financial trouble. In addition, the recordation of a lien may be a basis for the lender to consider the owner to be in default under its loan.
If the contract contains a "lien free" provision, requiring the Contractor to post a bond, the project manager should immediately send notification to the contractor that a lien has been received, that the contract requires the contractor to post a bond, and that the contractor has so many days to post a bond or be declared in default under the contract. In addition, an immediate meeting to discuss the claim with the contractor is a good idea.
If the contractor fails or refuses to post a bond, immediate action should be considered. This includes reaching agreement with the contractor for the owner to make direct payments to the claimant, directing the claimant to make a stop notice claim, and directing the claimant to make a claim on the contractor's payment bond.
If the contract provides the owner with audit rights, the project manager should consider whether now is the time to get to the contractor's financial records to determine whether there should be concern about the contractor's ability to finish the project.
E. Closing the Deal
Assuming a resolution has been reached, the terms of the settlement should be put in writing at the time a settlement has been reached. It is essential to avoid additional claims that the settlement terms include a statement ending the introduction of new claims. The following is an example of language that could be used to eliminate any further claims arising before a particular date:
"This is a settlement of all claims relating to performance of the project through (date), and the Contractor waives all claims for extra work, delay, disruption, and other claims for compensation, and that upon payment of the agreed sum, the Contractor will sign an Unconditional Release of [Final or Progress] Payment in accordance with Civil Code section 3262, and will identify the amount of disputed claims for extra work in such release as ‘zero.'"
Use similar language in change order documentation to ensure a complete release of all claims. An attorney will likely recommend additional language to address the particulars of a given settlement.
On public projects, there are additional limitations on the public entity's ability to obtain releases. Public Contract Code section 7100 provides as follows:
Consequently, if a public entity tries to obtain a release from all claims from a contractor arising out of the work performed, the release provided may not be enforceable. Consulting an attorney concerning the appropriate terms for a release is recommended.
Part 16 of Our Series on Construction Project Management Skills XVI. Dealing with Project Delays
Part 14 of Our Series on Construction Project Management Skills XIV. Working with Contractors to Complete Projects
Part 13 of Our Series on Construction Project Management Skills XIII. Addressing Deficient Work and Materials Issues
Recording defective work is important in many respects. Recurring problems can be better identified. Communication to the contractor that the work is of unacceptable quality and the contractor's agreement to fix the deficiency can be employed later if the fix undertaken by the contractor is unsuccessful.
In most cases, observations of deficient work should be communicated to both the owner and design professionals. It is often the case that a seemingly innocuous deficiency in the work turns out to have devastating impacts later on. In addition, consider whether the repairs made by the contractor will impact any product warranties.
B. Evaluating Impacts of Deficient Work
Addressing deficient work takes time, personnel and equipment. For the contractor, correcting deficient work is a complete loss. Contractors may later try to re-characterize the slow progress caused through the repair of deficient work as delays caused by owner impacts, such as late response to RFIs or submittal approval. Measuring the forces and time spent repairing deficient work will demonstrate that the contractor's claim of delay impacts has an alternative explanation.
Part 12 of Our Series on Construction Project Management Skills XII. Project Recordkeeping
Daily reports should keep an accurate accounting of personnel present on the project, the hours worked by each, the nature of the work performed, weather conditions, and significant events or conversations at the project site. If the contract involves performance of bid items, identification of the bid item to the work is a very helpful means to identify performance of contract work. Identification of work locations through stationing is helpful, particularly on utility installations or roadwork. Alternatively, use grid line locations or other form of specifying where the work is taking place. This is very helpful in deterring claims of interference or interruption. If a contractor claims, for example, that surveying work is interfering with its performance, locating the areas of work will help demonstrate whether any interference actually occurred.
Inspectors preparing the daily reports should also have at hand the current project schedule. Make note of other critical and non-critical work items that are available to the contractor, but not being worked upon. Be sure to document changes in crew size, contractor management or equipment demobilization. These changes can indicate an additional project being taken on by the contractor that may affect his ability to perform to the same degree.
Daily reports should also address contractor issues, such as safety problems, defective work, poor coordination, late delivery of materials, inefficient deployment of resources and other observations that may highlight aspects of the contractor's performance that may otherwise be lost.
You should regularly review daily reports to ensure that a thorough record of project events has been created.
Daily reports are an important repository of the staffing and use of contractor resources on the project. There are several essential areas that should be tracked and checked on a daily basis:
Personnel changes or shifts
Idle Equipment on Site
Deliveries to the Project Site
Potholing/USA requests
Difficulties encountered by the contractor
Impacts to the contractor's schedule
Documents received or delivered on site
Discussions with contractor personnel
Management and supervision observations
Work available but not worked on by contractor.
Change orders and force account work.
B. Incorporating Photographs Into Daily Reports
Photographs are perhaps one of the best means of capturing project events, and illustrating important points. A digital camera should be carried by every project management staff member who is on the project site. Ideally, photographs should be taken on a daily basis. Photographs should show crew size, equipment on site, areas of available work, and problems on the project site, to name just a few. These photographs can actually be dropped into computerized daily reports, providing a vivid record of what occurred on that day.
C. Handling Project Correspondence
The basic rule for handling project correspondence is that all issues raised by the contractor in correspondence must be addressed in a thorough and complete manner. References to the contract requirements should be included in correspondence, as well as a full account of events.
It is important that correspondence continually refer back to the contract requirements, and that the contract requirements be followed as closely as practicable. A recurring theme on many construction projects is the claim that the owner impliedly waived the contract requirements by failing to enforce the provisions of the contract.
The tone of correspondence should always be professional. No matter how insulting or demeaning correspondence from the contractor may be, sinking to the contractor's level will only further erode the level of discourse, and seriously impact your credibility and objectivity.
D. Conducting Weekly Meetings
Weekly meetings with representatives of the contractor and design professional are an excellent way to keep the channels of communication open. The project manager should take responsibility for setting the agenda for the meeting, conducting the meeting, and preparing the minutes of the meeting. It is strongly recommended not to delegate this task to the contractor. Weekly meeting minutes are an important record of the unfolding events at the project, and keeping control over the contents of these minutes is an essential part of keeping control over a project.
Most project managers adopt the convention of numbering agenda items. The items are left on in ensuing meetings and the status of each items is noted until the matter has been finally resolved.
E. Certified Payrolls
Certified payrolls are an essential part of the paper work of a project. The certified payroll has the advantage of identifying the wages, hours and personnel involved. If the provision of certified payrolls is optional, there should be a request at the commencement of the project that certified payrolls be provided.
Certified payrolls provide a reliable method to track and confirm the employment of personnel on a project. Certified payrolls are more reliable than daily reports in tracking personnel. You should periodically review the reports generated by both its own staff and the contractor's daily reports and compare the reports to the certified payrolls.
F. Daily Extra Work Reports
When you first learn of a potential claim, immediately advise inspection staff to monitor closely the work purportedly affected by the claim. Monitoring of claimed extra work should take place without regard to your assessment of claim's validity.
Precise and accurate measurement of time, personnel and equipment is essential to the future handling of the claim. Impacts upon the performance of critical work should also be identified. Photographs of the affected area, the equipment and the personnel should all be taken. If there are claims that may involve delay, take pictures of the areas of the site that are available for work, but are not being worked.
It is often the case in litigating a claim that new issues, documents or contentions are raised that gives validity to what was originally considered to be a meritless claim. In this case, if the owner's representatives have not documented the work disputed, the owner is at the mercy of the contractor's record keeping.
G. Schedules and Schedule Updates
Before construction begins, obtain a reasonable project schedule from the Contractor. The schedule should be examined for faulty logic or identification of non-critical activities as critical. Preferably, the schedule should contain the anticipated level of staffing.
Regular schedule updates and maintenance of an "as-built" schedule are essential to dealing with issues of delay, disruption, and imposition of liquidated damages.
H. Responding to RFI's
Contractors often use the RFI process to create or justify claims. RFI's should be examined carefully to guard against abuses of the RFI process.
An RFI that requests "clarification" of whether the contract requires certain work is a signal of a potential claim. The response to the RFI should note carefully the contract requirements and not attempt to impose additional requirements unless it is intended that those additional activities will receive compensation. If a clarification is provided that specifies how the work should be done, an explanation of why there is no additional cost to the contractor should be included. Field personnel should be alerted to monitor the work raised in the RFI.
Another contractor technique to create claims through RFI's is to submit a large number of RFI's at one time and request an immediate response to all of them. Alternatively, the contractor will repeatedly resubmit an RFI in an effort to extract a response that creates extra work. Any time that there are a large number of outstanding RFIs, the project manager should request that the contractor prioritize the response to the
RFIs, and indentify any deadlines or critical work that may be impacted.
An RFI log is an essential part of contract management and should be reviewed regularly to ensure that responses have been provided in a timely manner. Delays in responding to RFIs are a frequent source of delay and disruption claims.