CPA & Business Advisory Blog

Five Steps to Help Minimize your Legal Pain: Planned Cost-Cutting to Avoid Future Legal Problems

Many general contractor (GC) owners think of litigation as of the cost of doing business.  This is especially true now that economic times are difficult.  Banks are more carefully reviewing draw requests, GCs are asking more questions of their subs, accounting firms are monitoring their cash flows, and everyone is trying to cut costs.  Here are a few steps to take to minimize potential pain from litigation:

  1. Know the condition of your lenders
    a. If you anticipate needing a line of credit, apply early on before you need it as lenders are more apt to offer credit to those with strong cash positions
    b. When applying at banks, make sure the institution is strong.  Look at their track record of commercial lending.  If they are calling loans from healthy customers, they may not be the best option for you.  Check the flexibility a bank will offer with deadlines, as well.  Be sure the bank is committed to funding your projects.
    c. Visit for lender ratings
  2. Get to know your client
    a. Talk to people who have dealt with them in the past.  Ask about their payment performance and punctuality. 
    b. Take note on how hard they fight change requests
  3. Prequalify your subs
    a. Find evidence that details the size and type of projects they’ve performed.
    b. Require subs to be bonded.
    c. Keep an updated list of prequalified subs.
  4. Install and maintain a good cost-cutting system
    a. Break costs down by cost code, change order, and cost type in order to research where things have gone wrong
    b. Keep precise records – list all vendors, subs, and all other relevant data to prevent unauthorized payments and increase efficiency
    c. Manage change orders to the max – make sure proper authorization – key is to make sure you get paid for your work.
  5. Be careful about your agreements
    a. Work with a good attorney – be mindful of penalty provisions for delays or late completion.
    b. Make sure terms are attainable and fair to avoid bad rep
    c. Use joint checks to ensure subs are paying suppliers
    d. Request release of lien rights as payments are made to subs (A Notice to Owner will need to be files by anyone doing work on the project that wishes to reserve lien rights)

These steps will put you in a better position in the event disputes arise.  Keep your files organized throughout the life of the project to remain efficient during times of litigation.

For more information on avoiding future legal problems, post a comment below or contact our Real Estate and Construction Group at 440-449-6800.

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