I KNOW THAT this column is entitled "McGreevy on Law" and not "McGreevy on Marketing," but bear me out. Many times I have encountered contractors who, faced with increased competition or decreased demand in their traditional market, have decided to branch out by working for a different type of customer, and ended up with less than great results. Often, what they have done is not appreciate that the legal framework for one market is drastically different from what they had been used to.

I divide the construction world into three continents: residential, commercial and governmental. Doing business with one can hardly prepare a contractor for doing business with the others in many respects, and a major difference is the legal framework.

The residential marketplace is generally highly regulated to protect the supposedly unsophisticated consumer.

In many states, residential buyers are allowed a period of time in which to back out of a deal. They must be given notices in advance advising them of a contractor or vendor's lien rights. They have more rights to avoid arbitration, get jury trials, limit interest charges and so on.

Some states have enacted special dispute-resolution systems for homeowners that are faster and less expensive than going to court. Condominium owners in particular are frequently the subject of laws requiring extensive disclosures by the developers. At the same time that residential customers have more rights, they generally have fewer duties. Residential customers are generally exempt from prompt pay laws, some labor and employment laws. Seldom are residential customers represented by a lawyer in the transaction.

Commerical customers tend to be more sophisticated.

Commercial customers tend to be more sophisticated. While the laws don't generally protect commercial customers as much as they do residential customers, commercial customers often protect themselves quite well through the use of limited liability companies or partnerships to limit personal financial exposure.

Commercial customers (particularly big ones) employ lawyers who draft very tight contracts for the contractor to sign — and the bigger the project, the longer and tougher the contract. Because time is money for a commercial customer, deadlines for completion are taken seriously. In states with private prompt pay and retainage laws, commercial contractors will have some of the terms of their subcontracts dictated by law (and include in this antiindemnity statutes and limitations on disputes procedures too).

Complex financing arrangements are often involved in large commercial projects, and contractors find themselves negotiating with the lenders who require estoppels, collateral assignments and subordination agreements from the contractor. More private commercial construction is partially financed by tax-increment financing, which adds another layer of regulation. Certainly, contractors don't like to surrender their rights to the banks, but often they have no alternative since without the loan, there is no project.

Governmental work is even more removed from the other types. It is far more likely to be "hard bid" work based on (supposedly) complete plans and specifications. It is subject to a dizzying maze of regulations, from prevailing wages, local preference rules, surety bond requirements, affirmative action participation, bid mistake and correction procedures, limitation on authority of representatives, inspection and certification procedures, false claim exposure, tax-exemption policies, debarment procedures and, most pernicious of all, the "incorporation by reference" of entire codes of regulations that the contractor doesn't even see.

When moving from one type of work to another, contractors often underestimate the impact that these different laws will have on their work:

  • While the smaller the governmental customer, the more personal the relationship, many time-consuming requirements simply can't be avoided. Working for a government owner frequently involves a large amount of paperwork, which, if not done right and submitted on time, can cause payment to be delayed.
  • Failure to accurately complete government forms can expose contractors to fines, penalties and other sanctions. Government contractors are responsible for the compliance of their subcontractors and vendors as well, adding to the administrative burden of running a job. Not knowing that a project will be deemed "public" and require payment of prevailing wages could, for example, cost a contractor a lot of money.
  • The contractor who has only done governmental work (say, school construction) can find itself unprepared for a private owner's loss of funding and the necessity of filing a lien. Lien notice statutes require strict and timely compliance and, in states such as Texas, the paperwork to comply is significant.
  • A contractor who has not done residential work may not be aware of different lien, disclosure, disputes and other laws and forfeit his rights as a result.

Just as a plumber would perform substantial due diligence before taking on electrical work, or a Vermont contractor would investigate the laws of Georgia before agreeing to do a job in Atlanta, contractors should educate themselves about the different requirements, even in the same state and city, depending on who the customer is. This is one area where making "assumptions" can be a very costly mistake.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800; e-mail to susan.mcgreevy@husch.com.