Not So Fast! Closing Out Construction Projects

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Not So Fast! Closing Out Construction Projects

By Christopher Utrera / Published March 2020

Photo by iStockphoto.com/ALotOFPeople

So, you retained a contractor, money is still owed, and their work is near completion—now what? Whether it’s delays, payment issues, or workmanship concerns, the closing out of a construction project can be just as daunting for an association board as making the decision to undergo the construction in the first place. The following are some common issues that arise when a construction project is nearing its end.

Terms of Contract Control

     As always, the starting point with all legal relationships is the contract. If properly drafted, the contract should cover most of the issues that can arise. Despite this, associations and contractors often rush to make quick decisions, overlooking their contractual duties. Doing so can be incredibly detrimental, and an association could be violating the terms of the very contract it is seeking to enforce. Because of this, it is imperative that any decision made at the end of a construction project be made after carefully reviewing the terms in the contract for work.

Payment / Retainage

     The root of nearly all issues with the close-out of a construction project is exactly what you would suspect, money. Do you release the retainage to the contractor? Do you withhold progress payments? Are you waiving any claims by paying the contractor? These are all legitimate questions that must be addressed. First, as stated above, one must start with the contract. Many times, contracts require that each party continue with their duties and responsibilities to each other, even if a dispute arises. For example, let’s assume there is a delay in the work that is the responsibility of the contractor. Do you withhold progress payments, or do you pay the contractor what is owed and make the claim after? Generally, the association should endeavor to not violate any other terms of the contract, which likely includes making timely payment if a request for payment is properly made. The association could arguably be in breach of contract by withholding progress payments for delays (or other issues). Holding progress payments hostage for a legitimate concern may appear to be the logical course of action, but unless the association has properly weighed the legal ramifications, it could potentially backfire. Ensuring that a proper amount of retainage has been negotiated in the contract is another way to protect the association financially if issues arise towards the end of the project. Again, the terms of the contract are critical.

Liens

     So, the decision was made to not pay the contractor, and as is often the case, the contractor records a lien. What are the association’s options? First, have an attorney review the validity of the lien. If it is improper or incorrect in some way, it could potentially invalidate the lien and subject the contractor to an invalid lien claim. Secondly, a discussion should be had whether it is worthwhile to “bond off” the lien. In short, Florida law allows for a transfer bond to be purchased and substitute as security for the property that is subject to the lien. However, an association should consult with an attorney and reputable surety prior to “bonding off” a lien in order to make sure it is the proper course of action and worthwhile.

     Condominium associations present a unique situation when a lien is recorded by a contractor. When the work is performed with the express consent of each unit owner (which is assumed if the board of directors enters into a contract for the work), the lien is recorded against all individual condominium parcels in proportion to their liability for the common expenses. So when a unit owner attempts to transfer his interest or refinance his unit, the title is clouded by the lien. There are two options when a unit owner is faced with this scenario. He can either pay the proportionate amount of the lien that he is responsible for (typically a small percentage, depending on the number of units within the association), or the association can provide an affidavit of sufficient funds stating it has the adequate amount of funds to “cover” the lien. Again, the association should consult with an attorney and be sure that it does, in fact, have sufficient funds available to pay the claimed lien amount.

Inspection

     Without question, before closing out the project, the work should be inspected by a professional. Chances are the association has already retained a project management company, or the architect/engineer tasked with designing the work is also responsible for inspecting the completed work. Never-theless, the association should undoubtedly have a professional inspect the quality and completeness of the work. If there is a problem, the professional can document it, and a claim can be preserved.

Claims

     Speaking of claims, there are a handful of claims that can arise at the end of a construction project. One potential claim already mentioned is a delay claim. If the contractor was delayed in completing the project, there may be a viable claim against them for delay damages. Again, the contract has possibly addressed this issue by way of providing a completion date and the remedy if there is a delay (e.g., liquidated damages). The same is true in reverse—the contractor may have a claim against the association for causing the project to be delayed. In an appropriately drafted contract, a delay claim can likely be asserted even after final payment has been made to the contractor. However, the association must be aware of the terms of the contract to ensure it does not waive or disclaim any sort of delay claim.

     The other typical claim that arises as construction comes to an end is poor workmanship or materials. If the claims are based upon the contract (e.g., breach of express warranties or breach of contract), then careful consideration must be given as to the claims procedure, choice of law, attorney’s fee provisions, and other relevant terms of the contract. The association would be remiss to assert a claim in a certain manner only to learn the contract provided for a different manner of asserting a claim. The same can be said for a claim against a contractor’s performance bond—adhering to the technical requirements is critical. Lastly, several other considerations must be weighed, such as Florida’s Chapter 558 notice process, insurance coverage, and ultimately whether a lawsuit will be filed. It goes without saying that if the association has reached this point, an attorney experienced in condominium and construction litigation must be consulted before any decisions are made.

     In sum, the completion of a construction project can be a daunting task for an association board. While there are numerous variables, and no guarantee the completion will be without issue, consulting a competent attorney from the onset is one way to ensure the association’s interests are best protected.

Christopher Utrera

Partner, Haber Law

     Christopher Utrera is a partner at Haber Law. He is Florida Bar Board Certified in Construction Law and is experienced in handling a wide variety of matters in construction law, commercial and business litigation, and complex tort litigation, regularly advising associations on construction-related matters. He can be reached at cutrera@haber.law.