September 2019
Level With Me By JeremyWyatt
Three Construction Law Lessons I Learned From the Last Recession
Every time I pass a TV tuned to any news channel nowadays, the ticker says, “Recession, Recession, Recession!” Add to that the fact that architectural firms appear to be billing less and less each month this year, and I am starting to worry about a recession in the construction industry. The reduction in architectural billings is particularly indicative, as new projects require architects to plan them, so, when architects are billing less, it means they are planning fewer future construction projects, which means there will be less construction work in the future (at least temporarily). If indeed a construction industry recession is coming, here are three lessons that I learned from the last recession and its aftermath. Lesson 1: Beware the Risk of Reaching. The parable of Icarus flying too close to the sun, his “wings”melting, and him subsequently falling fatally into the sea is apt here. In the last recession, I saw construction contractors reaching too high to sign contracts that were either beyond their capabilities or contained unconscionable contract terms. Both of those situations caused disastrous consequences for contractors. In the former situation, I saw, for example, a trade contractor sign the biggest contract in the company’s history just as the recession of the late-2000s began to hit, hoping to extend the glory days of big profits that the company enjoyed in the mid-2000s. The problem was that the contractor simply didn’t have the manpower to self- perform this huge new contract, and the recession was eliminating labor subcontractors that it otherwise could have used. The result was that this company’s performance petered out midproject, its
bond was called, and the company (and its owner) had to declare bankruptcy. In the latter situation, I saw a well-established general contractor sign a contract to construct a project that was right in its wheelhouse in terms of size and location. Unfortunately, it signed the contract at a time during the last recession when work was scarce, so this general contractor essentially agreed to every single unfair term that the owner wanted. When the project developed major problems stemming from delays by the architect, those unfair contract terms pushed the problems down to the general contractor, who took a multimillion-dollar pay cut to the project’s profits in order to get paid at all. If either of these contractors (or many others!) had buckled down and continued to do business in the way they always had before the last recession, they wouldn’t have had these monumental issues. Lesson 2: Prepare for Contraction. To keep a business running smoothly without reaching, it likely will be helpful to prepare for a contraction in your business’s revenue. The traditional wisdom is that, on average, construction business revenues contract about 30% during a recession. To my simplistic business mind, a 30% reduction of revenues is handled most easily by a 30% reduction in expenses. For construction companies, much of the expenses related to construction projects (material and labor) will handle themselves by
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jwyatt@harrisonlawgroup.com
www.HarrisonLawGroup.com
(410) 832-0000
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