How to Structure Construction Contracts to Protect Your Rights and Get Paid What You’re Owed I Ep. 46

    

Bill Porter is the President of Porter Law Group, Inc.  Bill has been awarded the highest possible rating of “AV Preeminent” by America’s premier attorney rating service, Martindale-Hubbell, which has also designated Bill as a “Top Rated Lawyer” in the field of construction law.  Bill’s practice encompasses more than 30 years in private, state and federal construction claims before state and federal courts as well as in mediation and arbitration. Bill regularly represents contractors, subcontractors, suppliers, developers and owners in complex multi-party construction litigation. His areas of expertise include construction collections, mechanics’ liens, stop notices, bond claims, prompt payment remedies, construction contracts, competitive bidding, construction defects and construction-related labor and employment matters. He is an appointed El Dorado Superior Court Temporary Pro Tem Judge, a private mediator and arbitrator and has regularly contributed to legislation on behalf of the construction industry.

Highlights include: 

  • How mugged and stabbed propelled Bill into legal practice 
  • How to discourage illegitimate wrongful termination claims
  • The origin of Applied Legal
  • The common “legal” problem: people 
  • How to be reasonable and have a backbone in contract negotiations 
  • How to handle a mechanics lien 
  • How subcontractors should approach contract negotiations in order to build relationships and secure good terms
  • How good lawyers on both sides of the table help construction contract negotiations 
  • How contractors can use the “squeaky wheel” strategy to secure payment
  • The importance of diplomacy and “speaking softly, but carrying a big stick”

Bill’s Websites: 

Porter Law Group, Inc.

Applied Legal

Bill’s Restaurant Recommendations: 

Ella Dining Room & Bar

El Papagayo 

 

Transcript

Eric: How did you become a lawyer? 

Bill: During college, I was a cashier, and these two guys robbed me while I was working. They’d parked across the street, so I got their license and called the cops. The cops caught them about a mile away with the money they’d stolen. I had to testify against them, and that’s what exposed me to the court process. It really interested me. I had talked to the assistant district attorney, and he was encouraging. So a few years later, I took my LSAT and applied to law school. I got in at McGeorge.

Eric: Do you ever wonder about the thieves?

Bill: I had wondered if they’d seek me out, but so far it seems they haven’t. They were older than me, so they probably got that stuff out of their system.

Eric: It is interesting how much impact our choices make during different parts of our lives. Sometimes the immature choices have a much deeper impact on us than we would’ve anticipated.

Bill: True, especially the choices you make from an early age. Everything adds onto the next thing. If you do good things, it usually leads to more good things. Then you find yourself in a place you never expected you would be, a place where people who didn’t make wise decisions never end up. So do good things and stay involved. That leads to a good pathway in life.

Eric: It’s the idea of incremental progress. We live in an instant gratification world, but you and I both know from building a business and from our clients in construction that any progress that last tends to be built over time through those small choices.

Bill: Absolutely. Every organization I’ve been involved in, has started with a small idea. Each small decision takes you down a different pathway, and then you find yourself trailblazing with people following behind you. Before you’ve realized it, you’ve created something new.

Eric: So after you graduated, did you begin practicing law right away?

Bill: Yes, I worked for a wrongful termination and discrimination plaintiff’s firm. Now I mostly work with construction law, employment law, and some general business law. But what I learned as a plaintiff’s wrongful termination discrimination attorney prepared me to help employers today to draft policies and procedures for their benefit. I’ll draft policies with the secret ingredients to discourage attorneys from accepting the case of a disgruntled employee. Because if you do certain things right in the practices and policies, then most attorneys won’t want to work with an unhappy employee, whether rightfully or wrongfully unhappy. The attorney asks for their work paperwork that their employer or you have drafted, so your contract, your policies, your procedures and manual. After the attorney reviews all that, they’ll say they aren’t interested and will refer the employee to another attorney who’ll just refer them elsewhere. Then you never hear about that unhappy employee who wants to bring an action against you because they never found an attorney. 

Eric: So often my clients in construction, like a general contractor, have an employee who’s basically abusing the paternal leave laws to their own advantage. But the employer is hamstrung because they have to work within the rules so they don’t get an HR suit or a different case against them. And you always know that this is the type of employee who isn’t a high performer. They aren’t someone you want to keep in the organization. They’re just there to work the system. 

Bill: You’re often damned if you cooperate with them and damned if you don’t. Years ago, there was one high-profile case where an employee would attend staff meetings and would take notes in different colored pens. The different colors were for different people, and the employee would intentionally misstate everything that was said in these meetings. They would blow it out of proportion, all for the benefit of making everyone in that room look bad and themselves look good. Then they brought a lawsuit against the employer. It was terrible and caused a lot of havoc. But after it was resolved, that same person went on to another high-profile employer and sued that employer also. For some people, that’s a way of life. 

Eric: That really speaks to one of the fundamental keys to success in business. You must wisely choose those you do business with and those you employ. So how did you start working with construction companies? 

Bill: Well, I had transitioned to a firm, which no longer exists. It was Stanton Kay and Watson, and they did a lot of construction law and employment law. I worked with Elmer Markoff. He was an excellent attorney and well-known for mechanics lien, stop payment notices, bond claims, and all types of construction claims. For many years, he held seminars for industry groups. I attended some to learn the small details of construction claims. Then unfortunately, he died. But there were seminars scheduled, and people had already registered to attend. Somebody had to do it. It was one of those turning-point decisions I made in my life. I thought, “All these people can’t be let down. They’ve taken their afternoon off to attend a seminar. So I guess I’m going to do it.” From that point forward, I developed the program to provide more and more depth. Transitioning from that, I did a video series. So it was all a progression from one thing to the next. I didn’t intend to pursue that direction at the time. But when I did the first of those seminars, I enjoyed it. The people really appreciated the time I spent with them and the information I gave them. I just enjoyed helping the construction community. I wasn’t even thinking of it as a marketing device. But it became one. 

Eric: And where’s that video series? 

Bill: It’s appliedlegal.com. 

Eric: What are some of the reoccurring challenges that contractors, both large and small, have in light of some of the legal issues that you specialize in? 

Bill: There isn’t really a difference between the problems that the different types of entities encounter. I think one common problem can be found in all of law and all of business. That is people. All the legal rules that I could discuss don’t matter if you don’t have the people problem solved. It’s usually a personality clash or someone being unreasonable. A huge contractor might have a dispute because there’s one person on the owner’s side who’s quite unreasonable. There’s no way to work around them. The same thing happens for a smaller contractor with a job for one person, maybe a residential job. Their client refuses to be satisfied, no matter what. It’s the same thing in a multi-million-dollar project or a fifty-thousand-dollar project. It’s people. 

The problems that are most often brought to me happen because people have neglected to educate themselves on the rules that they have to follow. For example, if you’re working on a construction project and you’re not getting paid, then there’s a contractual issue. But can you just stop working? That depends on what’s in the contract. Eventually you have to keep working to preserve your construction claim. Otherwise, all the projects would end whenever anybody had a dispute. 

Another huge problem occurs when people don’t protect their rights from the outset. For instance, subcontractors and suppliers have to send out a preliminary 20-day notice. If they don’t, they won’t have a right to a mechanics lien, stop payment notice, or bond claim. They won’t be able to protect their rights. 

Eric: So the preliminary 20-day notice is like waving the flag to start the process?

Bill: Yeah. In fact, if you’re among those who are required to do that and you don’t send a preliminary 20-day notice, then there’s a law that subjects you to be discipline by the contractor state license board. 

Eric: So do you often see sophisticated contractors missing details in the terms of the contracts that they’re signing? What do you see most often?

Bill: I see larger contractors having very well-developed contracts and subcontractors just signing them willy nilly. Those big contracts are at the edge of what is allowed to be in a contract. The large contractors have cautiously managed to draft into the contract a clause that’s only legal because of the way it’s worded. Sometimes it’s a defense and indemnity clause written in such a way that it’s barely not a “type 1” because those aren’t allowed anymore. So it’s barely legal. Or there’ll be what’s call a “pay if paid” clause. A few years ago, in the Clark v. Safeco case, the California Supreme Court ruled that you cannot have in your contract a clause that basically says, “If I don’t get paid, I don’t have to pay you.” It used to be in all the contracts for a long time and was very unfair. The court said, “No, that’s unfair for various legal reasons, including the state constitution.” Now, people have changed it so it says that they won’t pay you right away. So if the general contractor and the owner have a dispute, the subcontractor will have to wait until the dispute is resolved to get paid. That can be years. 

Now, the problem is that subcontractors won’t even take a stab at revising any of those contract terms. To revise a clause that’s saying, “I don’t have to pay you yet,” maybe the subcontractor could add in something like a time limit: “as long as it doesn’t exceed six months” or another reasonable deadline. Otherwise, they could be stuck for years without getting paid, and that can destroy their business. 

Eric: I’m just reflecting on a company who’s in a dispute with an owner. Along with that dispute, the company’s got outstanding retention and some outstanding accounts receivable. This subcontractor has been very successful for many years but now it’s about bankrupt. What advice do you give your clients about the people issues that cause many of these contractual difficulties and this unreasonableness? 

Bill: In as diplomatic and pleasant a way as possible, people need to nip that in the bud. Everybody’s personality is different. Try to work around unreasonable attitudes. Sometimes you can approach the situation with, “Hey, we’re kind of getting off track here. Let’s get us ourselves back and focus on the project.” You apply that light personal touch, and it’ll help. Sometimes the beast on the other side can be tamed, and that’ll deflect their energy’s intentions to something else, and not you. It’s a diplomatic thing that depends on the particular situation. 

Eric: Does this problem usually arise pre-contract or after the contract’s signed? 

Bill: Usually those personality problems arise after the contract is signed. Sometimes the people involved are a little new. Or maybe they’re just out of college. They think they know everything, but they don’t realize how much they don’t know especially about the people problem. They don’t know how to work with people yet.

Eric: So not only do they not know construction yet, but they don’t know the people part because they lack the experience? 

Bill: They know the book stuff on construction. But they have to learn the practical aspects of construction which are decades in the making. 

Eric: Let’s say a subcontractor is in contract negotiations for a project that’s a great fit for them, but they haven’t worked with the general contractor or owner before. How do you counsel subcontractors about approaching a project like that during the pre-contract period?

Bill: First, get into that contract, line by line, as soon as you can. There’s a seminar I do where I go through a contract. I’ll look at each clause and explain why it’s terrible for you. I’ll offer different ways that you can edit it reasonably. You might think if you present a huge number of edits, the company will just reject the whole thing. But if you have enough edits, they’ll recognize that you want to get the contract finished and out of the way. This also tells people that you’re not a rollover. Show them that you’re paying attention and that you know what you’re doing from the beginning. Then they’re less likely to mess with you. After that, you just have to stay on top of it. 

You need a good contract administrator. Have good backup people in the office. That’s very important from a very early stage. But it starts with negotiating the terms of your contract as best as you can. 

Another factor, which takes decades to develop, is that gut feeling you get in your stomach. People tell me all the time that before they signed the contract two years ago, they had a bad feeling about the company, but the profit margin looked good, so they signed. Now, it’s still not profitable, and everything went wrong. They have to do work that they aren’t getting paid for. All their employees are unhappy. But they knew from the beginning it was going to be a mess. Learn when to listen to you own instincts and just walk away. 

Eric: True. In construction, once you sign that contract, you’re putting yourself on the line. Your personal wealth. Your blood, sweat, and tears. Following that gut instinct can be fundamental. 

So you’re saying, you need to pay attention to the psychology of negotiating as you’re going in? You want to establish yourself as someone with backbone, but not someone who’s unreasonable. 

Bill: Yes, and allow the other person to assume the same role. So that professionalism develops between the two of you. 

Also, some things need to be in writing so you can protect yourself in the long run while other things don’t need to be. 

Eric: What’s an example of something that doesn’t need to be in writing? 

Bill: It could be something that reflects poorly on the other side or maybe on an employee of the other side. You might call higher-level management to let them know their employee is acting unprofessional and explain what’s happening. You can tell them that you don’t want to put it in writing because you don’t want it to reflect badly on them. You just want to talk it out with them and resolve it so the job will run smoothly again. 

If you put that in writing, then it’s evidence that can be used at a later time. So one of the things you need to reiterate is to ask them not to write back asking you to explain what you said or to clarify in writing because you don’t want it in writing. You just want to talk it out. 

But on the other hand, when things start going wrong, you do need to keep many things in writing. Run things by your attorney and start documenting things. If the job’s going off the rails, you need to show who’s to blame for it. If it’s you or your organization who’s to blame, then own up to it and fix it yourself. But if the other side is in the wrong and they won’t adjust, then it’s time to start documenting things. There’s an old saying among attorneys: He who has the most writings wins. It’s mostly true. 

Eric: What do you think are some of the key qualities of successful attorneys in the construction field? What should contractors be looking for when they want to work with an attorney? 

Bill: Involvement in the industry and resources on their firm website are good signs to look for. But if you can’t use a particular attorney, maybe because of a conflict of interest, ask them who would they would reach out to for advice on how to help you.  Attorneys know each other. We know we can’t pull the wool over each other’s eyes. We meet with each and delve into the facts and the law. We’ll discuss among ourselves and get issues resolved. When you have a reputable construction attorney on one side and another attorney he’s worked five or ten cases with over the years, those two guys can sit down together and work out what the problem is, who’s at fault, how the dollar figures lay out, and how to resolve it. You could resolve an issue within a couple of days with an attorney like that. Unfortunately, some attorneys have a different philosophy. They churn the situation, and they’re just Billing time. But they could better use their time professionally by finding another professional they know and get the problem resolved because they want to work in the best interest of the client. But a different attorney might say, “Let’s file a lawsuit. Let’s fight this out for three years.” You’re going to pay a couple hundred grand in attorney fees. Two years from now, right before the trial date, the case will finally be settled. Then you’ll have the same outcome that those two professionals would’ve worked out in a couple of days. But it took two years and a hundred thousand dollars out of your pocket. 

Eric: In the beginning, we discuss how a lot of these conflicts are people conflicts or relationship conflicts. If I’m a contractor, I need to identify the right types of clients that I want to work with and the types of employees I want to hire. Also, when it comes to services, like an attorney or like an insurance broker, I must understand what I want and find a match with an outside service provider who is aligned with my values and the way I do business. 

Bill: What is profitable for a number of companies, both contractors and subcontractors, is that they have a long-lasting relationship over many projects. A contractor will find a bunch of subs that they go through to see that the subs communicate well and that they’re both on the same page. The contractors and subcontractors know what each other wants, and they know how to work together. So the contractors don’t have to worry about the subs. That’s how they’ll find a good electrician, a good roofer, a good concrete guy. Then projects go smoothly. They never have a problem, and it’s wonderful. 

Occasionally something happens or someone can’t work on a project because their capacity is at its maximum. Then you have to hire another guy in that trade and test them out. Sometimes that works out, and sometimes it doesn’t. But the best thing is the relationships you build. Make good long-term relationships. 

For instance, I drafted a contract for Unger Construction years ago. They wanted a fair contract, and they have a group of subcontractors whom they work with very well. Their projects go smoothly. Other than an occasional bit of advice here and there, they’re rarely, if ever, involved in litigation matters. 

Eric: It seems like, as an attorney, you have the opportunity, with the right contractors and right subcontractors, to sit on both sides of the table and craft contracts that are reasonable to both sides and would minimize the likelihood of litigation. 

Bill: Yeah, it’s true. Sometimes when you make a contract that is stringent and near the edge of what’s allowed, it might cause a problem later down the line. Disputes will arise from it. But if you have a fair contract, that’ll help the professional relationship. For instance, a fair indemnity clause goes a long way with subcontractors. They recognize it and view the contractor as fair and reasonable as opposed to other people they might have worked for. It sets the stage for a good relationship from beginning. 

Eric: Could you share three to five pieces of advice from your seminars that most people would say have saved them thousands of dollars? 

Bill: Mostly, do your research and be serious about making your deadlines. Let’s say you’re not getting paid because of a dispute with the contractor. You record a mechanics lien. Next, the owner or the direct contractor will see the lien, and they know there’s a 90-day deadline on filing a lawsuit. Most people don’t file a lawsuit. They miss the deadline, and their lien dies. So the owner or direct contractor will wait to see if your lien dies. 

Let’s say a contractor doesn’t pay you, the subcontractor, after they get paid for your portion of work. There’s these prompt payment remedies where you can get anywhere from two percent a month, which is twenty-four percent a year, plus your contractual rate of one and a half percent a month, which is forty-two percent a year, plus your attorney fees. So you add these things together and send a letter to the contractor that sounds something like this:

“Dear contractor, 

We’re at the juncture where we must decide what to do. First of all, I have a mechanics lien. Please realize that I will not miss my deadline for filing my lawsuit. I will file. My lawsuit is this particular date. The deadline for filing is ninety days, but I’m not going to wait the ninety days. If you don’t respond in ten days, I will file it now because there’s no use wasting time if you’re not going to deal with me. Also, there’s an attorney fee clause in our contract. Once I file the lawsuit and we go through the process, you’ll be paying both your attorney and my attorney. There’s also the prompt payment remedies. In addition to paying my attorney fees and paying me what you owe me, under this statute here, you’re going to pay me two percent a month, plus the interest rate that’s stated in our contract, which is one and a half percent a month. You’re going to be paying me a three and a half percent a month, which is forty-two percent a year.” 

It’s a psychological thing. Doing all this means you’re the squeaky wheel that gets the grease. If someone’s not paying you, they’re probably not paying others. Whether it’s the contractor or the owner, they’ll probably want to take care of your issue because they’ll think you know what you’re doing. They’ll want to get the thorn out of their side. You have to pay attention to all the details and tell the other side that you’re serious about suing if they don’t resolve the issue. Show them what they’ll end up paying if you sue so that paying you now sounds like the better deal. They’re more likely to negotiate with you. Let’s say the other side owes a hundred thousand dollars. They’ll call and say they can give you eighty-five thousand dollars within the next thirty days. Then you can take the deal and be done with it. You can move on. 

Eric: Let’s summarize some of the things we’ve been talking about. 

The fundamental foundation of a healthy business is the quality of the relationships that you have with your employees and clientele. 

From a legal standpoint, contractors need to take the initiative to understand the contracts that they’re signing. Then they should negotiate in good faith with the general contractor or the client to reach the most favorable terms possible. 

Bill: Within fairness to both sides. Professional fairness. 

Also, you need to know all your remedies in case it doesn’t work out. 

Eric: So also pay attention to detail and be willing to take the initiative and not hope for the best. 

I also really appreciated that you mentioned a sense of negotiating savvy and an understanding of human psychology. So you’re not necessarily bringing the hammer to the first conversation. You’re speaking softly to begin with. You’re not putting everything in writing because you want to see where the other party is. You display a willingness to resolve something without having to raise the stakes. 

Bill: It’s the saying: Speak softly and carry a big stick. 

Eric: So if you want to be successful in construction, you have to play long-term games with long-term people. This includes the outside help, or the service providers, such as an attorney who understands the construction game and who can help you through the ups and downs that occur in different projects that you might build over the years. 

Bill: Yeah, that’s true. You need to have a good relationship with your attorney. Bring them in on the little things before those things get out of control. Keep that relationship going. 

As a construction attorney, people don’t call you unless they really need your help in that moment. I try to prioritize responding to the client immediately. The best way to do work in this profession is to get it done as quickly as possible because that’s when people want it. Some attorneys don’t get back to clients until a couple days later, and in a couple of days, a lot of things can happen. 

For instance, I was out of town yesterday when a client contacted me. They needed an interpretation of a contract clause that was causing a lot of problems. It concerned a joint venture and what the law says the public entity could force on the client. I told them I’d drive back later that afternoon and get right on it. I had been presenting, getting up at 5 a.m., and driving for three hours. So I was tired. But as soon as I got back, I looked over everything, at the law, the contract clauses, and the position of the public entity owner. I decided that the public entity was wrong about what they were saying, so I sent the client my opinion and how I arrived at it. This morning the client informed me that the public entity backed off everything they wanted to force on them. But the whole situation as about moving quickly and not letting it fester and worsen. That’s something for any attorney to understand about their clients. Clients want help now. 

Clients should also look for an attorney who responds to them quickly and in a way that they can easily understand without being too technical. 

Eric: True. If you’re a contractor and you’re going to grind to complete a project on time for your own clients, you should be working with service providers who are willing to provide that same level of service to you. 

Bill, I really enjoyed this conversation. I have a question I like to ask my guests. What’s your favorite restaurant that you would recommend to our audience? Here in Sacramento.

Bill: I love Ella’s. They have a unique gin and tonic that they get from some exotic location. So they make a really nice drink, and it’s a fantastic restaurant as well. One of my clients built it. 

Another little place I really like is tucked back near the corner of Fair Oaks Boulevard and Marconi. It’s a Mexican place called El Papagayo. Their crispy AmErican style tacos are really good. The people in there are fine people. As our kids grew up, that was our special place where we’d take them. 

Eric: So we got the crispy AmErican tacos at El Papagayo and the gin and tonic downtown at Ella’s. Well, I really appreciate you taking the time to speak with me. You’ve got some great insights that my audience can apply, and I do wish you the best in your business. 

Bill: Thank you, Eric. I really enjoyed spending time with you today. I hope the information I gave might be of interest to your listeners. 

Eric: Absolutely. I know it will be. Thank you.

Podcast Reviews

Why the Construction Industry is Foundational to the Success of California | Ep 12

Malard

How to Win the Battle Against Silos | Ep 19

Pat, Glad you enjoyed it. I appreciate the feedback. I'll have some more episodes in the same vein, coming soon. Eric

How to Win the Battle Against Silos | Ep 19

Eric, really enjoyed this podcast. Extreme Leadership is one of my favorite business books. Nice to see that you are incorporating some of their leadership strategies into your podcasts.

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