In the chaos that ensues when a disaster affects your area, it’s easy to grow overwhelmed. That’s why we wanted to produce this Disaster Recovery Playbook. Helping construction companies get paid the money they’ve earned is what we do best, and it just so happens that managing payments (both getting paid and making payments) is one of the trickiest issues following a natural disaster for everyone involved in the recovery.
First of all, if you’re reading this, we feel for you. Located in New Orleans, we at Levelset know what it’s like to have to rebuild following a major catastrophe.
This “playbook” is long-ish and packed with a wide variety of information, but take a minute to give it a read. No matter how a disaster may have impacted or will impact you, your property or your company, when it comes to the recovery, protecting yourself on the front end will pay huge dividends.
Disaster Recovery Tips for Owners of Damaged Property
Owners of damaged property need to make every dollar go further, since most will be dealing with finite (and often very tight) budgets. Those lucky enough to have an insurance policy that covers their damage will nevertheless find out that the policy will only cover so much.
Unfortunately, if you talk to people from south Louisiana who have been through this before, you’ll hear horror stories about how they ended up receiving much less from their insurance than they expected or needed to be made whole.
And then there will be property owners who aren’t covered and will be on their own. While there’s always the possibility of outside assistance from FEMA or some other agency or even a non-profit group, it’s probably not wise to count on it.
Because of this, the top priority for property owners should be to use whatever recovery dollars they have in the most efficient way possible while taking every step to reduce risk. By researching those performing work on your property, demanding notices (even when not required by law), and leveraging lien waivers, you can be sure to minimize the risk during the rebuilding process.
Research
After a big disaster, out-of-state construction companies will flock to the area in search of work. The influx of contractors and suppliers will be imperative to rebuilding, but with unfamiliar contractors, it is even more important that property owners adequately protect themselves. Owners should do as much research as possible before hiring anyone. Avoiding a mishap in the rebuilding process could not be more important, so be patient when verifying a contractor.
As a rule of thumb- avoid contractors going door to door! It’s not 100% effective, but using a contractor recommended family, friends, and neighbors is a good first step. However, just because a contractor was referred to you doesn’t mean the research process stops there.
Vetting the contractor won’t take a lot of time, but it could make a huge difference. A quick online search of a company or an individual’s name can help spot red flags. Better yet, ask for references from recent projects and see how they respond. Follow up with a few of the references as well – this may seem tedious and annoying, but a phone call or two won’t take long and making the calls could go a long way to protect yourself.
When discussing an agreement to rebuild, be wary of a contractor who offers a better deal in exchange for speeding up the process. Savings like this will pale in comparison to the costs of hiring the wrong contractor. If a deal sounds too good to be true, it almost definitely is – there will be a shortage in construction help in the aftermath of a disaster, so get comfortable with the idea that you may have to pay a premium.
Lastly, and perhaps most importantly, use a good contract template and put everything down in writing. Any work done on your property should be done pursuant to a written contract. The contract should list exactly what work will be done, should include a set price, and must be signed by everyone involved.
In the contract, limit work to what is contemplated in the agreement and require that all changes, alterations, or price adjustments must first be agreed to by owner in writing. Contract forms are available online, and there are lots of free legal services available in the wake of a disaster. You should use every tool at your disposal, and free legal advice can be a very helpful resource.
For help researching contractors that specialize in residential work, check out this helpful guide put together by Consumer Reports.
Utilize Notices
It can be tough to keep track of who’s working on the property. It’s a good idea to request every party on the project provide some preliminary notice that includes a description and price of their work. Some states require these notices, but regardless of any legal requirement, it just makes sense. Notices create better communication and transparency on the job site, and any potential issues can be nipped in the bud.
Another huge benefit of receiving construction notices for owners is that they can help prevent the owners from paying for the same work twice. By collecting notices from all of the project participants, the owners will gain 100% visibility on their project and won’t be surprised by a “hidden” lien from a company that they didn’t even know was on the project. Receiving notices from every participant will also provide the owner with a comprehensive list of everyone they need to be collecting waivers from (more on waivers in the next paragraph). It’s not uncommon for an owner to pay for construction work twice, especially during a chaotic period following a disaster. By requiring notices, you can arm yourself with the knowledge of who all is on your property, which means you can stop problems before they start.
Use Waivers
Making funds go further means ensuring that every dollar paid on a project is a dollar earned. Another way property owners can limit their exposure is to require lien waivers when payments are made. By using conditional lien waivers, property owners and subcontractors are both protected.
A conditional waiver waives lien rights, but only for the work that has been completed. They must be drafted with great care and attention to detail, but when done right, they’re fair. For example: When a subcontractor receives $5,000 for work performed, that contractor gives up the ability to lien that $5,000 in payment.
Effectively, the waiver works like a receipt. By pairing such a waiver with payment, a subcontractor only gives up lien rights when they can safely do so.
Insurance
Claims should be made as soon as they can be put together. Many states (Louisiana included) have specific time limits by which insurance companies must pay undisputed amounts when proof of loss has been submitted. If those amounts aren’t paid in a timely fashion, insurance companies can be found in bad faith and could be subject to triple damages and penalties.
More generally: take pictures of everything, never assume work will be covered (verify!), and alert your insurers of damage as soon as possible (if you contact your agent, they will be able to walk you through the process). Keep good records, save receipts, and save copies of every communication you make with insurers and those providing rebuilding work. Practically speaking, get ready to save, store, and organize tons and tons of paperwork, all of it essential. Talk to any property owner that went through Katrina and they’ll all have a story about the giant “Katrina File Folder” they used to keep track of all the paperwork associated with the recovery.
Better yet, it makes sense to use a cloud-based document storage service like Dropbox or Google Drive to save and backup everything in the cloud. We’ve been through this before, and trust us when we say that you’ll need to be able to provide signed copies of the various forms and documents again and again during the recovery process, sometimes for years after the initial event. Keeping track of all this paperwork is essential!
Insurance may not cover everything, and sometimes funds won’t be available at all, so make sure your insurance dollars stretch as far as they possibly can. Aid may come in other forms and from other places, but never assume that it will. In any event, don’t let your guard down – protect whatever aid you do receive as if it’s your last dollar.
Disaster Recovery Tips for Construction Companies
The actual loss suffered by the property owners is at the “heart” of the construction work that comes after a disaster, but contractors, subs, and suppliers are at risk, too. Here are some things to keep in mind.
Licensing
Where licensing is required, only perform work you are licensed to do. Licensing requirements vary from state to state. For out-of-state contractors, it’s important to understand the requirements of the state where work will be done. Just because you are licensed in one state does not mean that license is valid everywhere else.
That being said, after a disaster it is fairly common for a state to suspend some licensing requirements or to issue emergency waivers to help with recovery efforts. This does not happen after every disaster, and even when requirements are relaxed, not all licenses will be affected. A failure to hold the proper licensure could result in serious penalties and affect your right to payment. In many states, unlicensed contractors have limited lien rights, or none at all.
Research
Just like property owners, it’s important that contractors know the subs and suppliers working for them. Likewise, the subs and suppliers need to know the general contractors they’re working for.
The speed at which projects come together after a disaster can be dizzying, but properly vetting the parties you’ll be working with must be high priority. No one likes idle hands, but what good is a contract for construction if the bills won’t be paid or the work won’t be completed?
Following a disaster, your best bet is to work with someone you’re comfortable with. Unfortunately, that’s not always possible, especially for companies that are coming from out-of-state to work on the recovery. When working with someone for the first time, do your research. Do an online search for their name or the name of their business. Ask them about licensure, insurance, and prior projects, and be sure to ask for referrals from past contractors and subs. Also, ask them if they’ve done insurance or disaster recovery work before.
For GCs, subbing out the work to the right subs and suppliers is incredibly important. That the lower-tiered project participants will show up and complete a project is something that cannot be taken for granted, especially after a disaster. There will be lots of opportunities in these situations, so make sure your hires are trustworthy and won’t jump ship.
Research is crucial for down the chain parties, too. When it comes time for payment, the general contractor will get their hands on funds first. Thus, it’s incredibly important that you can trust payment will make its way down the chain. No one wants to be forced to file a lien on any job, and especially not on a disaster recovery project.
Lien and Notice Laws Change From State to State
Out-of-state construction companies, laborers, and all manner of other folks will flock to disaster areas in search of work. In order to secure payment, contractors, subs, and suppliers need to know the applicable lien and notice laws. These laws vary greatly from state to state, so pay attention if you’re traveling to perform work.
Even if you’re at home, these laws will be more important than ever. Rebuilding can be almost as frustrating for industry members as it is for property owners, but managing lien rights can help. Lien rights management isn’t just about filing a lien. It’s more about getting you paid, and the best way to do that is to keep your lien rights intact.
What’s more, doing so shows that you mean business, and should speed up the payment process. The threat of lien is nearly as effective as a lien itself. However, with great power comes great responsibility. Lien rights must only be used when proper. Luckily, many states have laws that punish the improper use of liens, and local agencies are on the lookout for bad actors following disasters.
Use Partial and Conditional Lien Waivers
For general contractors, utilizing partial and conditional waivers in exchange for payment is a great way to make sure a project goes smoothly. When dealing with the owner, these waivers should speed up the payment process- an owner knows that the risk of making that payment has been limited. For subs, this means that payment is sped up while risk is still minimized. When using a partial waiver, only some portion of lien rights are given up. With conditional waivers, rights are only waived if and when payment comes.
However, it is incredibly important that waivers are properly drafted. Otherwise, you may be prematurely giving up your lien rights. Pay very, very close attention to the language of anything you sign, especially lien waivers.
Dealing With Insurance
When dealing with recovery work, contractors, subs, and suppliers will likely be receiving some, if not all, of their payment from insurance companies. Insurance check delays have caused problems in the past, so preserving their rights to payment must be a top priority.
All industry members love the idea of doing work where the homeowner is not completely funding the project. The contractor puts in an estimate to the owner, then owner submits it to the insurance company then the insurer approves of the work and sends payment along. Many times there are progress payments, but other times the insurance company will pay a lump sum. Regardless, these checks rarely arrive quickly.
Many times insurance checks will come after the local lien period has expired. At this juncture, industry members lose their best tool to enforce payment. It may frustrate a property owner, but you should take the necessary steps to preserve lien rights before it’s too late. Even if it’s not the owner’s fault, the risk of losing lien rights is not worth it. When payment does come, you can stop pursuing a lien (or cancel it if it’s already been filed).
Industry members should beware of the effects of deductibles on their payments. When an insurance company is making progress payments for work, they often subtract the deductible from that payment, which leaves the owner to fund the remainder. Without protection, these funds may be tough to obtain.
Upgrades and change orders are a huge point of contention too, when dealing with insurance. It’s common for an owner to request alterations or upgrades during any project, but when insurance is involved, such changes might not be covered. When an owner does not have the help of insurance to cover these amounts, payments could become less of a sure-thing. This is all the more reason to keep your lien rights intact.
Conclusion
In the wake of a natural disaster, getting life back to normal is usually priority number one. However, in the race back to normalcy during disaster recovery, it is imperative that construction companies follow procedures to maximize protection during the rebuild. Property owners, contractors, subs, and suppliers should all be sure to protect themselves while recovering from natural disasters. However, a “me against the world” outlook can also be harmful. Your best bet is to balance vigilance with cooperation. Hopefully the tips and resources in the post make that a little easier.
