Avoiding Red Flags in Construction Projects

Construction projects can be incredibly exciting. But, with big investments come big responsibilities, and unfortunately, things don’t always go as planned. The truth is, most project owners aren’t construction experts. They’re stepping into a world dominated by contractors who have years of specialized experience. This creates an imbalance of knowledge, which can make identifying problems early both daunting and stressful.  

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Identifying The Warning Signs of A Troubled Construction Project

About the authors
Todd M. Conley
Jeremy L. Baker

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.

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Welcome to Womble Perspectives. Today we’re talking about something that every construction project owner needs to know about: avoiding red flags in construction projects.  

Construction projects can be incredibly exciting. But, with big investments come big responsibilities, and unfortunately, things don’t always go as planned. The truth is, most project owners aren’t construction experts. They’re stepping into a world dominated by contractors who have years of specialized experience. This creates an imbalance of knowledge, which can make identifying problems early both daunting and stressful.  

So today, we’re going to walk you through the warning signs of troubled projects and discuss how having a solid construction contract can mitigate many of these risks. 

For starters, let’s define some common red flags to watch out for during your project. These signs don’t always mean disaster, but they’re signals that something might be going off course.  

Here are some of the top indicators to pay attention to:  

First up, delays. Delays can happen with any project, but when they become frequent and excessive, it’s a major red flag. If your contractor can’t recover lost time, you’re likely to see deadlines pushed back and costs spiral out of control. For example, if your project was supposed to reach the 50% milestone six weeks ago but is still stuck at 25%, and there’s no corrective plan in place, things could quickly go downhill.

Another concern is poor quality schedule updates. A clear and detailed schedule is essential for keeping you informed, but some contractors provide vague or incomplete reports to mask problems. If something feels off in those updates, trust your instincts and push for clarity

Frequent changes in work sequencing can also derail a project. Constant re-sequencing may lead to “trade stacking,” where too many workers are crammed into the same space, causing delays and compromising both safety and quality.

Workforce shortages are another warning sign. If fewer workers are showing up on-site, it could mean the contractor is having trouble paying subcontractors or is caught up in disputes. Either way, it’s an issue that requires immediate attention.

An uptick in RFIs, that is "Requests for Information) is also worth noting. While RFIs are a normal part of construction, an excessive number could signal design issues or a contractor planning to use change orders to increase costs.

Changes in project management can be equally concerning. A sudden switch in the project team, especially if skilled workers are replaced with less experienced ones, often indicates the project isn’t profitable and the contractor is reallocating resources to other jobs.

Finally, subcontractor disputes are worth keeping an eye on. While occasional disagreements are normal, prolonged conflicts can lead to work stoppages, which will cost you both time and money.

By paying attention to these warning signs—delays, poor updates, re-sequencing, workforce issues, excessive RFIs, management changes, and subcontractor disputes—you can spot potential problems early and address them before they derail your project.

Now that we’ve covered some of the major warning signs, the good news is that these risks can often be mitigated with something as simple as a well-structured contract.  

One common misconception among project owners is that the best contract is one-sided, allocating all risk to the contractor. However, contracts like this tend to backfire. Why? Because contractors responding to highly owner-centric contracts often compensate with excessive delays or by filing endless claims for extra work and costs.  

Instead, focus on creating a partnership-oriented contract to align shared priorities between you and your contractor. If you allocate risks fairly, your contractor is far more likely to work toward completing the project efficiently and on time.  

Key Takeaway: A good contract is proactive. It doesn’t wait for problems to surface. Instead, it anticipates potential challenges and outlines how to resolve them.  

When drafting a solid construction contract, there are a few key provisions you should prioritize to avoid potential red flags. First, payment terms should be tied to clear, objective milestones. 

This approach motivates contractors while maintaining a reasonable cash flow. It's also wise to include payment withholding rights, allowing you to withhold payment if the contractor doesn't meet their obligations. However, this should be used cautiously to avoid project delays or work stoppages.

If you're working on leased spaces, make sure landlord requirements, such as noise restrictions or work-hour rules, are clearly outlined in the contract to prevent unexpected claims. 

Additionally, define completion requirements carefully. Terms like "substantial completion" should be explicitly detailed to avoid disputes, especially for technically complex projects.

Incentives and penalties are another consideration. Offering fair bonuses for early completion can be effective, but punitive liquidated damages may damage the partnership and should be avoided. Lastly, warranties are crucial. Consider including wrapped warranties, which place warranty obligations under the contractor's management. This streamlines accountability and provides better protection for the project.

But even with the best planning and contracts, disputes can happen. And when they do, engaging legal counsel early is key. Whether it’s a delay-related disagreement or a quality issue, having a strategic plan in place will save you time and resources.  

A few best practices:  One, simplify contract terms wherever possible to avoid confusion.  Two, when disputes arise, assess the situation realistically. Don’t bluff. Litigation is expensive. And three, collaborate whenever possible. A broken partnership serves no one.  

To wrap up, avoiding red flags in construction projects boils down to two things: staying alert to warning signs early on and having a thoughtfully structured contract in place. These measures, combined with a willingness to collaborate, can help reduce the stress involved in construction.   

Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.

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