We’ve written on this blog many times about the importance of documentation in the construction industry. But how long should you hold on to these records? And why? Implementing a sound document retention policy is an incredibly important aspect of running a successful construction business. Good retention practices can act as an insurance policy to protect your business from any lawsuits or claims that may arise later on. This article will explain how having a construction document retention policy can help reduce your business’ exposure to risk.
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Why retain construction documents?
First of all, it’s just good business practice. Keeping business documents after a project has been completed, should be a part of every company; regardless of the industry.
However, given the amount of paperwork that flies around on construction projects, this can seem like a tall order. An office can buried underneath the stacks. Particularly, because the shift to a paperless construction industry is is an unnecessarily slow one. So why keep these documents? Sometimes a construction company may be required to do so. But the main reason is liability.
Protection against liability
Anytime a change order, or back charge happens on a project, what’s your first instinct? You’ll likely grab a copy of the contract, or begin to review the daily reports and pay applications. Whenever a dispute arises, the best way to defend or clarify your position is through documentation. That’s easy when something happens during the project. But not all problems occur on the job site, or even during the lifespan of the project. Some can arise months or even years afterwards.
Your construction company needs to be sure it can defend itself against claims, or be able to enforce claims against others. The ultimate issue is, that claims can arise long after the project is completed. If a dispute reaches the court, well organized records are not only your best line of defense, but also, your best ammo to prove your side of the story. On top of that, the other party may request certain documents through discovery. If you’re unable to produce these documents, you may find yourself with claims barred, or being charged with evidence tampering.
At the end of the day, it’s a cold, hard truth that what actually happened, isn’t nearly important as what you can prove. The more evidence you have, the better chance of coming out on top.
When you may be required to do so
There are other reasons why you should not only retain certain documents for a period of time, but you may actually be required to do so. This is not an exhaustive list, but here are a few examples.
For accounting and auditing purposes, documents like tax returns, account ledgers, credit card statements, cancelled checks, and any other financially related document should be kept. In fact, the IRS themselves have set up some basic rules regarding record keeping for tax purposes.
If your company does get audited by the IRS, the investigation can go back as far as 6 years! So the generally prevailing rule is that tax records should be kept for at least 7 years. If this happens to your business, the inability to provide accurate records and statements can get into some treacherous waters.
Public works project requirements
If working on a prevailing wage project, contractors are required to keep certain documents for an extended period of time. Take for example, certified payrolls records. On federal prevailing wage jobs a contractor is required to retain certified payroll records for 3 years, and the supporting regular payroll records for 7 to 10 years. There are similar state laws that have document retention requirements for prevailing wage projects as well.
On top of that, there is also a document retention policy required on federal jobs. There is a section in the Code of Federal Regulation entitled Contractor Records Retention.When working on a public works projects that is commissioned and funded by the federal government, not only are there document retention requirements, but they lay out specific time periods for specific types of documents.
How long should construction documents be kept?
The general rule of thumb, is however long the period of liability for a claim, plus one year. There are a number of different factors and deadlines that need to be taken into account. So what types of claims are we talking about? And what are the deadlines to assert or enforce these claims? Let’s take a look at some examples.
Mechanics lien enforcement deadline
Let’s start with our bread and butter, mechanics liens. As you are hopefully aware, mechanics lien claims can come up well after the project is completed. The filing deadlines alone are typically based off of the project completion date or the last date that labor and materials are provided. Some enforcement deadlines can be incredibly short. Take for instance California and Massachusetts, the enforcement deadline is just 90 days. On the other end of the spectrum, there are states like Ohio and South Dakota. The enforcement deadline in those states is 6 years!
Breach of contract claims
The timeframe to file a breach of contract claim in court is governed by the particular state’s statute of limitations. A statute of limitations sets out the period of time in which a claim can be brought. These are measured from when the breach actually occurred. Again, depending on the state, these timeframes can drastically differ. The statute of limitation on claims for a breach of a written contract can fall anywhere from 3 to 10 years.
Defective work or materials claims
Claims based on construction defects are limited by different statutes, called a statutes of repose. As opposed to a breach of contract where the clock starts running once harm has occurred, a statute of repose just runs for a specified period of time, regardless of when the harm occurred. Most states have a statute of repose for construction defects that runs from the time the project was completed. These deadlines will usually range from as little as 4 years to as much as 12 years after substantial completion of the project.
Tips for creating a document retention policy
Creating a construction document retention policy is fairly straightforward. However, implementing the policy and maintaining the practices is an entirely different animal. The first step is researching the laws applicable to your type of business. When coming up with a retention period, be sure to keep all of the applicable claim deadlines in mind; not just the ones mentioned above.
1. Categorize your documents
Gather a team, and begin to categorize the different types of construction documents your business regularly encounters. Think about all the different types of documents that come through the back office on a daily basis, there’s so many.
Once they’ve been categorized, you’ll need to rank the document type in order of importance and risk. You’ll have to consult with your team or legal counsel to form a strong ranking system. However, a good place to start could look something like: contract documents, insurance certificates, business correspondence, bid documents, purchase orders, drawings and specs, daily reports, change orders, invoices, time sheets, and so on.
Once these categories and rankings have been established, put in writing. Train the rest of your company to abide by these rules. Having a construction document retention policy is one thing, actually implementing it is a whole other ball game.
2. Don’t hold on to working documents
One way to reduce clutter is to get rid of “working documents,” which are documents that change and are edited before they become a final or completed documents. Once the contract, bid proposals, or drawings and specs are finalized; toss the old, outdated copies. There’s no use in holding onto old versions of construction documents. In addition, this can help reduce confusion over referencing out of date versions of drawings, specs, or other important documents.
3. Consider electronic storage
As for the project documents that you do want to keep, you may consider electronic storage. Yes, it requires the extra step of scanning the docs, but the time will pay for itself if an issue ever arises. Converting your records into electronic documents will give your company the ability to easily tag and organize all of your project records, instead of sifting through folder after folder to find what you need.
4. Have a document destruction policy
Construction documents can’t be held onto forever, at some point there are things that need to be fed to the shredding machine. When a document has reached the time limit your team has set up, it should be destroyed according to an established routine. Setting up a written policy of when and how documents are destroyed, is just another way to protect yourself against liability.
Obviously, if there is a reasonable likelihood of litigation, or a pending lawsuit, then a litigation hold should be implemented. Meaning all documents should be retained until the dispute is resolved. But what if a claim does arise and the documents needed have already been destroyed? If you have a destruction policy in place, and the documents were tossed according to that policy, the likelihood that the claims is dismissed, or a defense to the claim being barred is dramatically reduced.
Having a sound construction document retention policy is a huge step in the right direction for your business’ risk management. Yes, keeping and organizing all these documents can seem like a pretty daunting task. But not nearly as daunting as being unprepared for a lawsuit or an audit. Your document retention policy should detail how these should be organized, where they should be stored, and how long they should be kept.