Whenever you have an industry that’s as big, complicated, and valuable as the construction industry is, you better believe that the legal profession is going to be close at hand. In this comprehensive article, we’re going to discuss how construction law works by looking at some of the main areas and issues where construction law comes into play.
Read on for an informative overview of a huge subject: construction law.
Table of Contents
Construction Law Is Different Because the Construction Industry Is Different
The following statement might sound a little wacky, but hear us out: The construction industry isn’t an industry at all. Rather, it’s a grouping of several different, unique industries that all must come together to successfully complete construction projects.
For starters, there are the architecture and engineering industries. There’s steel, lumber, glass, and concrete industries. Let’s not forget the plumbing industry, the electrical industry, and…you get the idea.
The point we’re trying to make here is that there’s no single construction industry that exists. That’s true for the overall economy, all the way down your everyday commercial construction project.
Construction work is estimated to make up approximately 8-10% of the United States GDP (if you like hard numbers – that’s just over $20 trillion for the fiscal year 2018). As you could imagine, the number of individual projects being undertaken every year is mind-boggling.
But where does “construction law” fit in? The answer is: “Almost everywhere.” Depending on who you are, that may be a good or a bad thing.
Construction law industry experts believe somewhere in the neighborhood of 10-30% of all construction projects end up with some type of legal claim being asserted. That’s insane! Given the numbers we just introduced above, you can be sure of a couple of things:
The annual dollar value of construction claims is huge;
Construction law work isn’t going anywhere soon.
Construction Law Is Made Up of Many Different Legal Specialties (Just like Construction Itself!)
Like the “industry” itself, construction law is not really a specific, singular subset of law practice the same way, say, the practice of personal injury law may be. Construction law is an amalgamation of many different legal fields, including contract law, finance, real estate, bankruptcy, administrative, employment, environmental, insurance, and regulatory, just to name a few.
Despite this seemingly haphazard grouping of different legal fields, construction law has grown into its own distinct practice area. Large firms, small firms, and solo practitioners all provide counsel and assistance to all parties associated with construction all throughout the construction process. It’s not uncommon for larger construction companies to have in house counsel, themselves.
It’s probably an oversimplification, but we have to organize this somehow. Let’s break it down to three areas:
1) Pre-Project (before the project starts);
2) During the Project (active construction phase); and
3) Post-Project (active construction complete).
1. Legal Work that Comes Before a Construction Project Starts – 4 Main Areas
Work done prior to the project can be some of the crucial work undertaken by a construction lawyer. This is when contracts and agreements must be drafted for use both up and down the payment chain. Policies must be set regarding lien or bond claims, as well as other payment security rights and/or financial risk-shifting. A construction lawyer may even be enlisted to assist HR with employment policies. Finally, regulatory work must be undertaken to secure permits or negotiate with licensing agencies or explain building code requirements.
This is all just the tip of the iceberg.
A. Construction Contract Law
One of a general construction lawyer’s primary responsibilities and biggest areas of focus usually surrounds contracts. In a guest post published on Chris Hill’s Construction Law Musings, practicing construction attorney Greg Shelton writes that “contract law…occupies the center of the construction law universe.”
Construction has contractual agreements up and down the payment chain, ranging from the general contract for the entire scope of work, to sub-contracts, and supplier agreements. These agreements are all full of tricky issues and complicated clauses like pay-if-paid / pay-when-paid clauses, claim notice provisions, no damage for delay clauses, arbitration clauses, and more – any of which can cause significant problems for an unwary construction participant.
Besides clauses that need careful consideration on wording or acceptance, some types of contracts have specific requirements set forth by state law. It isn’t rare to have the general form of a contract and some specific contractual wording required for work on residential property. In these cases, the failure to consider the requirements can result in losing the right to payment altogether.
In addition, construction is full of other agreements that work as contracts between the parties, though these other agreements are not always treated with the same weight or importance. Lien waivers are contractual agreements between parties on a construction project related to the availability of securing any potential amount owed. These documents may or may not have specific requirements, but they should be treated with the same respect as any other contract.
While many construction participants use standardized template contracts from parties like the American Institute of Architects (or from levelset) as a jumping-off point, these contracts can, and often should, be modified to better fit the needs of a particular client. Because of this, contracts should always be reviewed prior to execution in order to get a prospective view and lay of the land with respect to working on a particular project or for a particular participant.
Free Construction Contract Template Downloads Available
- Simple Construction Contract template download
- Subcontractor Agreement template download
- Time and Material Contract template download
- Simple Contract for a Roofing Job template download
B. Approvals, Licensing, and Planning
Construction projects often require some sort of government approval – but the extent of governmental involvement or the intricacies of the approvals needed vary by project type and scope. Whether a project only requires a standard check and authorization of building plans, or requires some use variance, it’s the job of a lawyer involved with construction law to assist the client in obtaining the necessary consent. In many cases, the number and identity of the approvals needed is not necessarily clear, and construction lawyers can provide the assistance needed to determine and obtain the proper permits and approvals.
Additionally, construction participants are often required to possess some specific license in order to legally perform construction work. These requirements can be strict. The failure to obtain the proper licenses to perform the work being furnished can result in significant penalties. In addition to a loss of security rights that might otherwise be available, contracting without a license can be a crime! It can preclude the unlicensed party from any right at all to be paid for the work they have performed, and it could even force the unlicensed party to re-pay everything paid for a project worked on while unlicensed.
C. Property Law in Construction
Before construction can take place on any given property, there may be property law issues to sort out. A property may need to be purchased, or managed in a different way prior to initiating a construction project. Disputes related to the previous owners, to the deed, zoning, or other issues may need to be taken care of prior to further construction. Without confidence related to the property itself, construction and development companies occupy a precarious place. Additionally, questions regarding the mineral rights of a specific property, or any servitudes, rights-of-way, or other encumbrances can be of crucial importance related to construction work, and accordingly for construction law.
D. Employment Law in Construction
Employment law is another critical area of construction law, and it’s one where construction participants themselves must have a firm grasp. Turnover is high in construction. Hiring, firing, management, discrimination, and hostile work environments all must be dealt with.
Hiring and firing within the framework by the book is an important part of running a successful construction business. Construction lawyers, therefore, may be obtained to assist with Human Resources (HR) policies and procedures. If an employment dispute arises, additional assistance and support from an attorney will be necessary. Having compliant policies is important for any business, and businesses that routinely experience high turnover (like those in construction) are some that can gain the most benefit from legal-endorsed and streamlined processes.
Construction companies also have obligations regarding employees with which companies in other industries may not be familiar. Certain construction projects require “prevailing wage” determinations to ensure that workers are being paid appropriately. Determining whether a project requires this calculation, making the calculation itself, applying it, and checking the “certified payroll” of other contracting companies are all aspects of employment law in construction that a construction law attorney should be able to help with.
2. Legal Work Performed During a Construction Project – 5 Main Areas
A. Worker’s Compensation
As mentioned previously, the disparate practice areas that make up construction law globally can often flow between phases of a project. One example is that the compliant employment law policies and procedures must generally be in practice before (and irrespective of) any particular project. Other aspects of employment law in construction, such as prevailing wage issues or job site employment issues arise after a project has begun.
Another area of employment construction law practice relates to workers compensation. A workers comp claims can give rise to technically complex issues best suited for a lawyer to provide assistance with. And, prior to any claims being made. Information regarding policy, procedure, and responsibilities can benefit from an attorney’s eyes.
B. General Negligence and Torts
Accidents happen in construction. Businesses must be prepared to deal with the aftermath. Workers get hurt, problems occur outside of the contract due to the other parties’ negligence, there can be construction defects that later cause someone damage, construction could cause a nuisance for which the law provides recovery, workers or equipment could trespass on a neighbor’s property, damages to property or injuries can occur due to negligence during the performance of work, and more. All of these types of claims, where a party suffers harm to personal, property or financial interests, can be governed by the laws of tort.
Lawsuits are not uncommon, and while many construction-related lawsuits that are work-specific would likely be a contractual claim. Negligence claims can play a big part in recovery in situations where there was no privity of contract or when there is a contract but it doesn’t apply for other reasons. We live in a litigious society, and construction work is notorious for producing accidents and injuries to people and property. This results in a high number of claims.
C. Change Orders
Construction projects rarely, if ever, proceed neatly and exactly as originally drawn-up. The vast majority of projects will include some form of modifications or change requests. When some change must be incorporated into the project, that changes the scope of the contract for the original work to be performed. These contractual modifications are called change orders.
Because the contract provides the basis for what can (and must) be done on the project (and provides a framework for many future claims), change orders should be treated with the same attention to detail as the original contract. The ability to recover for work, or to make a claim for incorrect work, can come down to the validity of a change order and whether proper procedures or requirements were met. Making sure a client’s interests are best protected with respect to a modification of the work or material to be furnished falls squarely in the realm of construction law.
D. Security Instruments – Notice Requirements and Lien Waivers
As we’ll see later in the “Construction Law After the Project” section, construction law is intimately connected with the payment process. Claims made regarding money not paid for work done, or disputes regarding whether more (or any) money is due, make up a large portion of the claims and disputes related to construction work.
Luckily, construction participants can take advantage of payment security built directly in to the laws of every state. The mechanics lien or bond claim process provides construction participants with an interest in the improved property (or a ‘pile of money’, for bond claims) to virtually guarantee payment. However, taking advantage of the benefits provided by these laws can be technically complex, and at times may necessitate the services of a construction lawyer. Determining the deadlines, drafting and completing legally-sufficient forms, meeting filing requirements, and more all can require legal assistance. And, if the claim must be enforced, a lawsuit is required.
E. Prompt Payment / Retainage
Additional issues regarding payment can spring up with relation to other construction-specific laws and rules. Prompt payment requirements and retainage issues are common in construction, and a construction lawyer can provide both policy guidance and help with specific issues – whether you’re making payment or trying to get paid.
Prompt payment rules set forth the general time frame during which payment must be made to parties on a construction project, depending on the project tier. However, there are often many intricacies that can allow these periods to be lengthened or be rendered inapplicable. These intricacies are similar to the issues that would be relevant to other claims regarding payment or work. That means they may be best handled by parties with a knowledge of construction law and how to approach the issues in a manner to best position the relevant party.
Retainage, likewise, can be bound by rules and requirements that are complex to navigate. Many projects require or allow retainage, but the time period for when that retainage must be released can be complicated. Further, making a claim on retainage is a complex process that construction companies may not feel comfortable pursuing unless represented by a lawyer.
3. Legal Work that Typically Comes After a Construction Project Is Complete – 3 Main Areas
A. Payment Disputes
After the project (or some company’s individual contribution to a project) is complete, many of the issues that arise tend to relate to payment. While problems with progress payments during work may occur, the most significant payment disputes are typically at the end of a party’s work when invoices remain unpaid and weeks or months keep passing by.
Payment disputes are all too common in the construction industry. In many cases, the disputes are complex enough that attorneys must get involved. Payment issues involve the contract, the work, mechanics lien or bond claim processes, and more. Navigating the path to proper payment can be difficult. Whether the claim involves litigation, or some alternative dispute resolution, having a construction lawyer’s guidance and support is necessary. In many cases, construction contracts and subcontracts will require one contracting party to defend and indemnify the other for defects or claims of non-payment down the payment chain. Accordingly, what seems to merely be a dispute over payment can spill over into other issues.
B. Workmanship Disputes
Like payment, another contractual claim that arises post-project is a workmanship dispute. Not all construction turns out exactly as desired, and there are many levels of skill present throughout a job. When work is not of sufficient quality (or is alleged to not be of sufficient quality) a workmanship dispute arises. Often, these claims go hand-in-hand with payment disputes – but that’s not true of every case.
Not only is a certain standard of work generally set forth by the contract, state laws require contractors to perform at some minimum standard of quality and workmanship. As a result, not only can claims be made directly between the contracting parties, complaints can also be filed with contractor’s licensing boards or registrars. In either case, a prudent contractor or property owner enlists the assistance of a lawyer well-versed in construction law to facilitate the process.
C. General Litigation
What ties many of these claims and practice areas together is that a construction lawyer must generally have some familiarity with litigation. Construction, in practice, leads to many disputes of one size or another, and it’s common for these disputes to end up with actual (or at least threatened) litigation. Litigating is an art. While actually seeing the inside of a courtroom is not extremely common in relation to the number of lawsuits filed, knowing your construction lawyer is capable is important.
As shown here, construction law mirrors the industry it represents: a large group of different specialties lumped together by the circumstance. While knowledge and proficiency in construction law doesn’t mandate a deep knowledge of each of the areas noted above, the construction lawyer is best prepared by having the ability to dive into each of these practice areas to better serve their clients or employers.
Legal Resources for the Construction Industry
The biggest drawback for those who might need a construction lawyer is the price. Lawyers are expensive! But that doesn’t mean that any time you have a legal question, it will cost you an arm and a leg. And that doesn’t mean access to legal information is prohibitively expensive, either.
There are a plethora of online tools available to construction businesses that, for little or no cost, access to legal information (and, in some cases, legal advice) can be obtained. Let’s look at a few…
This one’s easy – you’re already there! The Construction Payment Blog is a one-stop-shop for discussion on a variety of construction payment. This blog is updated daily with construction payment topics by experts in the field. From legislative updates, explanations of complex rules, to challenging the construction payment status quo – you can find a little bit of everything on the Construction Payment Blog.
One article in particular that you should definitely read is, “What Does a Construction Lawyer Do, and When Do I Need One?”
Not to toot our own horn, but levelset has a library of accessible, relevant, and free legal information on construction payment topics. We’re talking notice requirements, lien laws, prompt payment rules, retainage practices, and waivers to name a few. There are Frequently Asked Questions sections for each of those topics broken down by state and project type!
TheConstruction Legal Center is an incredible resource where construction attorneys answer construction law questions – for free! Ask a legal question, get an answer from a licensed attorney. Answers are typically posted within 24 hours, and all sorts of construction payment topics are covered every day.
Cutting Edge Construction Law Services – Contractor Counsel
This one may seem a little out-there, but hear us out. Contractor Counsel is a one-of-a-kind service, tailored specifically for those in the construction industry. After signing up for Contractor Counsel, contractors, subs, and suppliers are connected with their own personal lawyer, receive access to phone consultations, can have their documents reviewed, and can also obtain discounts on other legal services.