Construction Contracts: How to Leverage Them to Drive Efficency and Save Money

FEATURE

Construction Contracts: How to Leverage Them to Drive Efficiency and Save Money

by Dan Broderick, BlackBoiler

Apocryphally, the phrase “may you live in interesting times” comes from an ancient Chinese curse. In the words of Sir Austen Chamberlain, politician, and brother of the British Prime Minister, Neville, “The curse has fallen on us… we move from one crisis to another. We suffer one disturbance and shock after another.”

There is no doubt that we live in “interesting times” right now, although whether that is a blessing or a curse is up for debate. We have some very strong headwinds as we enter the second half of 2022. The inflation rate in the US is heading towards double figures (8.6% in May) and hit a 40-year high recently. This may lead to what economists call a “cost of living crisis” which could auger a recession next year. In spite of this, the current economic situation is mixed, with unemployment still less than the number of job vacancies, and some industries seem to be weathering these headwinds with ease. The engineering and construction market is an interesting case in point. Although the supply of new homes has lagged the real demand for the past decade, a potential slowdown in spending will likely have a significant impact on the residential sector. The home building industry has recovered rapidly after the pandemic. Both residential and commercial builders face the same headwinds, but some are exacerbated.

Construction Industry in 2022

Firstly, both contractors and subcontractors face hiring challenges. Many construction workers left the industry post-financial crash and then during the pandemic. Replacing them

is certainly challenging. Secondly, the well-publicized issues with supply chains, caused by both the pandemic and the Russian war in Ukraine, deeply affect the construction industry, given its dependence on physical materials. Thirdly, costs of building materials have risen 20.4% YoY and 33% since the start of the pandemic according to the Bureau of Labor Statistics (ref).

Despite all these challenges, the residential construction sector remains strong with a 27% increase in spending in 2021 compared with 2020. In the commercial sector, spending fell 11% for the same period, but a boost is coming from government investments in largescale infrastructure projects (roads, bridges, rail, etc.). But, this is a fragile situation. If interest rates are raised significantly to rein in inflation, then borrowing becomes more expensive and that affects mortgages and house purchases. Let’s assume supply chain issues persist. In that case, contractors and subcontractors alike will need to sharpen up their processes to improve efficiencies and protect margins that are under pressure across the AEC landscape.

Drive Efficiency with AI Technology

RSM, the accounting firm, in a recent post, highlights supply-chain concerns, inflation, and labor shortages as concerns for the AEC industry. RSM recommends that contractors (including subcontractors) prepare for any possible strengthening of these headwinds by, among other things, including price escalation clauses in their construction contracts.

The negotiation of construction contracts is one area where firms in the value chain can hedge and ensure tighter control over these headwinds. Main contractors and their subcontractors, for example, can construct better, more tightly controlled contracts, which reduce risks between them. Often these firms, especially subcontractors, rarely have highly skilled legal staff to manage the complex redlining and negotiation processes to get to an executable contract quickly. That is not usually their area of expertise. Outside counsel can be engaged of course but that comes at a cost. By automating construction contract negotiations, companies can save cost and reduce the time to an executable contract. Creating a playbook of the ideal contract negotiation position and strategies for all types of contracts from NDAs, MSAs, Time and Material contracts to Lump Sum contracts, and then automating the contract review and negotiation process with the counterparty has enormous potential for cost savings. This is the bread and butter of what BlackBoiler‘s contract review software does for its clients in the AEC space. Playbooks can be rapidly built within the tool by learning from historical contracts, creating rules manually, and using a guided Q&A style playbook builder, allowing thousands of contracts to be automated redlined in 70% less time than manual review.

Take your Business to the Next Level

The outlook may be positive, but there is much that can be done to minimize further potential weakness. It starts with forward planning whether that be pre-ordering materials or tightening construction contracts to reduce risk.

Whether the times we live in are simply “challenging” or they are indeed, “interesting” probably depends on where you sit economically, financially, and politically. For those who operate in the AEC market, it appears to be more the latter than the former. Yes, there are challenges ahead but demand is clearly there and with a focus on efficiency, many contractors and subcontractors can navigate their businesses to a bright future.

About the Author:

Dan Broderick is the co-founder and CEO of BlackBoiler, an automated contract markup tool that instantaneously marks up contracts right in “Track Changes,” just like an attorney. Through deep domain expertise and passion, he's built a vision for BlackBoiler to transform the status quo of contract negotiation. Before founding BlackBoiler, Dan was an attorney with Kilpatrick Townsend & Stockton LLP, an AM 100 law firm. There, he specialized in negotiation, related disputes, and developing more efficient processes for contract review. He holds a J.D. from American University. Additionally, Dan holds a degree in engineering management. This article was originally published in July 2021, and is reprinted with permission from BlackBoiler.

FEATURE

Simple Things You Can Do to Lower Your Experience Modification Rate

by Robert Tuman, CCR Safety Consulting

In my almost 40 years as a risk manager and safety consultant, I was privileged to work with contractors who over time succeeded in lowering their experience modification rates, resulting in lower workers’ compensation premiums and more favorable treatment when bidding work.

Whether it is right or wrong, owners judge contractors on the basis of their experience modification rates, and I recall a concrete contractor client which was disqualified from even throwing its hat into the ring on a $10 million contract due to its 1.17 experience modification rate- 12 points above the owner’s and General Contractor’s 1.05 experience modification rate cutoff. The owner questioned the disqualification, but was denied an appeal.

SO…HOW CAN YOU IMPROVE AND LOWER YOUR EXPERIENCE MODIFICATION RATE (“EMR”)?

1. Ask your agent about experience

modification rating and the adverse impact of injury and illness claims, and especially the impact of claim reserves on experience modification rates. Many agents possess software programs which can forecast future experience modification rates and premiums based on current claim costs, claim reserves, and other variables such as payroll and class codes. Workers’ compensation insurance is experiencerated similar to auto insurance surcharges following at-fault events and accidents- i.e. conviction for turning on a “NO TURN ON RED” sign, rear-ending another vehicle, driving while intoxicated. Simply put, workers’ compensation claims, with reserves to pay for “what ifs”, increase EMRs and premiums in each of the 3 years following the claims. Even denied claims can impact your EMR. For example, a contractor’s EMR tripled due to a $250,000+ reserve put on a death claim. The owner’s brother, responding to a weekend emergency, was killed in a head-on collision while

driving to the jobsite. The insurer denied the claim, which a judge overturned 3 years later. Another client, a medical laboratory, experienced a dramatic increase in its EMR and workers’ compensation premium when a lab tech claimed that she contracted tuberculosis from handling tuberculosis-tainted blood two and one-half years after she had left the laboratory. The very thorough but timeconsuming investigation found that she had contracted tuberculosis after moving near the prison where her boyfriend was incarcerated and had contracted tuberculosis.

2. Regularly obtain and review workers’ compensation “loss

runs” from your agent. A loss run is a detailed accounting of claims costs- for medical treatment, incomereplacement payments to injured workers, reserves, and claimrelated expenses such as accident investigation and loss control consultation. Reserves are essentially an escrow account the insurer establishes to fund “what ifs”: “What if the injured worker needs surgery and lengthy physical therapy?” “What if the worker can’t return to her or his chosen occupation, and requires job retraining?” “What if the worker is permanently and totally disabled and can’t ever work again?” Insurers report what they have paid and what they have reserved to their states’ workers’ compensation rating and inspection bureaus, which then calculate experience modification rates for the following policy year. KEEP IN MIND THAT THE AMOUNT OF A RESERVE, WHETHER ANY OR ALL OF IT HAS OR HAS NOT BEEN SPENT, IS FACTORED INTO THE BUREAU’S CALCULATION OF EXPERIENCE MODIFICATION RATES. Due to experience rating, regularly reviewing loss run detail is as important as reviewing your company’s sales reports, expenses, income statements and balance sheets. Make believe you are self-insured for workers’ compensation- that every dollar spent by your insurance company is coming out of your current revenue. Accordingly, it is perfectly reasonable for you to ask adjusters “How did you come up with this reserve?” “Do you need this amount of (reserve) money, given that our employee is back to modified duty and doing well?” “Our employee is back to modified duty. Can you reduce the reserve?” “Our employee has stopped treating and is back to full duty. Can you close the claim?” “What is your plan to resolve this claim?” “Why did you accept (or deny) this claim?” All are reasonable questions.

3. Given that you now have claim details, regularly communicate with adjusters to obtain claim updates.

Claims evolve, and you want to know how they evolve- for the better or for the worse.

4. Implement an ACTIVE/ PROACTIVE Early Return to Work Program where you maintain

contact with your employee: “How are you feeling? Is there anything we can help you with or do for you? We have a job for you when you’re ready. Here’s what it entails. You can start with a few hours. We’re having a retirement/birthday/holiday party on….- how about joining us?”. PLEASE BE AWARE THAT CLAIM COSTS INCREASE AS LONG AS INJURED EMPLOYEES CONTINUE TO BE OUT OF WORK AND THAT WORKERS’ COMPENSATION ADJUSTERS HAVE NO CHOICE BUT TO INCREASE RESERVES IF THEY SEE THAT THERE IS NO END IN SIGHT. It is therefore incumbent on you, and in your and your injured employee’s best interest, to get her or him back to suitable, productive work, even it is parttime, as soon as medically possible. To company Presidents and senior managers: If you were injured and could not work for weeks or months, what would you like your company to do for you? The active/proactive approach includes contacting your employees’ medical providers to develop suitable modified duty jobs, and to modify these “light duty” jobs to accommodate the employee’s capabilities and restrictions. The ineffective passive approach relies on the employee’s doctors telling you what their patients are capable of doing. However, most of the time the doctor is going to detail what the employee CAN’T do. How many times have you seen doctors’ reports which state “can’t lift more that … lbs., can’t reach, can’t climb ladders…can stand for a maximum of ….minutes per day?” Come up with jobs and tasks which need to be done but you are not currently doing and put them in a job description which you then send to your employee, her or his doctor, and the insurance adjuster. If the doctor thinks the jobs or tasks will or might aggravate the patient’s condition, modify the “light duty” job and job description and send it back to the doctor, with a cc your employee and the insurance adjuster.

5. Do a better job of screening

applicants. Risk management starts with applicant screening. Ask yourself: Do you check references? FYI, after a reference spouts numerous superlatives about her or his former employee, ask “What is the worst thing you can say about ….?”. When I asked this question about a woman I had interviewed for an administrative position, her former employer told me “She has a hard time getting along with co-workers.” I did wind up hiring her, as her positives were more than her negatives. However, after a year we agreed to disagree, as she did have a very hard time getting along with co-workers. She was a good, but not a great individual contributor, but she created friction, dividing and polarizing staff. Try having several (no more than 4) valued, veteran employees and managers interview applicants and then conduct “What did you think of the applicant?” sessions. This will help you to get different and helpful viewpoints. Ask applicants to demonstrate the competence

they claim they have- i.e. operating equipment, ability to read and understand plans, their knowledge of safety- i.e. scaffold safety- especially if they listed relevant experience and knowledge on their applications or resumes. Not necessarily relevant to your line of work, but when interviewing secretarial applicants, I asked one to take a typing test. Her resume stated that she typed 60 words per minute. She said her glasses were in her car, and asked if she could get them. 5 and 10 minutes went by. Where was she? Long story short- she never came back. Perform as many legal background checks as possible. Risk management RULE 1: the more risklowering actions you take, the lower the probability of those risks and injury and illness exposures rearing their ugly heads. AND RISK MANAGEMENT STARTS WITH CAREFUL APPLICANT SCREENING.

6. Develop, implement, and execute a legal policy and procedure which enables you to quickly terminate employees who have misrepresented their

skill level, competencies, and are underperforming and/or not meeting the documented expectations you and the new hire agreed on. The expectations should include a safety section- i.e. “We require the following Personal Protective Equipment”. If I had a nickel for all the times I heard a client say “I should have gotten rid of her/him sooner”, I would have amassed a lot of nickels. Often this statement followed unwitnessed accidents and very questionable costly and contentious workers’ compensation claims. Question: what do you think of a claim submitted after you fired the employee?

7. Understand your biases and hit the delete button to remove them

from your head. Every applicant screening process should start with a clean slate. Worst case personal example: I was wowed by an applicant who appeared in a suit and tie, was the breadwinner of a family of four, owned his home, was a licensed insurance agent in his family’s insurance agency, and said all the right things. I contacted references, asked “What is the worst thing you can say about Joe?”, with references replying “I don’t have anything bad to say about Joe”. During his new employee orientation, I detailed my expectations, which included receiving a copy of Joe’s schedule at the beginning of each week along with an activity report detailing the previous weeks’ safety meetings, safety inspections, and other activities. A few weeks into the job, we started getting calls from clients: “Where’s Joe? He was supposed to be at our safety meeting at 11 but never showed up and never called.” Enough noise to cause me to be suspicious and to start documenting these complaints. Further, one morning, while driving back to my office, I spotted Joe’s company car speeding past me and other vehicles and weaving in and out of traffic. Waiting for me back at the office was an urgent request from my insurance agent: call me right away. Back then, Massachusetts assigned numerical scores to driving records. For example, a 9 indicated a perfect driving record. Drivers with at-fault violations were charged additional points. The reason behind my agent’s urgent request: to tell me that Joe’s score was 36, a result of 19 speeding tickets, at-fault accidents and other assorted moving violations (i.e. running red lights, passing an occupied school bus with its “STOP” signs and flashers going)! I confronted Joe and took the car away. At the same time, we discussed the client complaints, and I cited the many no-shows. He gave me a lot of lame excuses which I documented, and which went into a disciplinary memo citing my expectations for the next 30 days. Much to my disappointment, the number and seriousness of the complaints increased during the next 30 days, and I had no choice but to terminate Joe. I later found out that Joe had also had his insurance agent’s license revoked due to numerous improprieties- one for repeatedly pocketing new clients’ life insurance deposits. Long story short: I was duped by my bias and I only had myself to blame. I had failed applicant screening 101. This guy was a sociopath and an empty suit, and I should have done better.

8. Commit to a goal of lowering

your EMR. This will require you to be patient and to implement practical, doable safety practices such as multiple-person lifting and equipmentassisted lifting, Pre-Task Safety Planning for tasks with high inherent risk of injury or illness, daily Foremen/ Supervisor-employee Job Hazard/Job Safety Analysis (“What are we doing today? What do we need to do to keep ourselves safe?), Project-Specific/ Site-Specific Safety Planning are other tools which contractors use to manage the many constantly-changing projectspecific injury and illness risks and exposures.

Can’t or are unwilling to do these things? Hire from a labor service and engage a safety consultant and give her or him the authority to take timely corrective action.

I want to thank all the contractors who listened to me despite their hesitations. I was happy to be told “Bob, you did a great job, but you worked yourself out of a job.” Note to the file: many of these same contractors reengaged my services after they unfortunately relaxed their commitment to safety.

About the Author:

Bob Tuman is president of CCR Safety Consulting in California, providing safety consultation to construction contractors and performing Workers’ Compensation and General Liability Loss Control Surveys for property and casualty insurers. For further information or to contact CCR directly, please contact: 805-545-5976 or email bobtuman@ gmail.com.