What is Construction Law?
Construction law is a very complex area of practice. Construction includes the construction of residential buildings, offices, other commercial and retail buildings, industrial plants, infrastructure, and other structures. Construction companies can be solely focused on construction or, especially more recently, they may focus on both the design and construction phases of a project. These agreements are known as “design-build” contracts.
The construction industry, no matter the state or locality where a project is located, is subject to a tremendous amount of rules, regulations, and ordinances at the federal, state, and local levels of government.
What do construction law attorneys do?
There are two main areas of construction law:
The litigation side, where things have already gone wrong and the parties are suing one another.
The transactional side where the construction law attorney drafts, helps negotiate, and reviews contracts, advises clients on how to structure projects, and provides general business support.
KLH Advisors offers transactional legal services to clients, and that’s what we’ll focus on here.
Drafting Quality Construction Contracts
Contract drafting is extremely important in construction law, but is often overlooked or dismissed as too expensive, too complicated, or even unnecessary. However, handshake deals or the use of contracts found online will almost never end well when things start to go wrong with a construction project.
Spending money upfront on legally-binding, well-drafted contracts from a construction law expert to ensure your assets are properly protected and legal pitfalls are mitigated, before they arise, actually saves you money in the long run.
Setting Up Your Construction Business Properly
Regardless of whether you have an existing construction business or are just starting out on your own, you will likely need to consult a business attorney.
A business attorney may help your construction company:
Set up the proper entity prior to doing anything related to the business,
Register with your state or locality, if necessary,
Obtain a license from your state or locality, if necessary,
Get properly insured, and
Assist you hiring employees or independent contractors.
Selecting the Right Business Entity for Your Construction Company
There are many factors to consider when forming a business entity for your construction company. A limited liability company is not always the right choice for businesses. Once you and your attorney determine the correct entity to form, your attorney will draft the necessary formation documents.
Some factors to consider when determining an entity are:
Whether you will seek outside investors in the new company,
Whether you will need to hire employees and/or independent contractors, and
Which entity would be best from a taxation perspective.
In addition to forming an entity, you will want to ensure the state does not require any additional registration requirements of businesses in general or specific to the construction industry.
You will also want to open a separate bank account for the newly formed business. It is important that as a business owner you keep your personal assets separate from your business assets. Never commingle your business and personal finances.
All these steps will ensure that you do not unintentionally pierce the corporate veil and lose the liability protection from your personal assets that a separate legal entity provides.
Construction Business Licensing
Every construction company owner must ensure that they have the correct business licensing, which can vary by jurisdiction.
For instance, one city may require that general contractors have a general contractor license while others may not. Some localities may require a contractor to obtain separate licensing to work in their county.
The worst thing a contractor can do is start working in a state or particular locality without the proper licensing. Check with a construction law attorney if you have questions.
Construction Business Insurance
Each contractor going into business in the construction sector must ensure that they are properly insured.
Important insurance coverage for contractors may include:
Commercial auto insurance,
Workers compensation insurance,
Commercial general liability insurance, and
Professional liability insurance.
Additionally, it is important to know what type of insurance to require of owners and subcontractors that you will be working with on various projects.
Necessary Contracts for Construction Companies
Once your construction business is formed, you will need to decide whether you will be hiring employees or whether you plan to use independent contractors.
Depending on your construction business, your construction law attorney may draft:
Employee offer letters,
Employment handbooks,
Independent contractor agreements, or
Subcontractor agreements.
Make sure you understand the employment laws where you are located. If you hire independent contractors, it is essential that you understand who is legally considered an independent contractor, versus an employee to avoid serious tax penalties. You may think you are hiring someone as an independent contractor but the state and the federal government may consider that person your employee.
Additional contracts necessary for construction businesses may include owner and contractor agreements, or construction contracts between the owner, designer, and contractor.
The contractor will also want to develop change order forms, certificates for substantial completion, release of liens, and lien waivers. Contractors also may need an attorney to review purchase orders or vendor agreements.
Mechanic’s Liens
It’s important to understand lien laws, and specifically mechanic’s lien laws in your jurisdiction. Contractors will want to structure your contracts carefully in order to fully protect your business to the extent possible. Mechanic’s liens are an extremely useful tool to help construction business owners get paid, but mechanic’s liens can also be difficult to deal with if you are on the receiving end of one.
Construction business owners should immediately contact a construction law attorney if they receive a notice of intent to file a mechanic’s lien in order to avoid missing essential deadlines.
Construction Law is Complex—Hire an Expert to Help
Many different areas of law touch the construction industry. With the complicated nature and amount of contracts in the construction sector, it is best to consult a construction lawyer prior to taking your first client.
This is where KLH Advisors is here to help. Our firm can help both with setting up your new construction business and with contract drafting, review and negotiation specific to the construction industry, as well as advising on general business and construction matters.
