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Multifamily Construction Requires Due Diligence and Careful Team Selection

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Multifamily construction is booming despite the slow economic recovery for commercial and single-family markets, but it is a very different market than it was 10 years ago. Like other segments of construction, the increasing number of firms in multifamily has driven profit margins down. As a result, bidding errors or unanticipated project costs, which were once part of doing business and could be absorbed within the contract price, can now wipe out all profits on a project and even threaten a company's overall financial strength.

Multifamily's healthy backlog of work has attracted firms from both residential and commercial backgrounds. The residential firms likely have the skills to build a multifamily project, but the scale may be more than they or their subcontractors are prepared to handle. Commercial builders may find that contracting practices of project owners differ in the owners' attention to detail and sophistication, even on large multifamily projects. In addition, multifamily work has drawn on all levels new companies that may be inexperienced with respect to construction practices as a whole.

This is why thorough pre-contract investigations and due diligence about hiring prospective firms is a must. Before contracting on a multifamily project, it is an excellent practice to contact all current references for firms, seek financial assurances and carefully consider a firm's experience with this project type. Services that report on companies and their financial situations are invaluable tools for assessing firms' capabilities and track records.

Your inquiry should extend beyond newcomers and include those firms with whom your company has worked in the past. Even firms that have performed well may have undergone management changes or financial setbacks that could prevent them from performing at their previously high levels. Your project execs should call industry contacts to find out whether a prospective contractor is still viable.

Multifamily construction is one of the last strongholds of informal "handshake" deals based upon long-term relationships, but the risks are too great for firms to continue doing business that way. Performance expectations must be clearly communicated up and down the contracting chain to avoid costly disagreements and litigation. That's why written communication is the key. As a construction attorney, I frequently see multifamily firms rely upon e-mails or other brief electronic communications like text messages as proof of their positions. These short messages are often difficult, if not impossible, for third parties to decipher and they are subject to multiple interpretations. Informal messages frequently omit details that provide enough context to fully understand the issue at hand. The result can be increased confusion during the project, which later fuels disputes.

Spell It Out

Firms are far better served when they encourage employees to write stand-alone, "letter-style" e-mails that clearly communicate their subject, confirm verbal conversations and agreements and outline facts, issues and deadlines. A good rule of thumb when writing e-mails is to consider how they will be read by parties who may later decide a dispute. An effective e-mail will clearly communicate its content and possibly cause an insurance company to assess the merits of a submitted claim more fully, dissuade a factoring company from filing suit to recover payments allegedly due its principal or inform an arbitrator or judge about the author's perspective on an issue.

The multifamily market can be profitable for those who are conscientious in assessing their project partners and who take the varied experience levels of other firms into consideration when communicating with those parties. Firms who do due diligence before contracting and who clearly communicate their expectations of others over the life of the project can preserve their profits and enhance their prospects for future success in multifamily construction.

Danielle N. Senn is a construction attorney in the Dallas office of Ford Nassen & Baldwin PC. Website: www.fordnassen.com.

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