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On Thursday, March 6, Austin Backus, James Forrest, and Lauren Triebenbach hosted a complimentary live webinar, “Top Construction-Related Legal Issues for Faith-Based Organizations”. Their discussion aimed to provide faith-based organizations with the tools to navigate the complexities of construction projects. The following discussion has been edited for length and clarity. <a href="https://www.michaelbest.com/Newsroom/359509/Top-Construction-Related-Legal-Issues-for-Faith-Based-Organizations" target="_blank">Access the full recording here</a>.

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<cite>*Information provided is for general informational purposes only and is not intended to be legal advice. While we strive to ensure the accuracy and timeliness of the information, laws and regulations are subject to change. We recommend contacting your Michael Best attorney for advice specific to your situation. </cite>

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Lauren Triebenbach: “Most organizations, not just faith-based organizations, have limited construction experience. Perhaps you have a lot of maintenance experience, but it's a whole new ball game when you're starting construction from the ground up or expanding on your existing facilities.”

Planning for a Construction Project

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Austin Backus: “If you are going to do a construction project, you need to make sure that your landlord is adequately looped in, that you're following the provisions of your lease, and that your landlord isn't going to run into any problems or you're not going be put into a situation where you're at odds with your landlord.”

If you are looking to buy or use existing property

Austin Backus: “Where the organization owns the property in and of itself, there are two real key considerations, either the organization is going to be purchasing new land or they're going to be upfitting land that they already own. Either way, you want to be very mindful of any zoning restrictions, local land use, or municipal restrictions.”

Lauren Triebenbach: “There are facility goals and limitations to consider. First of all, you should consider the amount of space needed to accomplish your long-term goals. Specifically, plans should accommodate not just the space you need now, but also the needs of the future. What long term goals do you have for the space, and do you have the funds available to accomplish them now? Next, how will you obtain the space you need? Will you rent space or purchase land? Will you expand on your current land or look for new land which can accommodate your full vision? And when you are searching for that space, you need to consider whether the zoning designation will need to be changed, and what that process will entail. Finally, if your space needs are based on a fixed date in time (for example, holiday services or a school year), you definitely need to plan far enough in advance in order for these dates to be realistic."

Consider your financing goals and limitations

James Forrest: “I coach clients that this is probably going to be twice as expensive, and it will take twice as long. I would say the clients that do this the best, on the church side, regularly talk about stewardship and generosity, it’s not a capital campaign. Having a ready-to-go relationship with a lending partner as early as possible is always a good thing rather than starting from scratch.”

Lauren Triebenbach: “The most typical way we see projects financed would be a construction loan, taking out funds with a bank to finance your project. If you're a tenant in another space, sometimes as an added incentive to either continue to occupy a space or to move to a new space, those landlords will offer tenant improvement allowances.”

Construction Due Diligence

Austin Backus: “This process is going to be very organization-dependent. Some organizations might have different committees that can help out with a project like this. One of the key points when you're developing your internal committee is keeping in mind any sort of conflicts of interest that your organization might have.”

Lauren Triebenbach: “If you have a board member who is an architect, a contractor, a lawyer, maybe they want to become involved. There is some potential that can cause friction amongst that board member and other members. Another conflict that can come up is if you have a large donor, that large donor may have some ideas or some qualifications for their gift.”

James Forrest: “The churches and the clients that handle this the best have a good conflict of interest policy, either in their bylaws or in a standalone policy. And as long as a group of disinterested people approve that kind of what I call affiliate transaction, it's totally fine.”

Austin Backus: “No two projects are ever the same, no two organizations are the same. You need to work within the confines of your goals for a specific project to ensure that you have the right project delivery method.”

One party, typically an architect, designs it. After the design is completed, you solicit bids from general contractors. You then select and accept a bid, and then the contractor goes on to build.

The design-build process combines the two elements. One benefit is it cuts down on the number of parties and stakeholders you have to work with.

Lauren Triebenbach: “The design-build is that one-stop shop. You have the option of working more upfront with the construction team, allowing the construction team to be involved and engaged in the design process which sometimes can result in some savings in terms of the feasibility of construction.”

Option three: Request for Proposals Process

With a request-for-proposals process, you solicit bids from different contractors and design-build entities. Then you select the one that works best for you.

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Timely Engagement of Members

Lauren Triebenbach: “You’ll want to consider the impacts on your organization when scheduling your project so that it causes the least disturbance to staff and your members. There are different deadlines and timelines depending on the project delivery method. You’ll also want to make sure you leave time for review of your contracts by your insurance and legal teams.”

Austin Backus: “Making sure your lender is aligned, that the financing is aligned with your organization is critical in any project. It’s equally important to make sure there’s no conflict of interest. Make sure they have specialized knowledge of the construction process, and the impact of potential delays, and are willing to work with you every step of the way.”

Lauren Triebenbach: “There are specialized insurance products that you should purchase when you are undertaking a construction project. Builder’s risk insurance is one of the most standard policies. It's meant to cover the property associated with the work under construction, the existing building as it's under construction, and the materials while they're being stored or in transit.”

Austin Backus: “Title companies can be used to disperse funds, to collect lien waivers, to process payment applications and invoices. If you have a smaller internal team, it might be worth engaging with a title company to help facilitate some of the more managerial and administrative tasks that come up during a construction project.”

Lauren Triebenbach: “When you're selecting an attorney to work with, ensure they have familiarity with the subject matter, and the locale in which you're working. If you're working on securing space, taking down new space under a lease, or you're purchasing new space, you can also work with that same team to help you through the process of reviewing your lease and making sure it's set up for a tenant improvement allowance. That same team can help you with the acquisition of that land. Most firms, including ours, that specialize in construction will have team members that can help with both parts of those processes.”

Lauren Triebenbach: “An owner's representative is somebody that you hire. These people act as your eyes and ears on the project. These professionals are engaged to act on behalf of you to the extent you need them to. You can engage them to review payment applications for you, to review change order requests for you, to review any schedule updates you receive to make sure that you're maintaining the overall project schedule.”

The Three Types of Pricing Structures You May See in Your Construction Contract

Selecting the Right Contract

Austin Backus: “This is one of the most critical components in getting your construction project off the ground.”

Austin Backus: “Whenever you are doing your capital campaign or you're working with your lender or you're otherwise planning the financial approach that you're going to take with a project, it's very important to leave yourself some room. You want to have some flexibility as the project progresses so you can make sure your pricing structure fits in or gives you that flexibility to be able to make changes as they happen.”

Cost plus with a guaranteed maximum price

Lauren Triebenbach: “Depending on what lender you're working with, they may have a certain set of not only architectural contracts but contracts for construction that they require their clients to use. I've seen a lot more recently that lenders are requiring certain language regarding change orders and also regarding force majeure. Force majeure is a fancy word for things that are ultimately outside of the control of any of the parties. If you have a title company involved, you might have an escrow agreement that the lender wants to have you execute, and that will set forth the procedures that are going to govern the payment draw process during construction. On construction loans, lenders usually will require the owner to assign their rights under both the architectural contract and the ultimate construction contract.”

Lauren Triebenbach: “If you're going through an RFP process, you typically will want to use contract forms in that RFP process.”

Austin Backus: “Most architects and general contractors are going to have some sort of preferred form, some sort of classic or standard language that they'd like. Make sure that you never accept any architect or any contractor's preferred forms without having an attorney, or at least somebody put another set of eyes on it.”

Lauren Triebenbach: “Having your preferred form for your construction project is the best way to ensure that you're as protected as you possibly can be. But you need to work with somebody that can help you select that form. The selection of the proper form depends on the type of project delivery method you're using, the type of pricing structure that you're using. You need to work with somebody who has knowledge of the proper form because you don't want to have somebody put a contract together for you only to find out that after you've spent the money, it's the wrong form.”

Key Contract Clauses

Lauren Triebenbach: “The best change order forms are going to include a description of the scope that's being added or removed, the effect on the cost of the overall project related to that change, and any schedule changes that may also occur as a result of these changes in the scope of work.”

Austin Backus: “It's important to have a fixed substantial completion date or at least a target substantial completion date. That way you can track any sort of delays the project might have against the completion date.”

Austin Backus: “The way contractors, architects, owners, and faith-based organizations often handle those delays is by outlining whether you're going to have liquidated damages, which is a set figure of money to be either paid or deducted from the total cost of the contract on either a daily, a weekly, or maybe a monthly basis. Other times, maybe they'll have consequential damages where there is a loss that stems from the organization's inability to use or otherwise make use of that space.”

Lauren Triebenbach: “This is not something that's always included in a construction project. Including a contingency can help protect you against things that might arise during a project that are unanticipated, things that you couldn't really plan for.”

Austin Backus: “A contractor will give your organization a payment application, or maybe it comes in the form of an invoice. In terms of negotiating that contract, what you're going to want to set out is the frequency of the pay applications.”

Lauren Triebenbach: “Indemnity is essentially a fancy word for risk shifting. Indemnity is something in writing whereby the parties agree that one person is going to accept the risk of another party. It's critical that you work through those clauses with your attorney and insurance agent to make sure that you’re knowledgeable about what risk you're accepting and that you are passing along that shift of risk to your contractor where it's appropriate.”

Austin Backus: “There are two types of termination. Number one is for cause. The other one is for convenience. It's important to give your organization a way out.”

Lauren Triebenbach: “The key with insurance is that you want to consult with that insurance agent and make sure that you're getting as much protection as possible. It's important to talk to your agent about what those coverages should be and what type of additional insured endorsement that you want to have.”

Lauren Triebenbach: “The key with the warranty is you want to make sure that you're getting as much warranty coverage as possible and that it is clear when coverage is going to start and how long it is going to last.”

Lauren Triebenbach: “The most common thing we see in these contracts is a mediation prerequisite. This is where the parties work with somebody who is a neutral party to try and see if they can resolve their dispute. In the event they can't actually ultimately work out that dispute and mediation, the contract should provide whether or not disputes are going to be resolved via arbitration, which is essentially where the parties pay for a private judge or litigation which is where the parties bring their dispute to a court of law.

For more information, or to discuss how these changes may impact your business, please contact our team.

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Webinar Recap: Top Construction-Related Legal Issues for Faith-Based Organizations

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