Since construction is a risky business, most contractors use surety bonds to protect against job performance risk and general liability insurance to mitigate loss due to accidental injuries or property damage.
Construction is also highly litigious, but fewer contractors invest in plans or tools to reduce their exposure when facing legal action.
While insurance may protect against direct losses, it does not protect against the many indirect losses that result from the litigation process.
Reconstruction During Litigation
Due to the complexity of construction projects and regulations, as well as the technology used to communicate and accomplish work on a daily basis, proving what actually happened on a job during litigation is a feat in itself.
When proving or defending fault on a job during litigation, one must collect all of the pieces, assemble them in the proper format, and produce a specific structure at the end of the project. Just like a construction project, “reconstruction,” or the process of assembling these parts, involves multiple parties – GCs, subcontractors, vendors, and legal teams – and thousands of plans, specifications, e-mails, and other types of documents.
Litigation Response Plan
Rather than ignore the eventuality of litigation, some advance preparation can help prevent litigation costs from spiraling out of control. Similar to an Emergency Response Plan, contractors should consider creating a Litigation Response Plan to prepare for those costs incurred during the inevitable project litigation.
When a complaint is filed against a contractor, advanced planning can defray many costs that can arise from having to move quickly and without enough time to find cost-effective solutions to technical and legal problems. Much the same way insurance protects assets against unforeseen losses, a litigation mitigation budget can help protect against unforeseen costs that can throw a balance sheet into the red. Let’s look at what to include in a Litigation Response Plan and mitigation budget to help reduce expenses.
Human Resource Costs
As soon as litigation is anticipated, costs begin to accrue as employees try to plan a response and course of action, which can be quickly decided upon if the company has an established Litigation Response Plan. Contractors with protocols in place speed up response time and reduce HR costs.
The Litigation Response Plan should document the appropriate legal counsel for certain types of litigation, such as contract disputes, change orders, or defects. The plan should also identify the software and e-discovery vendors (or companies specializing in the extraction and analysis of electronic information), those equipped to handle e-discovery, and their contact information.
For greatest peace of mind and to ensure that your company does not negotiate rates while in a time-sensitive position, pricing should already be established with these service providers and documented in your company’s Litigation Response Plan
Just as a contractor structures bids using the most accurate information available, an e-discovery vendor or legal service provider will attempt to do the same. Your greatest leverage in negotiating service pricing will depend on your ability to learn your company’s potential exposure on both a liability and service expense level.
For instance, the more information your company has regarding how many people may be involved with (or subject to) discovery in a given matter, how much data must be culled, or how many places must be searched for relevant evidence, the faster you’re able to ascertain an estimate to put your company in the best position to negotiate service pricing. A Litigation Response Plan that provides the quickest route to determine these facts can help reduce the assessment of uncertainty costs.
Identification & Collection Costs
A Litigation Response Plan should also incorporate a method for determining the relevant people in control of evidence (custodians) based upon scope of the matter as determined by counsel. Each matter may be different, but all will share the common requirement to determine the responsible parties. The responsibility of parties will be related to the expected duties of the employee based upon position, as well as the employee’s actual duties as determined by the self-disclosure of their actions or contents of their files and correspondence.
The Litigation Response Plan should also include a method and procedure for identifying relevant parties in response to litigation and all potential locations where evidence within their knowledge and control might reside. In addition, include a form for a litigation hold notification, which advises employees connected with the anticipated litigation not to delete e-mails or other data. Sanctions for evidence loss or spoliation can be expensive, include criminal sanctions, and start a matter off on the wrong foot.
The cost of gathering this information can be extremely expensive, as several tools are sometimes needed for assessing, gathering, and searching various types of data repositories – especially if backup media has to be retrieved. In many unfortunate situations, it is impossible to distinguish what’s relevant before collecting, indexing, searching, culling, and de-duplicating all of the data.
Discovery costs can be vastly reduced by setting up centrally managed data repositories and establishing protocols for saving potentially relevant information. It is always considerably more expensive to gather disorganized data than to collect information from a central location, particularly if it only stores one copy of the evidence. Invest in software to enable the rapid retrieval of evidence to help dramatically reduce litigation expenses and response time, and show ready compliance in the eyes of a court.
Discovery Review Costs
Each previous stage of planning plays a part in reducing the amount of evidence that ultimately ends up in front of lawyers for review. Today, a leading litigation cost is driven by thousands of files containing millions of pages that may need to be reviewed.
To the extent that all prior steps fail to reduce the volume to a manageable level, taking control of the discovery review process can reduce fees. Some large companies have internal discovery teams that handle these requests on a full-time basis, while others contract with law firms or e-discovery vendors to review some or all of the data. Regardless of the method used, discovery costs can exceed $1.00 per document, multiplied by thousands (or millions) of documents.
Ensure that your company’s Litigation Response Plan defines a specific review platform able to handle teams of reviewers to avoid using an inefficient or problematic tool. A review platform should allow attorneys to move efficiently between documents, review all relevant aspects of data, and efficiently search and categorize information. It should also support collaboration and tiers of review, allow customizable security and permissions, and include the ability to produce data in a format that meets the court’s format stipulations. It is also important to set up the review database to be compatible and efficient with the end production format.
In most cases that involve voluminous electronic data, parties agree to a format of production; if they do not agree, then a court may specify one. Some state laws specify that electronic data must be in “reasonably useful” form to avoid situations where, for instance, one side prints a million pages of searchable data that isn’t in a searchable format and unfairly prejudices the merits of a matter. While this an extreme example, data format problems can delay the review of evidence by hours, days, weeks, or even months.
To avoid receiving data in an unusable format, include data delivery standards in your company’s Litigation Response Plan. The party that takes the initiative in establishing the production format for electronic evidence (e.g., single-page images, a metadata load file, an image load file, and associated text files for searching) can often set the tone for an orderly and efficient exchange of evidence.
In addition, specify the numbering format, metadata fields (e.g., author, title, date, etc.), and minute details (down to the character encoding) to help avoid problems and delivery or negligent misinterpretation of your request. Data received in electronic format can reduce internal staff review time.
Such production costs as printing or making copies are based on volume and complexity of the task requested. The more orderly and attainable the planned specifications are, the lower the costs and smoother the process. A modest investment in planning and software can avoid a lot of added pain in an already unpleasant situation.
Technology’s Role in Litigation Management
Standard operating procedures and centralized documentation are key elements in creating a Litigation Response Plan and mitigating litigation costs. Fortunately, new technologies and software specifically designed for the discovery process in construction have emerged to make locating and culling through evidence faster and easier.
Until recently, contractors were limited to online file sharing and FTP sites for centralized storage and distribution of their project documents. Those with access to these types of sites, including subcontractors and vendors, could view and edit documents, but couldn’t track project activities or communication. Information in the form of plans and specifications could be uploaded to the site, but versioned documents and audit trails simply did not exist.
Recent advancements in technology have enabled the development of construction-specific documentation software that gives all project participants access to centralized information. These applications provide GCs, subcontractors, vendors, and potentially even legal counsel the ability to access all necessary files and evidence from one location. Terabytes of plans and specifications are not only easily stored, but supporting documentation in the forms of e-mails, RFIs, submittals, and project logs also provide the ability to recreate an entire project or a specific phase at any given time – whether during construction or years after construction is completed.
When considering new software, look for applications that go beyond simple document storage and focus on project communications and collaboration. All documents related to a project (including plans, RFIs, photos, and even e-mails) should automatically be stored and place project information in one location. With this technology, construction owners and legal teams can efficiently collect evidence, assemble the pieces, and reconstruct the construction project to help determine the parties at fault.
During a construction project, changes occur frequently. RFIs and e-mail correspondence need to flow between the parties. Submittals need to be approved. Depending on the size of the project, numerous subcontractors and vendors may be involved, which creates multiple layers of communication when changes are made. Without specialized software, determining who received, read, and responded to a communication can be difficult.
Today’s software solutions can provide visibility into who performed which activity and when, who read which documents and when, and thus, who might be responsible – or not – for omission or negligence. Look for construction document management software that can track and record every e-mail opened and document edited, and create audit trails and version tracking from these activities. With these tools, legal consultants can not only obtain all of the evidence they need, but they can also move between the documents, easily review the data, identify all of the parties involved, and determine who is responsible.
With thousands of plan versions, supporting documentation, and e-mails for any construction project, organization plays an important role in the documentation process.
As mentioned, the Litigation Response Plan should address file standards and delivery formats. Once files are uploaded to a software application, they need to be organized within the application for easy sorting and searching. Optical character recognition (OCR) capabilities are not new, but the technology used for litigation should go far beyond searching for words.
When considering software, look for the ability to add information to documents in the form of meta tags and categories. Some documents (such as time cards and invoices) may be associated with multiple jobs or phases, which makes adding data to documents even more vital when gathering evidence.
Reconstructing a project requires legal teams and contractors to recreate specific moments or phases during the project. Once documents have been added to a job within a software application, they must be organized to reflect job activity and be easily searchable.
To provide a smooth discovery process, software needs to be able to sort based on the type of document, responsible parties, and even date. Look for project and document management software that provides the ability to correlate diverse pieces of information that can be associated together, which allows for relationship analysis. With easy searching, sorting, and correlating functionality, creating a snapshot of a specific period in a project timeline is simplified.
Litigation is inevitable. While legal fees, discovery costs, and other direct costs cannot be avoided, the indirect ones can be mitigated with the right steps. Responding to litigation requests, finding relevant materials, and culling through documents can tie up employee resources. Savvy contractors that take a proactive approach to their legal plans mitigate their risks and financial liabilities.
With a sound Litigation Response Plan and appropriate technology in place, significant cost savings can be achieved. Regardless of the outcome of the litigation, contractors that carefully plan can significantly reduce the impact of indirect litigation costs and help focus their efforts on building their businesses.
ALEX WALL is Director of Client Services and Legal Counsel for Novitas Data, based in Portland, OR. Prior to this position, he served for several years as an attorney with Fried Frank, LLP, a Manhattan-based international law firm.
Alex researches, develops, and tests standards for e-discovery. He is active in presenting continuing legal education seminars. Alex earned his BA from Colby College in Waterville, ME and his JD from The University of Maine.
JOHN B. CHANEY, CPA, is President and Co-Founder of Seattle-based construction software developer Dexter + Chaney, founded in 1981. John is involved in all aspects of development of Dexter + Chaney’s construction software, working closely with clients throughout the U.S.
A frequent author for CFMA Building Profits, John is also an active member of CFMA’s Puget Sound Chapter, a former member of the chapter’s Board of Directors, and a former chair of its Academic Scholarship Committee. He frequently writes about topics relevant to construction financial professionals.
John earned his MBA from the University of Washington, Seattle, WA and his BS from University of the Pacific, Stockton, CA.