Sunday is always “prone to trouble,” as I have been saying for years. It is the day when clients always call with problems they ran into over the weekend, malfunctions of all kinds and unforeseen surprises. Since we started working abroad, Sundays have become quieter and the problems pop up on Mondays, so I was surprised to receive, early on a Sunday morning, a call from a developer we advise abroad.
“I've been debating for several days whether to call you or not,” he opened the conversation, “the building contractor disappeared at the beginning of last week.”
“What do you mean disappeared?” I asked.
“Disappeared,” he replied, “he hasn't come to the site since last Monday, neither he nor the workers. He screens my calls. I sent someone to his house, but his wife opened the door and said he wasn't home.”
I tried to find out more about the progress of the work, any quarrels between him or the supervisor and the contractor. On the face of it, there was no reason for the sudden disappearance.
“Listen,” I said, “it's Sunday now. They aren't working there in any case. Tomorrow morning I'll speak with our local office and try to find out more details through them. I'll update you during the day tomorrow.”
The conversation on Monday morning with our local partner cast the conversation with the developer in a somewhat different light. It turned out that over recent months the building contractor had called the local office several times, complaining about payment delays and the difficulties this was causing him in carrying out the works. He said he would nevertheless look into it and try to find out what the matter was. At noon he got back to me and said he had tracked down the building contractor and even spoken with him. The contractor was fed up with the payment delays and had decided to stop working until the payment issue was settled. According to the contractor, for the past four months he had been required to finance materials and labor out of his own pocket, and he was owed a debt of several tens of thousands of euros, and until it was paid he would not return to work.
When contracting with a building contractor abroad, it is very important to make sure the agreement is as detailed and comprehensive as possible and protects the developer's interests. A detailed and comprehensive agreement is the key to success in a construction project abroad. Beyond all the essential terms we included in the contract, I took care to include a clause allowing us to remove the contractor from the site (this clause allows the developer, under certain conditions, to remove the contractor from the site and hire another contractor to complete the work, thereby minimizing damage and delays. For example: stopping work without justified cause, a fundamental breach of the agreement, failure to meet the schedule, negligent or defective work, insolvency of the contractor, and more), but in this case, where the developer we represent owed him money, I thought we would have difficulty with a “removal” move.
The phone call with the developer was not easy.
“I don't have the money to pay him right now,” he said, “my cash flow is problematic and the bank won't release any more money to me for the project. I understand his distress, but if he doesn't finish the works I won't be able to collect the balance from the buyers and I won't be able to pay him.”
“And what about arranging bridge financing from an outside body, or in some other way?” I asked.
“It's expensive.”
I won't weary you with the long conversations we held over the following two days in an attempt to find a way out of the situation the project had landed in. The local office's attempt to find a solution by replacing the building contractor also failed, since every offer we received was more expensive than the cost of having the current contractor complete the project, and where the developer's cash flow does not allow paying the current one, it is also unrealistic to commit to a new or different one.
We were required to think and be creative. I suggested to the developer that we fly out to the project, sit down together with the local partner and the building contractor, and try to find a solution, while privately I had worked out a few alternatives, but I thought that once we sat the two of them in a room together we would reach understandings more easily than through cross-border phone calls.
When we sat down for the first meeting, I let the contractor “blow off steam.” The developer sat there trying to justify himself and give explanations. I laid a proposal on the table - to agree to spread the existing debt into smaller installments, easier for the developer to pay. To set a new payment schedule, with agreed dates and conditions. I knew this was a good proposal for my client, but that it would not be acceptable to the contractor, and so it was.
The second proposal was that the developer would try to raise an additional investor for the project, who would help finance the existing debt and allow the works to continue. Neither side was enthusiastic about the proposal. Then I decided to step up the proposals and suggested to the developer that the contractor buy part of the project (for example, one or more apartments) at a discount, in order to cover the existing debt. The two began to examine the numbers, argue over the pricing and, above all, try to reach agreement on what would happen with the balance of payments the developer had to pay the contractor until the project was completed. They agreed to part ways at this stage and meet again the next day, so that each could think about the proposal and examine the numbers in depth.
At the start of the meeting the next morning, the building contractor informed us that the developer's pricing was not worthwhile for him, and that he had no intention of also paying the developer for his developer's profit, when the consideration was being given in his own work and raw materials.
At that point I laid before them the final proposal - the contractor would continue the works and in return receive a share of the project's future profits. I knew they were ripe to discuss the proposal. I proposed that the contractor convert the existing debt, and the value of the future work and materials up to the completion of construction, into an investment in the project, which would entitle him to certain percentages of the future profits. The contractor, who understood the potential inherent in the project and our difficulty in raising additional financing, showed great interest in the proposal. The developer objected at first, but when he understood the complexity of the situation he was in, he was left with no choice but to enter intensive negotiations.
A Stanford University study examined various models of partnership between developers and contractors in construction projects. The study found that a profit-sharing model may be particularly effective, since it creates an incentive for both sides to work for the success of the project.
To ensure the success of the move, we drew up a detailed agreement that included the following clauses:
- Ownership percentages: We set the contractor's ownership percentage in the project according to the amount of the existing debt, the works still remaining and the raw materials he must supply (all based on the prices and costs of the existing agreement between the parties) and the value of the future project.
- Profit sharing: We defined a clear mechanism for dividing future profits, taking into account each side's investment and contribution to the success of the project.
- Project management: We agreed on a division of authority in managing the project, while maintaining full transparency between the parties.
The agreement was signed to the satisfaction of both sides, and the contractor went back to work with great vigor. The new partnership created positive synergy, and the project was completed successfully with a slight delay in the schedule. The contractor, who had become a partner in the project, was involved in every stage of construction and made sure the work was of high quality and high standards.
In the end, the project was sold at a handsome profit, and the contractor enjoyed a high return on his investment. The successful partnership led to further cooperation between the developer and the contractor and created added value for both sides.
The story proves that even in difficult situations, solutions can be found that allow you to emerge from the crisis stronger. In complex situations, it is important to consider creative solutions that are not self-evident - to think outside the box.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית