As a construction litigation attorney, I have seen just about everything that can go wrong with a contract. Unfortunately, most contractors pay little attention to their contracts. In fact, they often never read a contract and assume protections exist that are not in the document. Only after having been burned on a job by a poorly drafted contract do they come to their lawyer, invariably asking for the same thing: "Make me an ironclad contract." Unfortunately, no such thing exists.
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As a construction litigation attorney, I have seen just about everything that can go wrong with a contract. Unfortunately, most contractors pay little attention to their contracts. In fact, they often never read a contract and assume protections exist that are not in the document. Only after having been burned on a job by a poorly drafted contract do they come to their lawyer, invariably asking for the same thing: "Make me an ironclad contract." Unfortunately, no such thing exists.
A contract is a written expression of the intent between two or more parties. While there are form contracts, usually even a form contract has blanks. This is because contracts are like snowflakes; no two are ever exactly alike. This means that there are always variables. As a contractor, then, what should your contract have to provide you reasonable protection? Here are ten things to consider.
1. Be Specific. Many of the problems on jobs result from poor communication, starting with the written agreement. While a contract doesn't always have to be a novel, it helps to clearly define expectations. So, if your price is dependent on availability of particular materials, spell that out. Conversely, if you want the right to substitute "or equal" items, let the customer know that up front, and if you are going to substitute, where possible, get the customer to agree to your substitution in advance. Provide the known specifications, materials selections and so forth up front. If you want the customer to obtain any required permits, state that in the contract.
2. Get it in Writing. Homeowners, in particular, are notorious for changing their minds in the middle of jobs. While it might seem like a small thing to the homeowner to change out one wood floor finish for another, particularly if both are in stock and similarly priced, you should still get the customer to sign off on a written change. Sometimes customers "forget" what they tell you in the field, especially when the change involves an increase in price, and you don't want to be responsible for their faulty memory.
3. Payment Milestones. In some instances you can get paid entirely up front. Usually, though, you will only receive a partial payment up front and the balance later. Avoid fronting the materials expense for a customer, particularly if the materials used are special order items. If you then require payments at certain milestones, whether by date (every 30 days) or by event (upon delivery of materials, installation and finishing), put those milestones down and tell the customer that you can stop work if you aren't paid at any milestone.
4. Lien Rights. Liens are a subject unto themselves. Make sure your contract and any other required documents comply with the law where the work is being done. Make sure your customer knows that you have the right to secure payment by placing a lien on their property. (For a more complete overview on liens, see "Lien Lingo" from the June/July 2011 issue.)
5. Timing. Timing is often an issue, particularly where the work being done interferes with use of the property or is otherwise inconvenient to the owner. It's a good idea to give a range of dates for project completion-if you finish early, you're the hero!-but if the customer insists on having a specific completion date, make sure you spell out the things that will cause that date to be exceeded, particularly where such things are out of your control. Your homeowner client may unreasonably expect that all of the samples you provide for their selection are instantly available. If there is lead time, make sure the customer knows that their delay in selecting material will result in delaying completion.
6. Warranties and Liability Limitations. Your contract should spell out what warranties you will and will not provide. Don't assume that because you have stated a warranty that the customer has none. You also want to make sure that you limit the scope of your liability. If you do not want to be responsible for accidental damage to a customer's property, tell the customer in writing.
7. Source of Payments. Sometimes the customer will delay payment simply because they do not have all the money available at the time your payment is due. Often the customer lacks the funds to pay and may be relying on lending or insurance funds to pay you. Where possible, you should verify the approval of your work and the amount of financing prior to starting. You may also want to have the lender or insurer agree to make payments to you directly, rather than to your customer, to ensure timely receipt and full payment. However, the contract should expressly provide that while you may accept payment from such other sources, the customer remains fully liable to you for the total contract amount. If for any reason that financing or insurance does not become available, your customer needs to understand that they are still responsible.
8. Interest. If you do not charge interest for delayed payment, invariably you will get a customer who will delay as long as possible. When this happens, you are essentially loaning them the value of your unpaid contract. If your customer is going to make you a lender, your customer should pay interest on that loan. So, have a clause that provides a high rate of interest on any unpaid amount that is due. That interest should be the higher of the maximum amount allowed by law in the state where the work is performed, or a rate above a typical high credit card rate, since you likely would prefer the homeowner borrow from another source and pay you immediately.
9. What Law and What Court. Except when exercising your lien rights, you may want all disputes heard in your location rather than your customer's. If you are in a different state, you may want the court to rule based upon the laws in your state. Perhaps you prefer disputes to be settled out of court, either by settlement before a mediator or by private arbitration. Put this into your contract.
10. Included and Excluded Items. Often there will be a back-and-forth exchange of communications, both before and after the contract. You want to define which of those communications will be included in the contract, and to exclude all other communication, whether verbal or in writing. If the work is for a contractor who is providing the contract and you want certain terms to protect you, provide a written proposal that includes your protections, and then make sure the contract expressly includes the proposal. Where you have a proposal, a set of plans, a contract, and a specification sheet, make sure that the contract spells out the order of priority between them. If you relied upon particular information when agreeing to contract (e.g., a non-final set of plans), make sure that is known, so that you have the right to adjust your contract if that information changes.
While this is not an exhaustive list of all considerations for a contract, addressing these ten items will go a long way in eliminating common issues and disputes, and they will provide some protection when you do have problems with your customer.
Business Brief
Q: Why would a sole proprietor choose to use a federal tax ID number in the business, instead of his social security No.?
A: A sole proprietor should use an Employee Identification Number (EIN), or Federal ID number, as a way in which to build a business credit profile in order to qualify for credit without relying entirely on the owner's credit history and personal guarantee.
