Today we’re continuing our discussion of issues that eat away at your profit margins.
A poorly written contract, or no written contract at all, will cost you money. Contract issues are the #3 reason that construction companies go out of business. As an expert witness and as an arbitrator, it’s been my experience that somehow, in some way, poorly written contracts figure into almost every dispute.
Many contractors believe they know how to assemble a good contract. Unfortunately, too often, they don’t. A poorly written contract leads to different interpretations of the same issue, and that leads to an argument.
Disagreements are a no-win situation for any contractor. Even if you are declared the “winner” in an arbitration or in a courtroom, you’ve lost. Because every hour spent dealing with that disagreement is an hour you won’t be able to spend building your business.
Consider all the costs: your level of distraction, lost employee productivity, the cost of material and labor on the job site for which you won’t be paid or will only be paid years later, lost sales time with potential clients who are willing to pay, and the damage to your reputation. You can see why avoiding a disagreement is the best way to go. How many times have I heard a fellow contractor say, “If I had only known…!” The best way to avoid disagreements is with a clearly written, detailed contract.
Let me suggest a minimum standard for your contracts. Every contract should have three sections: the Customer/Contractor information, the Job Details and the Legalese.
- The Customer/Contractor section clearly states who is involved in the contract, and it briefly outlines what is to be done.
- The Job Details section clearly outlines all the details of the job. Not some of the details, all of them. NO GRAY AREAS. If it isn’t crystal clear with make, model, color, size, and material and/or installed allowance amount(s) if needed, it is not complete.
- The Legalese is the section that causes the most problems for contractors. It is not so much the language or the use of poorly written language as it is the payment schedule and terms on the contract.
All talk about money should be right above the signature line, which should be on the last page of the agreement, not in the body of the contract. This is one of the issues that comes up in almost every arbitration I do. All too often, the contract mentions the total price on page one, but the payment schedule (if there is one) is spread over several pages. The signature is on another page altogether. In a courtroom, the homeowner says they signed the contract, but they didn’t know about the total price, or the payment schedule, or whatever. When those details are on the same page as the signature, they can’t make that claim.
Two more things. Are you using Right of Rescission on every contract you do for remodeling? That is a federally required document and there are some exceptions for its use, but make sure you know when it’s required, and use it appropriately.
And be very careful when you hire an attorney. Make double darned sure that they know and understand construction. Preferably, their focus is construction law. Anything less and you could have problems. Do it right, gang, protect yourself.
- In Chapter 7 (pages 155 to 162) of the book Markup & Profit; A Contractor’s Guide Revisited you’ll find more on contracts.
- Fast Track Proposal Writer Software
- Craftsman’s Contract Writing Software
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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