A well-written contract has three sections.

  • The first section outlines the parties involved and a brief description of the work to be done.
  • The second section clearly describes the details of the job. Not a few items, not a rough description, the details. Make, model, color, size, material and/or installed allowances. Details.
  • The last section is the legal language, the commitment language. And that’s what I’m talking about today.

The reason you’re writing a contract for construction work is because you’ve reached an agreement with another party to provide construction-related services. They are making a commitment and so are you. That’s why the commitment language is important. By commitment language I am talking about such phrases as:

The above specifications, conditions, and job material selection sheets are satisfactory and are hereby accepted. You are authorized to purchase materials and proceed with this job as specified in this proposal.

or

ATTENTION: CONTRACTOR will do only that work which is written in the above specifications for the above agreed amount. The terms and conditions as stated are part of this Contract. THIS CONTRACT IS SUBJECT TO CONTRACTOR OFFICE APPROVAL.

By the way, this last sentence about contractor office approval should be in all your contracts. This language gives you the option of canceling a contract if an employee writes a contract that doesn’t fit the type of work your company does or makes an error on the contract price.

You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an explanation of this right.

The previous language is required to let the folks know that they have the three day right of rescission. Be sure you study that law so you know when you need to and when you do not need to include the right of rescission in your contracts. This is federal law, but it’s also the law in some states, and you need to follow whichever law is correct in your jurisdiction (ie, the state law, if there is one, usually overrides the federal law).

Payment Schedules

One of the major causes of cash flow problems for contractors is a poor payment schedule on their contracts. Specifically, if your payment schedule is 1/3 down, 1/3 at some point in the job, and 1/3 at the end of the job, you’ll end up financing the owner’s project for 1/2 to 2/3 of that job, and that will hurt your cash flow.

Your payment schedule should start with this language:

CONTRACTOR shall furnish all labor and materials to do the work described in the above specifications and Owner agrees to pay CONTRACTOR as follows:

CONTRACT PRICE $AMOUNT
SALES TAX AT ___%, $AMOUNT
TOTAL CONTRACT PRICE $AMOUNT
DOWN PAYMENT $AMOUNT
PROGRESS PAYMENT at (specify phase) $AMOUNT
PROGRESS PAYMENT at (specify phase) $AMOUNT
PROGRESS PAYMENT at (specify phase) $AMOUNT
CASH DUE ON DAY OF ISSUE OF
CERTIFICATE OF OCCUPANCY AND
SUBSTANTIAL COMPLETION OF THIS JOB
$AMOUNT

A good payment schedule has smaller payments but more of them. On small jobs you should get 2 – 3 checks and larger jobs you should get your down payment and then a progress payment every 2 weeks. You can read more on this in our book, Markup and Profit; A Contractor’s Guide Revisited, Chapter 7, “Good Contracts Protect Your Assets”.

Signature Line

And last but not least is the signature line. With the payment schedule on the same page as the signature, and with a statement like this, they can’t come back and claim they did not understand your contract or the payment schedule.

________________________________________________/____/____
(Owner’s signature)

________________________________________________/____/____
(Owner’s signature)

Owner(s) acknowledge receipt of a copy of this Contract, and that they have read and understand the terms of this Contract and the payment schedule for this job.

________________________________________________/____/____
(Contractor’s signature)

Disclaimer: Nothing in this article is intended to be, or may be construed as, legal advice. I am not an attorney. You must consult an attorney before using any suggested language or any other information contained in this article to determine if it conforms to your state laws or your particular situation.

Comments from Michael

Something must have gotten into the air as I’ve had many calls from our readers about contracts, which is why we’re doing this series. I don’t pass out legal advice (“I am not an attorney . . . “) but I can give some advice on topics and issues that should be included in your contracts. One of my favorite sayings is, “Leave everything out of your contract that you don’t mind paying for . . . twice.”

Yesterday I heard about an owner expecting the contractor to pickup and deliver materials to the job site that the owner said they would furnish. I’ve also heard (and experienced) clients telling the contractor they want one thing, until the spouse shows up later and says, “Nope, don’t want that, we want so and so.”

Gang, you may want to review our Fast Track Proposal Writer software. With that tool in your computer, you will have the language at hand you need to prevent these scenarios. That program is CYA (Cover Your Assets) on steroids and used properly, you’ll never forget to include the CYA language that we talk about here.

One last thing. I saw a question on another forum asking if contractors should use one markup or variable markups on projects. Folks, I’ve been in this industry for 55 years come May and I can tell you with little hesitation that companies that use one fixed markup almost always make more money over a year than companies that try using multiple markups.

Multiple markups cause confusion and a lot of detailed, fussy number crunching to arrive at the same price, time that could be better spent promoting your business and selling jobs, or with your family. When someone starts talking to me about using a one markup for labor, another markup for materials and yet another markup for subcontractors, it tells me loud and clear that their focus is on selling price rather than the services of their company. Polish up your sales skills, calculate one markup and use it.

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