We’re going to spend the next few newsletters talking about contracts. One of the major reasons construction businesses fail is failure to use, or improper use of, legal contracts. I’d like to see that change.
One of the purposes of a contract is to protect both you and your client. Most of the time, once the contract is written, discussed and signed, you’ll only need it again to check the payment schedule. But when a job goes bad, the contract is front and center.
So we’re going to start with your dispute resolution procedure. If you don’t have one defined in the contract, when a job goes sideways you’re probably looking at a lawsuit. Lawsuits take time and they cost a lot of money, and most of us don’t have the time or the money to invest.
I strongly recommend that you specify binding arbitration, not mediation, to resolve any disputes. Mediation requires compromise. I’m not opposed to compromise (which is why I’m still happily married after 31 years), but we’re talking business. Let me explain.
One of my daughters is planning a wedding this spring. She’s lining up vendors and will have detailed written contracts with each one of them.
Now, imagine me approaching the caterer during the reception and telling them that we won’t pay the final bill. Fewer guests attended than we expected so we don’t need as much food. Also, the veggie tray has cauliflower and my daughter was supposed to tell her to leave out the cauliflower. And I don’t like the sweet and sour sauce on the meatballs.
You and I both know that I’m only doing that because last minute expenses for the wedding were far more than I expected and we’ve run out of money. I’m just looking for an excuse to not pay.
If the contract specifies mediation to resolve disputes, I might win the argument, or at least save myself some money. That’s because a successful mediation is where everyone gives up something, including the caterer. They’ll need to defend why they charged as much as they did. If I’m really lucky, I’ll find a mediator who also had to spend a fortune on a wedding and understands my pain.
If the contract specifies binding arbitration, I’ll lose (as I should). An arbitrator doesn’t look for a compromise, they look for what’s right. They’ll review the contract to make sure it’s legal and fair. They’ll ask if the caterer performed according to the contract. If they did, I’ll have to pay. End of story.
I think you should specify a non-attorney arbitrator with a construction background and a working knowledge of arbitration. If you have to compromise on who arbitrates, someone with a business background will probably be better than someone with a legal background. Some experts say to always ask for a three-person panel. I think that’s only necessary if the job is over $75,000 – $100,000, because with smaller jobs you’ll spend more on arbitrators than the dispute is worth.
No one wants a fight, and a well-written, detailed contract will help keep you out of many fights. But in case it all goes wrong, make sure your contract specifies what happens next so the fight can end quickly and fairly.