12 Steps to Running a More Successful Contracting Business
by GARY RANSONE
This is a great and satisfying business when things are going well. AHHHHHHH, to see a project come together like a well orchestrated event... to see that two dimensional plan turn into a beautiful three dimensional space....to hear the praise of the owners as they comment on your fine craftsmanship and the quality of your subs.... to see those checks roll in….What a beautiful thing...
But, when disputes flare up and the checks don't appear on time or at all, answers can be hard to find and you may temporarily hate your work and question your sanity for ever having picked up a hammer in the first place.
It's no secret that disputes drain valuable time and money out of your company and sometimes even your personal life. Disputes keep you from enjoying your work. Disputes diminish your ability to spend time with your family or pursue your favorite pastime. Even small disputes can keep you on the phone arguing with the owner until 10:30 at night....Who needs it?
Murphy's Law aside, many disputes don't "...just happen" on their own. The source of many disputes is easily traced back to the contractor's failure to implement good business basics and good written agreements.
Without a doubt, the smart money is spent on implementing reasonable and practical agreements and procedures to prevent disputes. And, develop your written communication skills and contract administration practices. Big words, but it’s not really that hard.
What can you do to keep the owner's sometimes unrealistic expectations from turning a good job into one you'll regret ever having taken? Do a better job of telling the owner what to expect! Prior to signing a contract, draw from your experiences (both good and bad), draw from your resources and let your expectations be known about how the basic aspects of the business relationship will be handled.
Develop routine systems for keeping track of and dealing with the basics of the business (i.e. contracts, change orders, insurance, subcontracts, etc...) so you don't have to constantly reinvent solutions to the same old reoccurring problems.
Regarding small disputes, implementing certain routine business procedures to reduce these disputes is similar to providing safety glasses and basic safety training to your employees to reduce jobsite injuries. You won't eliminate all disputes any more than you will eliminate all jobsite injuries, but you will prevent many of them from ever occurring.
Regarding exposure to large lawsuits, implementing good fundamental business and legal practices is like putting fire sprinklers in a building. You won't keep all fires or disputes from starting, but the likelihood of being able to keep the whole structure or business from being destroyed is much higher.
When taken as a whole, these good routine business procedures become more than just a few separate and distinct practices. They become an approach to running a more successful company where you can spend more time enjoying your work while making a reasonable profit and spending less time fighting with your customers, losing their confidence, damaging your reputation and losing money that you are entitled to.
What routine business practices can you put in place to help avoid small disputes, erosion of job profits and reduce the potentially crippling exposure to large lawsuits? A basic list of these routine business practices can include:
1. CAREFUL BIDDING AND PRECONTRACT WORK: Organize your preconstruction bidding process. Carefully review the plans and bidding documents prior to estimating every project. Don't guess at numbers because you've run out of time and the bid deadline is on top of you. Price the job high enough to make a fair profit - don't "buy" the job hoping you'll be able to make money on the extras or figure out ways to reduce the costs once you're into the job.
Don't bid jobs you aren't experienced, qualified and staffed to perform and don't bid on jobs if the completion date requirements of the owner are unrealistic. You'll make more money in any given year by passing up few jobs that aren't right for you... Prequalify your jobs. Learn to recognize the types of jobs that will be unprofitable for your company and then let them go. Be careful about liquidated damages clauses – especially ones that that are unreasonable which quite a few can be.
2. GOOD CONTRACTS: First, Don't work off verbal contracts! In California, most projects over a few dollars require written contracts. Verify the laws in your state. Provide a contract that is fair, but detailed and complete. One which takes into account many of the risks and contingencies unique to the project you are bidding. The only way to get what you want is to ask for it, i.e. put it in writing in the construction agreement!
On every job, think about, address, and in your contract assign who is responsible for the unique risks of the job.
This is one of the unique and powerful advantages many residential contractors overlook - by having the opportunity to draft and furnish the contract, you also have the opportunity to establish many of the rules that will govern your business and legal relationship with the owner. Don't miss out on this opportunity, it is worth MUCH more than you might think.
If the owner insists on furnishing the contract, carefully review it. If you are uncertain about the meaning of clauses, have your attorney review it. Don't be afraid to draft alternate clauses, strike clauses you can't live with, and generally negotiate the owner's agreement. Be careful about form contracts such as AIA agreements that may or may not be designed to protect your interests.
Become proficient at drafting your own agreements so that you can feel comfortable rejecting other generic form agreements in favor of agreements developed for your business which you then quickly customize to each job. Computerize your agreements if you have not already done so. Become aware of the requirements that the Contractor’s State License Board places on your residential contracts and contracting procedures. In California, these requirements are as expected – numerous. Know what they are in your state and implement them into your contracting procedures.
3. PAYMENT SCHEDULE (and RETENTION, IF REQUIRED): Include a payment schedule in your contract that keeps frequent smaller payments coming in. More frequent, smaller payments are better than lumping just two or three very large payments over the course of the project. Try to keep your final payment at an amount that is near or below the dollar limit of the local Small Claims Court.
Many disputes mysteriously seem to appear around the time of the final payment and you want the amount owing to you at that time to be as small as possible to help minimize the possibility of a large dollar dispute at the end of the project. By structuring the payment schedule so less money is owing to you at any one time, you reduce the chances of having larger monetary disputes turn into full scale, costly lawsuits.
Retention: Where the owner is financing the project, try to not agree to a payment retention in the first place. If you must agree to one, try to have it not exceed 5% and on larger projects try to have 50% of the withheld retention paid to you upon weathering in of the structure. In general, never agree to a retention that exceeds 10%. If you are subject to a retention with the owner, make sure you notify your subcontractors that they will be subject to the same retention that the owner places on your payments. In California, on Home Improvement Contract work, you must not ask for a down payment that exceeds 10% of the contract amount or $1,000, whichever is less. Also, you may not bill in excess of the amount of work actually completed.
4. GOOD SUBCONTRACTS: Most projects are the result of a coordinated teamwork effort between the general and the subcontractors. Usually anywhere between 30% and 80% of the project work will be subcontracted out on a larger project. Work off of adequate subcontracts when you subcontract work. Work with good subs that carry the proper insurance. Only allow experienced subcontractors who do good quality work to bid on your projects. In the end, larger contractors may succeed or fail based on the quality of work and pricing they are able to obtain from their subs. Check with your insurance carrier to make sure that your subcontracts meet their standards. Be sure to have your subcontractors name you as an “additional insured” under their Comprehensive General Liability policy or if a dispute arises, you may find that your liability carrier denies you coverage under your policy because you failed to have a subcontractor name you as “additional insured” under their liability policy.
5. PROPER INSURANCE: Carry the common proper insurances to protect against both common and catastrophic risks, (e.g. worker's compensation and comprehensive general liability insurance in occurrence based form with riders for owned, non-owned and hired vehicles). Require the owner to carry builders risk or course of construction insurance on most projects and your subs to carry the proper insurance that mirrors your own insurance. If working in a high risk field or when faced with high tax payments, consider the benefits of incorporating. Insure your tools and equipment with a rider attached to your comprehensive general liability insurance is an idea to discuss with your insurance agent. Discuss an “occurrence form” liability policy with your insurance agent and be careful about claims made liability policies that only provide coverage for a very limited time period. Worker’s compensation laws are very tough these days in many states and do not hire workers, even day laborers, unless they are covered by your worker’s compensation insurance. In California, the legal effect of violating the worker’s compensation laws can be very draconian and serious both on a civil and criminal level.
6. COMMUNICATE and DOCUMENT: Communicate well and often with the owner and all others involved in the construction process. Return phone calls, texts and emails promptly. Document all important communications in writing in a brief, but professional manner. Make sure all plan deviations requested by the owner/architect are placed in writing and signed by the parties - even when they don't affect the contract price. Send out "REQUESTS FOR CLARIFICATION" to the architect and/or owner to document any changes that you are asked to make which have not already been put in writing in a contract document, specification or plans.
If you later have to go to court or arbitration, your written documentation will be very important to the success of your case. It may also help to keep you from ever having to go to court if an owner or architect later develops a selective memory about a change you were asked to make during the project.
7. GOOD WORKMANSHIP, TIMELY PERFORMANCE and CUSTOMER SERVICE: Provide a high quality of construction and a high level of customer service. Complete the job on time. Knock out punch list work right away. Don't work like crazy to reach substantial completion in 6 months only to take another 6 weeks (and 10 phone calls and 10 emails from the owner) to reach final completion. If part of your work clearly falls below a workmanlike standard, replace it. Your reputation for doing what you say you will do is one of your most valuable assets.
8. CHANGE ORDERS: Obtain written Change Orders prior to performing extra work. This is one of the most frequent areas of dispute, but the one most easily avoided. If you absolutely can't get it signed prior to starting the work, get the owner's verbal approval and make a written note of the conversation and get the owner to approve it via email confirmation. Then, follow up and have the change order signed as soon as possible. Build a written record of all Change Orders (signed by the owner) and most disputes over extra work will never appear.
9. DEPERSONALIZE MINOR DISPUTES: Having laid a good business foundation through a detailed agreement and written Change Orders you'll find it much easier to depersonalize disputes. This is important because some owners occasionally seem to take personal offense to legitimate Change Orders and the contractor's differing opinion about the adequacy of the work or interpretation of the contract documents. Referring back to the contract and reminding the owner that a particular area was already addressed in the contract will often be a way to obtain good results and quickly resolve minor disputes because 95% of the owners usually go along with what's in the contract as long as the dispute is not a large one. Compromise when it’s appropriate.
10. PRESERVE YOUR RIGHT TO MAKE CLAIMS: Become familiar with Mechanic's Lien laws in your state and be sure to preserve your lien rights and not miss your filing deadlines. If disputes flare up, be sure you understand and strictly adhere to the dispute resolution and notice procedures in your contracts. When disputes flare up, contact your attorney early on prior to committing to a legal course of action on your own. If pushed for a decision, respond with “Let me sleep on that and I’ll get back to you in a day or two” approach and during that day or two get some advice. If any type of Preliminary Notice must be filed because you are not working as a prime contractor, file it early on in the project. File your Mechanic’s Lien Warning in California to preserve your right to file a lien if this should be necessary. Laws in this area have changed so make sure that you are up on them.
11. DON'T FORGET YOU HAVE INSURANCE WHEN A CLAIM ARISES: If you are sued in court, have an arbitration action brought against you, or are brought into any kind of legal action (even by way of cross or counterclaim), the first question you should ask yourself is do I have insurance that may potentially provide for one or more of the following:
A. Will my insurance carrier provide money for a covered loss in the event of a judgment against me?
B. Will my insurance carrier provide money towards a settlement offer in order to have the action against me dismissed and not go to trial?
C. Will my insurance carrier provide a law firm to defend me so that I don’t have to hire a lawyer to defend me?
If faced with a large dispute, legal defense costs and settlement money can be critical to the survival of your business. Don't overlook the possibility that you may have already paid for all or part of these costs through your insurance premiums. Some attorneys not familiar with the construction business may forget to explore this area with you. Upon receiving a claim, being served with a lawsuit, etc…be sure to immediately discuss it with your attorney and also call your insurance agent to find out if the claim is covered by your insurance and also whether your insurance carrier has a duty to defend and hire a law firm to handle the claim or suit filed against you. The duty to defend under the law if quite high depending upon the claim filed against you and the terms of your insurance policy so this is an area that you should be well aware of in the event a claim or lawsuit is filed against you.
12. COMPROMISE AND SETTLEMENT: As much as I like to see contractors get what they are due, some degree of compromise is appropriate to many disputes. An inflexible, "all or nothing" approach on larger disputes is a good way to provide lots of extra income to the lawyers at the tremendous expense of the contractor.
While no text book answers can fit every situation, critical to knowing when to "fight" and when to compromise is the ability to analyze the factual and legal elements of the dispute and, as objectively as possible, determine the correctness of your legal position and the odds of success. Of course, judges and arbitrators are human and only one side typically thinks justice was really done so that makes your odds better at blackjack than in court. You will typically benefit from some good legal help in this area of claims evaluation. With medium and large disputes, fill your attorney in on all the good and bad parts of the job before you are committed to a particular course of action.
While not always possible, the cheapest way to settle disputes is to never have them arise in the first place. The second cheapest way to settle them is to deal with them quickly and fairly without the need for the acknowledged involvement of attorneys. Some degree of compromise generally plays a positive role. There's no sense winning the battle and losing the war.
Following these basic steps won't make you a millionaire overnight or absolutely prevent all disputes, but it will help you to decrease or avoid many disputes, improve your relationship with the owner and increase your chances of collecting all of the money you are owed on any given job.
The considerations that have been reviewed in this outline are NOT comprehensive and can NOT possibly address the unique and varied concerns of every contractor or builder that is approaching a construction project. However, they are merely a starting point.
The Law Office Of Gary Ransone has prepared this message and can provide convenient, easy access to California Construction Law information, consulting, construction contract drafting or review, preconstruction assessment and planning, contract administration, dispute analysis, and arbitration/mediation services. To obtain information about rates for legal services or additional information about services offered call (831) 476-8784.
Thanks for taking the time to review this information. Good luck with your project!
Gary Ransone is a practicing attorney with an emphasis on construction law, licensed real estate broker, licensed general contractor, and construction arbitrator/mediator. He started in the construction field over 25 years ago, and now works with many building and remodeling companies and owners as an attorney, consultant, and contract administrator. Gary Ransone is also the founder of THE CONSTRUCTION LAW HELPLINE which he started in 1994 to provide contract preparation services and easy access to construction related business and legal information to contractors and owners throughout California.