When taken as a whole, good written agreements and contract administration procedures become more than just a few separate dispute avoidance practices. Together, they form a systematic approach to running a more successful building and remodeling company that allows you to spend more time enjoying your work while making a reasonable profit, and less time fighting with your customers and in the worst case, paying lawyers. It’s tempting to say that two or three of the dispute avoidance practices below are the most important, but the fact is that many of them may be critical to your long-term success in this business depending upon the situation you find yourself in.
Much of the focus of this site and The Contractor’s Legal Kit is on the importance of using written agreements and communications simply because they are the most effective way to define and document your expectations with the owner and increase your odds of having a successful project.
Implementing many of the routine business and dispute avoidance practices below to reduce small disputes is similar to providing basic safety training to your employees to reduce job-site injuries. You won’t eliminate all disputes any more than you will eliminate all job-site injuries, but fortunately you will prevent many of them from ever occurring. Regarding exposure to large lawsuits, implementing good dispute avoidance practices is like putting fire sprinklers in a building. You can’t guarantee a fire or major dispute will never start, but the likelihood of losing the whole structure or business is greatly reduced.
What routine business and dispute avoidance practices can you put in place to help avoid misunderstandings, small disputes and reduce exposure to litigation? A summary of these routine dispute avoidance practices may include the following:
(1) Careful Bidding and Pre-Contract 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 your costs once you’re into the job. Don’t bid on jobs you aren’t qualified and staffed to perform and don’t bid on jobs if the completion date required by the owner is unrealistic. You’ll make more money in any given year by passing up certain jobs that aren’t right for you than taking certain jobs that are all together wrong for you and losing money. Learn to recognize the type of job that won’t be profitable for your company and then don’t waste much if any time on those types of jobs.
(2) Good Contracts: First, never work off verbal contracts! Provide a contract that is fair, but detailed and complete — one that takes into account the risks and contingencies unique to the project you are bidding. On every job, think about, address, and in your contract assign who is responsible for the unique risks of the job and typical contingencies that may arise. For example, if you suspect that hidden structural damage may increase the scope of a remodeling job, specify in the contract that the owner will pay for any such extra work. On a remodel, if you will put a new roof and new windows on the new addition and the roof and windows on the existing structure are not being replaced, exclude any new roof and windows on the existing structure in the project specific exclusions section of your contract.
This is one of the unique and powerful advantages some 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 legally govern your business and legal relationship with the owner. Don’t miss out on this opportunity — it’s worth a lot, more than you might think.
(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 them into two or three very large payments. Try to keep your final payment at an amount that is near or below the dollar limit of the local small claims court. Because many disputes seem to mysteriously appear around the time of the final payment, you want the amount owing to you at that time to be as small as possible. By structuring the payment schedule so less money is owing to you at any one time, you reduce your financial exposure and you reduce the chances of having larger monetary disputes turn into full-scale lawsuits if the *$@! hits the fan.
Retention: If at all possible, avoid a payment retention altogether. If you must agree to one, try to have it not exceed 5%, and try to have 50% of the total amount withheld paid to you upon the “weathering in” of the structure. In general, never agree to a retention that exceeds 10%.
(4) Good Subcontracts: Most projects are the result of coordinated teamwork between the general and the subcontractors. Work off adequately detailed subcontracts when you subcontract work. Work with good subs who carry the proper insurance. You don’t want to be surcharged by your insurance carrier at the end of the year for working with subs that don’t carry insurance and you don’t want your insurance policy to get hit with claims caused by the work of unlicensed subs either. Allow only experienced subcontractors who do quality work to bid on your projects.
(5) Proper Insurance: Carry the proper insurances to protect against both common and catastrophic risks (e.g., worker’s compensation and comprehensive general liability insurance in occurrence form, get a binder for owned, non-owned and hired vehicles). Advise the owner to carry builders risk or course-of-construction insurance on most larger projects.
(6) Communicate and Document: Communicate well and often with the owner and all others involved in the construction process through emails and change orders. Return phone calls promptly. Document all important communications in writing in a brief, but professional, manner. If you end up in a dispute, your written documentation can be very important to the success of your position.
(7) Good Workmanship, Timely Performance, and Customer Service: Provide high quality construction and a high level of customer service. Complete the job on time. Complete punch list work right away. Don’t work like crazy to reach substantial completion in 26 weeks only to take another 10 weeks (and ten phone calls from the owner) to reach final completion. If part of your work clearly falls below an acceptable standard, replace it.
(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 email conformation of the scope of additional work and price you are charging for the additional work or the change in scope of work. Build a written record like this and most potential 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 will take personal offense at differences of opinion over, for example, what is a legitimate change order, whether the work is of adequate quality, or what is the correct interpretation of the contract documents. Referring back to the construction agreement and reminding the owner that a particular area was already addressed in the agreement will often help quickly resolve such disputes. People usually go along with what’s previously been agreed to in writing.
(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 adhere to the notice procedure and dispute resolution procedure in your contract. Also, it’s best practice to contact your attorney early on before committing to a legal course of action on your own, such as stopping the work or terminating the contract or filing a lien.
(11) 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 expense of the contractor. No textbook answer can tell you when to fight and when to compromise in every situation. What’s critical 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, the cost of pursuing it and your odds of success. You will typically benefit from some good legal help in this area.
(12) Check Your 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, the first question you should ask yourself is, do I have insurance that may cover my defense costs and claims against me? Ask yourself the following questions:
• First and most importantly, will my insurance carrier pay the legal expenses for my legal defense, i.e. provide me with defense coverage by hiring legal defense counsel to defend me? Attorney’s fees can be the tail wagging the dog with some complaints. Having your insurance carrier pay the cost of hiring an attorney to defend you is often a tremendous benefit to the contractor.
• Will my insurance carrier pay out for a covered loss or claim in the event of a judgment against me?
• Will my insurance carrier pay out toward a settlement offer in order to have the action against me dismissed?