© THE CONTRACTOR’S LEGAL KIT, LLC, 2022. All rights reserved.
This is a great and satisfying business when things are going well. Ahhhhhhhhhh, 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 repeated praise of the owners as they comment on your beautiful craftsmanship and the talented, high quality work of your subs.... to see the checks roll in....it can all be such a beautiful thing!
But, when disputes flare up and the checks don't appear, answers can be hard to find and you may be frustrated or even feel at times like you 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 can keep you from enjoying your work. Disputes can diminish your ability to spend time with your family or pursue your favorite pastime. Even small disputes can keep you on the phone politely arguing with the owner until 10:30 at night...Who needs it???
Murphy's Law aside and with few exceptions, many disputes don't "...just happen" on their own. The source of many disputes is easily traced back to the builder's failure to implement good communication, business basics and good written agreements.
Without a doubt, the smart money is spent on implementing reasonable and practical agreements and procedures to prevent as many disputes as possible from arising in the first place.
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 own experiences (both good and bad), draw from the experiences of others (both good and bad), draw from your resources and let your expectations be known about how the basic aspects of the business relationship and project 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 larger disputes, implementing good fundamental agreements and business/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 goes way up!
When taken as a whole, good routine business procedures become more than just a few separate and distinct practices. They become an approach to running a more successful construction company so that you can spend more time enjoying your work and the people you’re working with while making a reasonable profit and spending less time fighting with your customers and losing sleep, money and your peace of mind.
What are some of the routine business practices that you can put in place to reduce exposure to small disputes, erosion of job profits and reduce the potentially crippling exposure to larger disputes? A basic list of these routine business practices may 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. All of this is especially important when preparing fixed price agreements. However, it’s also important to get good realistic numbers when preparing budgets for cost-plus or time and materials projects so that the owner doesn’t feel blind sided with final actual construction costs that greatly exceed your budget numbers. When this occurs, the owner can wonder if the bait and switch approach was used to in a self-serving way to “sell” the cost-plus approach contracting method for the project and that can leave a bad taste in the owner’s mouth and a lousy referral, or even worse for the builder.
Be extremely careful about bidding 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, especially if there is a liquidated damages “penalty” clause.
On average, you'll make more money and sleep far better at night by passing up a few jobs once in a while that just aren't right for you. Prequalify your jobs. Learn to recognize the types of jobs that will be profitable for your company and unprofitable for your company and then let the unprofitable ones go.
2. GOOD CONTRACTS:
First, Don't work off verbal contracts! 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 that you are bidding. The only way to get what you want is to ask for it!
On every job, think about, address, identify and in your contract assign who is responsible for many of the specific and general risks of the job. This is one of the unique and powerful advantages many residential builders overlook. By having the opportunity to draft and furnish the contract, you also have the opportunity to establish many, if not most of the rules that will govern your business and legal relationship with the owner. Don't miss out on this opportunity! It can be worth much more than you might think and is also an invaluable communication tool between the builder and the owner.
It’s best if you can furnish your own contract, but if by some chance the owner absolutely insists on furnishing the contract and the project will not be awarded to you otherwise, carefully review it, consider sending it to your attorney for review and decide if you still want the project. A contract addendum may be drafted to go along with the owner’s contract that reduces your risk.
Become proficient at drafting construction agreements with a good set of form contract templates or templates which you may then learn to quickly customize to fit the specific needs and unique risks of each job. Again, consult your attorney as needed.
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 several very large payments into a payment schedule. Whenever possible, 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 end-of-project monetary disputes turn into full scale, costly collection matters or even 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 try to have 50% of the withheld retention paid to you upon weathering in of the structure. In general, try to never agree to a retention that exceeds 10%.
4. GOOD SUBCONTRACTS:
Most projects are the result of a coordinated teamwork effort between the builder and the subcontractors. Usually for many builders, anywhere between 30% and 80%, or more of the project work will be subcontracted out on a larger project. Work off of good subcontracts when you subcontract work. Work with good subs who carry the proper insurance. Review what your own insurance company requires you to require of your subcontractors in terms of insurance. Only allow experienced subcontractors who do good quality work to bid on your projects. In the end, larger contractors may eventually succeed or fail based on the quality of work and pricing they are able to obtain from their subs. A builder’s reputation may have a lot to do with the quality of work of their subs. Also keep in mind your own comprehensive general liability policy may have a clause where they limit their coverage to you if you fail to be named additional insured by your subcontractors on the sub’s comprehensive general liability policy.
5. PROPER INSURANCE & RISK MANAGEMENT:
Carry the common proper insurances to protect against both common and catastrophic risks, (e.g. worker's compensation if you have employees and comprehensive general liability insurance in occurrence based form with riders for owned, non-owned and hired vehicles). Contractually require the owner to carry builders risk or course of construction insurance on larger projects and your subs to carry the proper insurance in occurrence form that ideally mirrors your own insurance in terms of coverage amounts. If working in a high risk field or when faced with high tax payments, consider the benefits of incorporating to limit exposure of your personal assets. Insure your tools and equipment and business vehicles with an additional rider attached to your comprehensive general liability insurance.
6. COMMUNICATE and DOCUMENT:
Communicate well and often with the owner and all others involved in the construction process. Return phone calls 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 even when they don't affect the contract amount. 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 or appear in the contract documents or plans.
In the unlikely event that you ever have to go to court or arbitration, your written documentation will be very important to your success. More importantly, 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. Knockout punch list work right away. Don't work like crazy to reach substantial completion in 6 or 9 months only to take another 6 or 8 weeks (and 10 phone calls from the owner) to reach final completion. If a piece of your work falls below a workmanlike standard, fix it quickly and move on.
8. CHANGE ORDERS & INVOICING:
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 email approval of the scope and price of the additional work or changed work. Then, follow up and have the change order signed as soon as possible. Track and account for the owner’s payments and always separate between contract work and change order work so there is no questions about what work the owner’s payments are being applied to. Build a written record of all Change Orders, always know what the owner has paid for, don’t do extra work without signed change orders and most disputes over extra work will never appear.
9. DEPERSONALIZE MINOR DISPUTES:
Having laid a good business foundation through a detailed construction agreement and written Change Orders you'll find it much easier to depersonalize disputes. This is important because some owners sometimes 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, but the approach above will be far better than the “he said – she said” verbal tug of war approach that can lead to selective memory and the erosion of trust between the builder and the owner.
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 and if serious disputes flare up, you may want to contact your attorney who is familiar with construction law early on prior to committing to a legal course of action on your own. If any type of Preliminary Notice must be filed to preserve your lien rights on a job, file it early on in the project. If you are served with a legal document related to a project, contact your attorney immediately.
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 pay for a covered loss or claim in the event of a judgment against me?
B. Will my insurance carrier pay to make a settlement offer in order to have the action against me settled and dismissed?
C. Will my insurance carrier retain and pay for legal defense counsel to defend me in the lawsuit or arbitration action?
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 defense costs through your insurance premiums. Some attorneys not familiar with the construction business may forget to explore this area with you, but your legal defense coverage is critically important should a serious claim arise. In many instances, but not all, your comprehensive general liability company has a duty under their policy with you to defend you at their expense. This will save you a fortune in attorney’s fees.
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 can wind up being a good way to provide lots of extra income to the lawyers at the tremendous expense of the builder. A lawyer once quipped to me, “I put my son through college on cases like that”.
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, assess risks vs. costs as objectively as possible, take a hard look at the correctness of your legal position and the odds of success. You will typically benefit from some good legal help in this area. 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 in this. There's no sense winning the battle and losing the war.
Once in a great while, a dispute may get to the point where it requires the involvement of an attorney and/or your insurance company. Following the basic steps above won't double your revenues or prevent all disputes, but it may help you to decrease and/or avoid some disputes, ideally improve your relationship with the owner and hopefully increase your chances of collecting the money that you are owed on any given job. Hopefully it will also help you to feel like your business is running more smoothly and that you’re still very happy that you decided to become a builder!
Important Notice to Contractor:
© THE CONTRACTOR’S LEGAL KIT, LLC, 2022. All rights reserved.