It's in the Contract (if not, It Should Be)
"A good contract will help resolve any dispute. It protects everyone."
Another year, another light dusting of the same old two-page boilerplate contract you've used forever? Don't be tempted. The laws have changed, and new threats and risks have emerged, making it critical to revise and rework the contracts you use with clients, trade contractors and others, according to construction attorneys Andrea Goldman and Kevin Veler. Here are a few of the highlights they feel remodeling contracts need most.
Next week: A special look at how to avoid the legal hazards on online reviews.
Take it seriously
Temptation: You want your contract to be short, simple and bulletproof.
Reality check: That short and simple contract is riddled with holes and ambiguities.
Solution: Develop a detailed written contract that anticipates and addresses the different components and complications of the specific project you are performing.
Construction attorney Kevin Veler (right): "Your contract should address any concerns homeowners may have (completion dates, defaults, change orders, etc.) as well as your own concerns (substitutions, delays, liabilities, etc.). Even a small project requires a good contract.
"Your contract is a living form. Use it sensibly. Review it. Revise it. Laws and strategies change. As you encounter situations, evaluate how well your contract performs and make notes to follow up."
Construction attorney Andrea Goldman (left): "I couldn’t agree more. A good contract establishes the expectations of the parties while the relationship is good. In law, a contract is a 'meeting of the minds.' It spells out the payments, scope of the work, date of substantial completion, warranties, basis for termination, dispute resolution alternatives and much more. A good contract will help resolve any dispute. It protects everyone. Many states also require a written contract under the law.
"In terms of defining the scope of work, educate your customers and make sure they know precisely what they are getting. Be clear about the materials you will use, and provide as much detail as possible. If you intend to install materials that are 'builder grade,' for instance, be sure your clients know what that means."
Get (and use) a lawyer
Temptation: You're smart. You've got other remodelers' contracts. You can use them to develop your own.
Reality check: Every remodeler, client and project is different. A bad or insufficiently detailed contract can cost far more in dispute resolution than up-front legal fees are likely to be.
Solution: Pay for a construction attorney to review your contract, if not also to draft it.
VELER: "Legal DIY works about as well as a substitute for professional legal services as homeowner DIY does for professional construction services. Besides helping you develop a good boilerplate contract in the first place, a good attorney (preferably one who specializes in construction) can help you evaluate how well your contract performs and tweak it as needed and as new circumstances arise.
"If you find that a particular provision is problematic with prospects or clients, your attorney can also help you reword it to overcome objections and help you understand how to 'sell' it as part of your marketing."
GOLDMAN: "Having an attorney review your contract is a worthwhile investment that will protect your business and help you sleep at night. Seriously. I charge flat fees for my contracts so clients will call me when they have a question or want to make a revision."
Set and monitor expectations about pricing
Temptation: You developed a strong and honest estimate. The client understands that actual prices may be higher.
Reality check: The client is shocked that your actual costs are that much higher than the estimate.
Solution: Add language specifying that the job will probably exceed the budget by at least 10 percent.
GOLDMAN: "If I had a dime for the number of homeowners who have been shocked by the fact that their job exceeded their budget, I would be a rich woman. It is your job to educate your clients. Do not be coy. Tell them that more often than not, there are concealed conditions that will increase the cost of the project. Make sure they have a cushion built into their budget. I can't tell you how many homeowners are blatantly refusing to pay for change orders because they were unanticipated. Tell them verbally and in writing, and then tell them again."
VELER: "Setting and monitoring expectations is important. Andrea is absolutely correct that many disputes in remodeling arise regarding change orders and cases of 'might as well as' -- e.g., 'As long as we are doing this, might as well do that.'
"I am a strong advocate for including expectation management in your marketing materials as well as your contracts. For instance, you might have a standard disclosure (initialed by the homeowner) that explains why concealed matters, selection upgrades and 'might as well as' actions can increase costs and budgets. Then, as changes happen, notify clients accordingly."
Designate who has authority
Temptation: Now that she can actually see and touch them, the wife wants to skip the standard plumbing fixtures and upgrade to a nicer set. She's the one who is usually around and can make decisions for the couple.
Reality check: The husband disagrees and refuses to pay for the more expensive fixtures, let alone pay to remove them and install instead the fixtures he had in mind.
Solution: Have explicit contract language designating who has the authority to make decisions.
GOLDMAN: "This is necessary to protect your clients as well as your company. You do not want your clients asking your subs if they can make change orders and having them rely on their response. You want them to know who has authority on the jobsite, as well as how to reach you by email or cell if they have any questions.
"You also want to be able to rely on any instructions your clients have given. In my experience, I see these problems arise most frequently between spouses. If one spouse authorizes a change order, you don't want the other one saying that it was not okay. You want to be able to point to the contract and say that you relied on a person with clearly stipulated authority."
VELER: "There is no easy way to deal with conflicting spousal directions. The authority clause provides a legal basis to rely on the direction of one, but I have also seen cases where the spouse with 'authority' cowers to the anger of the non-approving spouse.
"Whenever possible, get both spouses to sign off. Above all, when a rush change is approved, make sure that, at minimum, the one delegated with authority has approved the change."
Get change orders in writing
Temptation: Of course the client understands that they'll need to pay for those additional outlets, and that those additional outlets can delay the completion of their project.
Reality check: The client can't believe you're charging that much for something as simple as a few additional outlets.
Solution: Have a clause stipulating that all change orders must be in writing and signed before additional work begins.
GOLDMAN: "Never, ever rely on a verbal change order. Have a clear policy for putting all change orders in writing and having them signed by the client and contractor.
"Change orders must state: the change in the contract price and the resulting impact on the date of substantial completion. This sounds so simple, but I bet I could prevent 90 percent of all disputes if contractors and homeowner would follow this simple rule. Homeowners are always shocked when they are charged for verbal change orders.
"Document everything. E-mails are fine. Just make sure you have a return receipt to show that they have been read.
VELER: "I agree that change orders should be signed and in writing. Most contracts that I have seen provide for that. I also suggest that in cases involving a non-refundable special order, you get the client to give you a 100 percent deposit in advance.
"However, the reality is that many contractors go ahead and perform the change work before the change order has even been written. Admittedly, it is difficult to stop work and process a change order when the electrician is pulling wire and the drywallers are waiting. But do get at least an authorization to proceed. Given the ability of most phones you can typically get that authorization via email or even a short, to-the-point video.
"Regarding return receipts, remember that these can be refused in emails. So consider using email to ask a simple question, e.g., 'Did you still want the door to be sealed?' When the client replies 'Yes,' you now have evidence they not only received your email but read it too.
"I also encourage contractors to include language noting that if the work has already been performed and the homeowner refuses to sign the change order, the contractor will still be paid for time, materials and markup."
On fixed-price projects, make payments contingent upon milestones
Temptation: Your crew is on a roll, so you'll let them keep cranking even if the client is behind on payments.
Reality check: Why should the client be in a hurry to pay when you're doing the work regardless?
Solution: Make payment contingent upon milestones reached.
GOLDMAN: "Don't let your work get ahead of your payments, and don't let the payments get ahead of the work. This keeps both sides honest. If the payment gets ahead of the work, the client may lose trust that you will finish the job. If you do your work ahead of the payments, the client may delay when you ask for a check. Numerous disputes develop because the payments are not in balance."
VELER: "In big projects, match your pay schedule to what you can afford to walk away from, and collect part of your 'profit' as part of each payment.
"Financial control is 90 percent of the battle. So many times in remodeling, the costs of litigation make it difficult for remodelers to 'win.' I would much rather be in a position of helping a contractor determine how big a refund a homeowner may be entitled to, even on a terminated contract, than how much the upset homeowner needs to pay so that the contractor can pay the subs, much less have any profit."
On T&M projects, invoice weekly
Temptation: Your clients trust you to bill them fairly and honestly when you work on a time-and-materials basis.
Reality check: Your clients aren't tracking your time or materials, but they're pretty sure you're overcharging them on both.
Solution: Invoice weekly and keep clients apprised of budget concerns.
GOLDMAN: "I promise you that if you have a T&M contract, one day your clients will wake up and think they have written you a blank check. If you invoice them infrequently, they will have no way of checking whether your labor charges are fair. They are also more likely to dispute your charges if there is not total transparency in your billing.
"T&M contracts do not work well for contractors who do not maintain good business practices. You must communicate with your clients at least weekly by email or in person to keep them apprised of costs and whether you are working within your budget. If not, you could have a nightmare on your hands as lawsuits about overcharging are very expensive to litigate."
VELER: "T&M projects require very clear contracts, detailed budgets, a great deal of accounting and hands-on management. Customers become upset when they see a worker standing around on their clock even if it is justified. As Andrea indicates, T&M requires close monitoring of budgets and frequent updates.
"Also be careful of your language. I know at least one homeowner’s counsel who tried to make mileage out of the contractor’s alleged response to the homeowner’s questions about budget status. Supposedly the contractor said he had to go back to the office and 'massage the numbers' when he really meant 'review the invoices and the budget, be sure everything was correctly categorized, and be proactive in suggesting reallocations between budget line items.' The contractor’s shorthand statement did not calm the irate customer, who ultimately refused to pay and ended up in a legal battle."
Have separate subcontractor contracts
Temptation: You've been working with your trade contractors for years. Your handshake agreement is rock-solid.
Reality check: Your trade contractor has new staff and management, and new financial and other challenges.
Solution: Have a detailed written agreement with each trade contractor.
VELER: "This is one of the areas I find so many contractors ignore. You depend on your relationship and expect subs and trades to be responsible for your costs of repairs, backcharges and damages. Often you warrant work but you don’t have supporting warranties from your subs. These are really unnecessary risks. I often recommend that remodelers have a 'master' contract with subs, along with a term sheet for specific projects."
GOLDMAN: "Even if you've been working on a handshake with your subs for years, now is the time to change your policies and have a written agreement. Your subs should agree to indemnify (pay you back) you if a claim is brought against you for something they did. A written scope of the work should clearly outline all responsibilities.
"Plus, under the RRP rule, you must submit your documentation to the homeowner within 30 days of completing the job or upon final invoice. You therefore need the documentation from your subs before they get paid."
Avoid "green" claims; promote "good building practices" instead
Temptation: The low-flow toilets and showerheads (and triple-pane windows, sprayfoam insulation and tankless water heater) that you're installing will slash the client's energy bills.
Reality check: Six months later, the clients are still taking 30-minute showers and cranking up the heat, and their energy bills have hardly budged.
Solution: Avoid making "green" claims as "your" claims.
VELER: "Most remodeling contractors do not test products independently and rely on the claims on manufacturers and suppliers. I have no problem with passing on others' reasonable claims as what they area — the claims of others. Otherwise, even if you have first-hand evidence that a certain product can result in better energy efficiency or indoor air quality or any other 'green' benefit, avoid making such claims unless you have verifiable proof to substantiate them (not merely anecdotal evidence).
"Moreover, keep in mind that occupant behavior can have a dramatic impact on product performance. I advise my contractor clients to tell homeowners that their savings may vary based on their particular use. For instance, a super-insulated home is not going to achieve super savings if kids are running in and out of the door all day while the a/c runs at 66 degrees."
GOLDMAN: "Beware of green products, especially if the client has bought them. Improper installation can void warranties. You cannot guarantee performance. Make sure it is clear who is responsible for procuring any rebates."
Acknowledge the "cooling off rule"
Temptation: The client can't wait to get started, so go ahead and use their deposit to order materials.
Reality check: The client gets cold feet two days later and wants to cancel.
Solution: Acknowledge and abide by the FTC's Cooling-Off Rule. Under this rule, buyers have three days to cancel certain purchases of $25 or more, and the salesperson is required to tell consumers about their cancellation rights at the time of sale. The salesperson must also give the homeowner two copies of a cancellation form, along with their copy of the contract or receipt.
VELER: "As long as the rule and its state versions have been around, you would think that most contractors would be aware of its requirements — and that failures to comply would be few and far between. In fact, I generally find that most contractors’ forms are not in compliance.
"The FTC rule allows a homeowner who buys an item in their home or in a location that is not the seller’s permanent place of business the right to cancel for a full refund until midnight of the third business day after the sale. In other words, it applies to sales at a client's home. If you are not familiar with the rule and its nuances, discuss it with your legal counsel."
GOLDMAN: "In Massachusetts, if you do not include the three-day right to cancellation in your contract, the homeowner can cancel the contract at any time, even once the work is completed. At that point, you are only entitled to the value of the work that you have provided; not the contract price.
"In addition, a failure to include the cancellation clause is an automatic violation of the consumer protection statute, which can result in the consumer receiving up to double or triple damages, attorney’s fees, interest and costs."
Remodelers: What questions or observations do you have about construction contracts? Your comments are welcome below
2 Comments (Login to Add a Comment)
DB-RemdPA1141 326 days ago
We don't use milestone payments because home owners are not qualified to assess milestone completion. One or two screw head pops in drywall, and the home owner says drywall milestone has not been reached.
We found that using milestones as payment indicators simply created "checking behavior" and "doubt" on the part of the clients.
Instead we break the project into weekly payments. This is clearly spelled out and the client signs this payment schedule as part of their contract with us. This sets up an expectation on the part of the home owner that a partial payment is expected each week. It keeps them on their side of the action: paying for our services, while we do our job: building what they are paying for.
Also we never confuse the words "cost" and "price". "Cost" is what it costs our company to deliver our services to the client. "Price" is what the customer pays us to do that. "Price" is always higher than "cost".
Change orders can be a wonderful revenue stream once you get your systems in order. The customer is happy because they get what they want. Owners are happy because the company gets paid to deliver it. You can even make your employees happy by having them earn a piece of that sale when they help process the change order.
Best of luck,
Myers Constructs Inc.
TrdConPA994 326 days ago
Great insights. Thank you! Most of it is common sense, but I bet most of us could go through and pick out at least one thing that we need to improve upon.