Tuesday, December 27, 2011

Ten New Year's Resolutions for Contractors

Given the approach of the New Year, I have been reflecting on the mistakes that I see contractors make and how to prevent the severe consequences that can occur as a result.  If you follow these resolutions, I assure you that you will prevent most conflicts with your clients, or at least protect yourself in the event of a dispute.

1.  Make sure that all of your licensing and insurance policies are up-to-date.  In most states, the penalties for not being properly licensed can be severe, including double or triple damages, attorneys' fees and costs awarded against you.  Follow the requirements for your profession.  If you do renovation work on pre-1978 homes, make sure that you are lead-certified.  Have proper insurance to cover your business and your employees.

2.  Learn how to properly estimate a job.  This may be the biggest mistake I have seen contractors make this year.  They have cut their margins and not allowed for increases in pricing of materials or labor in bidding their jobs.  As a result, they are not allowing enough latitude for the inevitable issues that arise during a construction project.  Within the last month I have received calls from at least four contractors who are having trouble getting paid, built all of their profit into the last payment, mis-bid the job and have to put money into it to finish.  This is the way you make a living.  Learn how to educate your customer and protect yourself.

3.  Define the scope of the work.  Educate your customers and make sure they know what they are getting.  Clients will always assume they are getting granite when it is your intention to install Formica.  Designate materials to be used clearly.  Use as much detail as possible.  If something is going to be "builder's grade," make sure the clients know what that means.

4.  Make payment contingent upon milestones reached.  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 owner may lose trust that you will finish the job.  If you do your work ahead of the payments, the owner may start delaying when you ask for a check.  Numerous disputes develop because the payments are not in balance.

5.  Make sure you have a good written contract.  Good contracts establish 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, etc.  I have written so many blog posts about why you need a good contract that I can't spell it out here, but read the archives.  A good contract will help resolve any dispute.  It protects everyone.  Many states also require a written contract under the law.

In addition, have an attorney review your contract!  This is well-worth the money, and will protect your business.  It's a worthwhile investment and will help you sleep at night. Seriously. I even charge flat fees so clients can call me when they have a question about their contract.

6.  Have written contracts with your subcontractors.  I get it.  Most of you have been working on a handshake with your subs for years.  However, 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.  You should have a written scope of the work so the responsibilities are clear.  Under the RRP rule, you must submit your documentation to the homeowner within thirty days of completing the job or upon final invoice.  You therefore need the documentation from your subs before they get paid.  This is in the archives as well.

7.  If you are working on a time and materials basis, invoice your clients weekly.  I promise you that if you have a T & M contract with your clients, one day they will wake up and realize that 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 the contractor who does 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.

8.  Designate who has the authority to make decisions in your contracts.  This is necessary from the homeowner as well as the contractor side.  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 the authority on the job site or how to reach the contractor by email or cell.  You also want to be able to rely on the instructions that are given by clients.  I see these issues 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.  It's nice to be able to point to the contract and say that you relied on a person with authority.

9.  Make sure your clients know that the job will probably exceed the budget by at least ten percent.  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, and then tell them again.

10. Finally, all change orders must be in writing and signed by the parties!  They must state the change in the contract price and how the date of substantial completion will be affected by the change.  This sounds so simple, but I bet I could prevent 90% of all disputes if contractors and homeowner would follow this simple rule.  Contractors laugh when I say that homeowners always believe that a minor change (can you add two outlets?) is free, and homeowners are always shocked when they are charged for verbal change orders.  Never, ever rely on a verbal change order.  Document everything.  E-mails are fine.  Just make sure you have a return receipt to show that they are read.

Happy New Year!  Hopefully I just saved you thousands of dollars worth of legal expenses in 2012.