Last month in this space, I reviewed a series of market projections for 2014 from Harvard University as well as the industry’s leading associations.
Blueprint For Success, Chapter 7, Signed Security
A solid contract prevents mix-ups, which ensures a happy client and protects your company.
While many remodeler-client relationships start out blissfully, not all end that way. Disagreements can result from misunderstandings: customer expectations might not be reached, quality standards might be ambiguous, or performance yardsticks might not be met. Many of these potentially divisive matters can and should be handled through a detailed contract.
The notion that contracts are only as good as the people who sign them has merit, but that’s no excuse for getting by on handshake deals. Failing to document the work you will do and how you will do it leaves you open to far more than just disagreements; it potentially subjects you to lawsuits.
Types of contracts
Remodeling contracts can vary in scope almost as much as the projects they detail. Basic types include:
Lump sum: Lump-sum contracts specify the price to be paid for the project, fixed before the start of the job and absent any changes to the scope of the project.
Time and materials: T&M contracts can include an estimate for the final job cost but often include only the hourly rate to be charged for labor and the markup to be applied to subcontractors, material and other construction-related costs. They may also be written as cost plus fixed fee.
Construction management: Certain remodelers have transformed their businesses from employee-centered to task-focused. Their job is to ensure that a remodeling project is completed to a customer’s satisfaction by overseeing the trades- people retained to do the job. In return, they are paid a fee, typically monthly, to serve in a supervisory capacity as an agent for the homeowner.
Performance: Some contracts have guaranteed maximums, which force the remodeler to justify any expenses that exceed the previously agreed maximum price. These types of agreements also might have performance incentives for completing a project on time or completing it for a lower-than-anticipated price.
Elements of a contract
While consumer-protection regulations and applicable state laws ultimately determine contract specifics, the following should serve as a core for most remodeling contracts.
Conditions: Certain general conditions should be part of every agreement. Those found in the typical American Institute of Architects agreement delineate the contract documents, responsibilities of the owner and contractor, contract administration, subcontracts, construction by the owner or separate contractors, changes in the work, time limits, payments and completion, protection of people and property, insurance, correction of work, miscellaneous provisions and termination of the contract.
Plans: A copy of the agreed-upon blueprints or drawings should be included with each contract. They should include not only the obvious dimensions found in even the most rudimentary drawings, but sufficient detailing so both parties can visualize how the project will look upon completion.
Specifications: The agreement should spell out the materials to be used on the job, finishes, manufacturers and model numbers. A homeowner looking for disputable points can easily point to such open-ended terms as "provide Kohler sink" and assume he should have received Kohler’s most expensive sink rather than the one you thought looked best for the project.
Payment schedule: A remodeling company should always try to stay ahead of the project in terms of cash flow, up to and including the final payment. Otherwise, interest expenses for the use of a credit line can eat away at net profit. The contract should include the points during project progression when payments are to be made. Payment points should be specific and tied to an event so there is little doubt between parties as to whether the event occurred (for example, $10,000 payment upon the beginning of Sheetrock installation).
To avoid holding up a $5,000 check while a $10 doorknob is on back order, the final payment should be far smaller than is often the case in remodeling. Using a phrase such as "substantial completion" when determining terms of final payment allows you to collect that $5,000 — minus the knob expense — before the knob is delivered.
Assumptions and contingencies: Whether it’s assuming the driveway can be used for a cement truck or that bedrock will not be struck when footings are dug, all contractors make certain assumptions about the conditions they expect to find on a job. If any of those assumptions are incorrect, the result could be costly. Where possible, any assumptions made should be spelled out in detail so "what happens if" questions are kept to a minimum after the project starts.
A $15,000 hit taught Mark Anderson, president of ADC Inc., a $12 million diversified construction company in Lubbock, Texas, about the "bedrock clause." He now adds that contingency to all his contracts. The incident also induced him to begin using contracts detailing the tasks to be completed on each job with each of his subcontractors. "You can never do enough research on a remodeling project," Anderson says.
Right to rescission: Consumer-protection laws in many states allow customers to rescind an agreement within the first few days after it is signed, and attorney review is not required. Clauses mandated by consumer-protection laws should be pointed out to a customer.
John Brooks left $30,000 on the table learning about the right to rescission. The owner of John Brooks Custom Homes, an $8 million-plus, high-end custom building and remodeling company in Indianapolis, he has "given up thinking that every contract I have is the last contract I have."
Brooks was completing a remodeling job for a professional football player when the client signed a change order. A few days later, the client revoked the change order, and then the entire contract, under the three-day right-to-rescission rule because his wife, a joint titleholder, had not signed the change order. The football player then sued Brooks, looking to recover all money he had paid under the original agreement.
Brooks now searches legal records to ensure that all titleholders sign all necessary paperwork. After 16 years on the job, he has learned that his contract is merely "a work in progress."
Change orders: Whether it’s as dramatic as altering room dimensions or as subtle as repairing an existing window, remodelers are always faced with the need to change the original agreement. Therefore, contracts must include detailed language specifying how changes to the existing agreement will be made, who is responsible for agreeing to them, how they will be priced and when the costs for the changes will be paid. Without a detailed process that is followed to the letter, remodelers can count on losing money every time a customer changes a project detail or reads from the "while you’re here" list.
Penalty and incentive clauses: When time is truly of the essence and work must be completed according to schedule, the remodeler must build in as many protections as possible. It is important to ensure that incentives are at least as profitable as the penalties will be costly.
It’s also a good idea to build in a penalty clause for breach or cancellation of contract. When both halves of a divorcing couple separately requested a return of their deposit money, David Getts realized he had to revise his contract. Getts, of David Getts Design/Build in Bothell, Wash., a small firm with two employees and $225,000 in annual revenue, had taken a $3,600 deposit for the job when it was months away from starting. About three weeks before the start date, the wife called to say she and her husband were divorcing and asked if Getts would return half the deposit. Getts agreed and returned $1,800.
Then the husband called and asked for the entire deposit. Realizing that the two parties (and now former customers) were apparently not communicating with each other, Getts refused to return any additional money. But his agreement now includes a clause that allows for forfeiture of deposit in case of a breach of contract.
Dispute resolution: Disputes inevitably arise. Their resolution should be in accordance with procedures spelled out in the construction agreement, not on the whim of a customer’s attorney. Probably the most widely used third-party resolution agency is the American Arbitration Association (www.adr.org). Its or another agency’s procedures should be thoroughly investigated (and understood) before they are included in a contract.
Understanding what to include and what to leave out is important when writing a contract. Ultimately, a successful contract will be tailored to fit not only your company, but the individual job as well.