3 Things to Add to Your Construction Contract—From a Lawyer

I've been in residential construction litigation since 2004, and I’ve found that 90% of litigation could have been stopped if contractors were upfront about the process and if contractors listened to the red flags.

A realistic schedule would prevent so many disputes on the back end. There’s also a few things contractors can include in a construction contract to make their lives easier. Below are a few examples of each:

Cancellations

Signing a construction contract means both the contractor and owner are obligated. The contractor is obligated to do the work, the owner is obligated to pay. Unless the contract says otherwise, you can’t get out of that. So if there’s a termination on either side, it’s a breach of contract and the opposite side would be entitled to damages. 

But right now it’s an iffy market and a lot of people are backing out of their contracts. 

Technically, if they sign a contract, and there’s no provision for cancellation, that's a breach of contract. You, as the contractor, could sue them to seek damages. Your damages would be your profit.

An easier route is to allow cancellations, but there’s a penalty. The penalty would be the down payment plus what it costs you, the contractor.

Obviously canceling is not ideal, but at least you're entitled to something, and it's clear to clients what that is when they sign.

As for many things, it's also dependent upon state laws. California is kind of limited on that and some other states are too, but generally speaking, whatever your deposit is, I would make it your cost plus some amount, such as 10 or 15%. 

Doing this means number one, you'll get serious clients. And number two, that if it does cancel, you'll be made whole.

Listen to Karalynn Cromeens talk about contracts and more on the Women at WIRC podcast

Negative Online Reviews

A big construction contract addition contractors don’t think of is limiting likelihood or the potential of bad reviews. 

We know the first place an unhappy client will go—social media. It's their constitutional right to do so and there's not much you can do about it. But you can put something in their contract such as, “Unless it's positive with no online comments.” And if the client violates that, it makes it a breach of contract, which is actionable. 

I'm not saying that it's a slam dunk case, but it gives you a stronger cause of action. When you don't have that, then it's a defamation claim. That’s very hard in any state, because it is your constitutional right to freedom of speech. So you make it a breach of contract action, as opposed to a constitutional one. 

You Can Cancel at Any Time

Another one that I like to put in a construction contract for my contractors is that they have the right to cancel at any time. 

Like I said, once you sign that contract, you're on the hook to do it. And a lot of the times you'll get to the middle of something that starts to not work out, and if you don't have that provision in there, you can't just walk away. 

If you don't have that right to walk away as a contractor and you let them fire you or you walk out on the job, you're not only missing out on the money that you're owed, you could potentially be on the hook for more because you made a promise in that contract. 

If they have to hire somebody to replace you and it costs them more, you're on the hook for the difference. So that's something to be careful of.