Contractor's Legal Kit

Introduction

Although billions of dollars are spent every year in the United States on residential building and re- modeling, many residential contractors face a common problem: finding contracts and other legal documents well suited to their businesses.

Most residential builders who use contracts at all use inadequate "boilerplate' agreements. This is understandable, since it's hard for smaller builders to find the time and money to have an attorney draft good, comprehensive construction agreements, and it's equally hard to find a construction attorney familiar with residential construction.

But don't wait until you are faced with a major law- suit or collection problem to pay attention to your legal documents. With litigation and arbitration costs on the rise, a medium-sized legal dispute on a $100,000 re- model can easily cost you $10,000 to $20,000 in legal fees, expert witness fees, and related costs. You might also end up having to pay a judgment to the owner as well as part of the owner's legal fees. After paying all those costs, most smaller contractors can kiss their businesses goodbye and start checking out the Help Wanted ads.

Spending a little time educating yourself about how to better control the construction process can’t help but pay big dividends regardless of what size business you currently operate. This manual is an attempt to get you off to a good start in that direction. It seeks to bridge the gap between the fully developed sets of construction agreements that are readily available for use on larger commercial projects (such as AIA or AGC documents) and the basic boilerplate agreements typically used by builders and remodelers.

Most importantly, this manual offers specific contract language that takes into account many of the unique risks and challenges that residential builders face. Much of this you will not find in any other "standard" agreements. It is distilled from my experiences - both good and bad - throughout many years as both a residential building contractor and practicing construction attorney. By understanding these agreements and adapting them for use by your own business, or incorporating relevant sections into your existing agreements, you'll be taking an important step toward taking charge of your business relationships.

An Expectations Game

The complex relationship between contractor and client is fertile ground for many kinds of misunderstandings and disputes. Typical problems include disputed change orders, what is and is not part of the scope of work, what are reasonable and unreasonable completion dates, when payments are due, amounts of payments, disputed punch list items, and whether final payment (minus an offset for punch list work) is due upon 'Substantial completion' or "final completion."

These kinds of problems can cost the builder money and time, and result in loss of reputation and future business. Perhaps more importantly, these and other types of largely avoidable problems weaken whatever trust there is between the owner and builder and can lead to future disputes, lost sleep, and lawsuits.

One major reason why job tensions and disagreements develop during a project is because the owner and the builder often start out with very different expectations about how specific aspects of the project will be handled. Often, this stems from a vague written communication system (i.e., a poor contract) furnished by the builder. These differing expectations show up in the form of numerous minor problems and disagreements, and often escalate from there.

A related problem is that most residential owners understandably have little or no idea of what to expect throughout the many phases of the construction process, both the building phases and the paperwork phases that control the disbursement of the owner's money.

Furthermore, residential owners are ordinarily in- vesting more money in the building of their home than they will ever spend on any other single item in their lifetime. For this reason done, they have a right to be nervous.

Unfortunately, many builders fuel the fires of potential disaster by not communicating very well with the owner, before, during, or after the project. But builders can't afford to take this approach without suffering the inevitable consequences. The good news is that there is an alternative to this gloomy scenario.

The Solution: The Construction Agreement

The solution to these problems is to establish a system for clarifying and documenting everyone's responsibilities and duties, and thereby avoid many disputes and the loss of time, money, and peace of mind. The con- tract between the owner and builder, referred to as the construction agreement, is the single most valuable tool the builder possesses for this purpose. That is why the focus of this book is on agreements.

Because about 90% of the legal disputes I see could have been avoided if the builder had furnished the owner with a good construction agreement (and then followed the agreement), it's not hard to understand why I think it is critically important for contractors to improve their understanding of basic construction agreements.

If you are like most builders I know, it's tough to find the time and money, and a construction attorney who knows enough about residential construction to draft good, comprehensive agreements for your business. However, now is when you need to find the time, the money, and the attorney - before you get into a dispute. Once you have a serious dispute with the owner, it's too late to rewrite the contract.

After you begin work on a job, it's too late to go back and add exclusions that you should have written into your agreement at the start. Often, your only choice is to pay for the items you knew were excluded but the owner assumed were included. Once you forget to include an attorney's-fees clause in your agreement and the owner is refusing to pay you, it's too late to go back and rewrite your agreement. (And your attorney's fees may just equal the amount of money you are owed by the owner!) The only time to include these things in your agreements is each and every time you give a construction agreement to an owner.

Establish the Rules

When you were a young kid and allowed to make up your own rules to a game like Monopoly or Kick the Can, who usually ended up enjoying the game the most and more often than not succeeding? You!

Being in the position to furnish the construction agreement is similar in many ways: it gives you bar- gaining power. When you furnish the agreement, you are establishing many of the rules that will legally govern the business relationship with the owner. You can draw upon your years of experience in this business and communicate to the owner how you want the business aspects of the project to be handled.

It's my experience over many years in the construction business that if the contractor takes this opportunity to establish reasonable rules, the owner will accept them. It actually puts the owner at ease to know that there is a structure for how the job will proceed. You are giving the owner an education about the construction process, which he needs. However, if you don’t establish the rules, the owner will take charge - often to your detriment. I routinely find contractors giving away 5% to 10% of the job profit by not having a comprehensive agreement.

If you fail to put your expectations in writing prior to starting the job, don't assume that the owner will be understanding later on and agree with whatever you want (no matter how reasonable your request may be). Many a competitive low bidder has discovered that once his agreement is signed, the owner is suddenly no longer willing to throw in concessions he would have happily agreed to prior to signing the agreement. This is human nature. Once the agreement is signed, both parties lose considerable bargaining power and often find themselves being much more close-minded.

This book is not an attempt to turn contractors into lawyers (there were enough of those around at last count). Nor is this book an attempt to teach contractors how to handle their own construction lawsuits and arbitration (you'll need a lawyer for that). To the contrary, this book is an attempt to help contractors do a better job of putting together agreements so that they can more successfully do what they enjoy doing and do best-building.

Who Should Use The Contractor’s Legal Kit?

• All building contractors who have recently started their own residential construction businesses.
   
• Residential remodeling contractors who do not have a fully developed set of agreements, subcontracts, and change order forms, and a commonsense procedure for using these forms.
   
• Residential contractors who build new homes and who do not have a fully developed set of agreements, subcontracts, and change order forms, and a commonsense procedure for using these forms.
   
• General contractors who do light-commercial construction work where standard AIA-type construction agreements are not used by the owner, and the con- tractor has the opportunity to furnish the construction agreement to the owner.
   
• Any building contractor who wants to increase his ability to avoid disputes, litigation, and loss of profits through a review of his own construction agreements and procedures for using them. Any building con- tractor who wants to improve his ability to identify and shift the inherent risks associated with all building projects more equitably toward the owner.

This manual does not attempt to cover the considerably greater liability attached to builders who build and sell "spec" homes. Nor does it attempt to cover the differing liability of subcontractors or general contractors who occasionally work as subcontractors.

Most of the contracts and other legal documents in this book appear first as blank forms, followed by the same form filled out with sample language (see example on the next page). The filled-out forms are annotated with brief descriptions of each clause, explaining its meaning and usage. By comparing the annotated agreements to the blank forms, you will find it easier to envision how to customize and fill out your own agreements. Some sections of the book, however, contain very short or simple forms which need no annotations.

After reviewing the various sections in this manual, you can draft your own construction documents based on sections of the manual that seem appropriate to your business. A computer disk containing nearly all the forms and contracts in this book is included to help you get started in this process. Once you develop a basic set of agreements, you should have a construction attorney in your area review them to make sure they are suitable for your specific business and in compliance with your state laws.

After developing a set of basic form documents that you are comfortable using, you will become more proficient at analyzing each job as it comes up and deciding which length agreement to use and which specific clauses to include. You'll also learn how to customize an agreement for a specific job.

Don’t be afraid to invest a few minutes of time with a construction attorney in your area if you are uncertain about how to proceed with a particular job. Better to spend a few dollars up front than to discover later that certain costly mistakes could have been avoided.

Remember, the sample agreements included in this manual are a good starting point only and will ordinarily require some customizing for your business. You also need to include any additional language required for residential construction or home improvement contracts in your state.

Finally, while using the forms or information in this manual, you will be acting as your own attorney. When in doubt about the content or best use of this information, consult a local attorney who is familiar with construction law.

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