The most important tool for a construction company or contractor is your written contract. Good solid construction contracts are the foundation for a positive experience for both you and your customers. It establishes a relationship with your customers and builds their confidence in you and your company. More importantly, a comprehensive and well written customer contract prevents misunderstandings and false expectations that can lead to a breakdown in your relationship with the customer, jeopardize the project, and result in litigation.
There are a number of model contract forms available to contractors, but by far the best approach is to develop your own customer contract, tailored to your company, and the type of work you do for your customers. You can create your own form or you can hire someone to do it for you. Either way, at some point, you should get a lawyer involved. For example, if you develop your own form, you should have your lawyer review it to make sure that there are no ambiguities or omissions that could cost you or your customers.
I urge clients to have their contract forms reviewed on an annual basis. Depending on changes in the law, changes in the industry, or changes in your own business, this process should only take a few hours.
The following are five things to consider as you review your existing customer contract forms and business practices:
First, always use a written contract with your customers. You have no idea how many contractors operate without a written contract. If you are doing this, you are inviting costly litigation. If you do not have a written contract, you are relying on an oral agreement. Disputes over verbal agreements usually come down to a “he said-she said” situation. When that happens, it is extremely difficult to resolve a disputed claim without a time-consuming and expensive trial or comprising away too much in settlement. A handshake deal saves a few pennies now, but could cost you thousands of dollars later.
Second, make sure that your sales people and estimators understand the terms of your contract. The last thing you want is to have your sales staff making promises that are different from what your contract says. When that happens, you are no longer dealing with simple breach of contract claims, but instead you become exposed to claims of fraud or unfair business practices. These types of claims are typically more difficult and more expensive to defend against than simple customer contract disputes.
Third, do not leave anything blank in your contract. In a best case scenario, blanks in a contract lead to ambiguities that will cut against you in litigation. In a worst case scenario, blanks in the contract could lead a court to void the entire contract. If you find your sales staff or estimators leaving blanks in the contracts they close, make sure that your customer initials and dates any blanks, additions, or changes to the contract, particularly after it has been signed.
Fourth, make sure that both you and your customer sign the contract, keep a copy for your records, and provide a copy to your customer. We handle contract litigation for all sorts of companies, big and small. You’d be amazed by the number of times our clients have come to us in the middle of a lawsuit and tell us that they are unable to locate a signed copy of the agreement that we are trying to enforce.
Fifth, retain a copy of the contract for at least five years. Depending on which state’s laws apply, a customer may have between two and four years from the date he knew or should have known about a problem with your work to bring a lawsuit. As a general rule of thumb, I advise my clients to keep copies of their signed contracts for at least five years. And, if you want to be extra cautious, you can keep them for ten years, particularly in the construction trade where some statutes of limitations for defective construction extend ten years.