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Contracts for Contractors – A Best Practices Guide (Part Two)

In my last post, I discussed the fact that the most important tool for a contractor is your written contract, which can help build a customer’s confidence in your company and avoid the types of misunderstandings and unrealistic expectations that ultimately can lead to a breakdown of the customer relationship, jeopardize the project and result in litigation.

The following are some things to consider as you review the specific terms in your existing contract forms or develop your own contract:

  1. Scope of Work.  This is probably the most important part of the contract.  A properly drafted scope of work clause should clearly state exactly what services and materials you are going to perform or provide.  Accordingly, the scope of work provision needs to be tailored for each individual project.  The purpose of the scope of work is to make sure that you and your customer are on the same page when it comes to knowing exactly what you are agreeing to do and what you are not going to do.  Ambiguity in a contract typically is not a contractor’s friend.  So a comprehensive and detailed scope of work protects both you and your customer.
  2. Exclusions or Clarifications to Scope of Work.  As important as it is to identify exactly what services and materials you are going to provide your customer, it’s equally important to make sure your customer knows what is not included in the scope of work.  If the contract is silent and there’s nothing else in writing stating whether something is or is not included in the scope of work, who wins?  If you end up involved in a lawsuit, neither you nor your customer is going to be happy after incurring the expenses and attorney’s fees associated with litigation.  The bottom line is that exclusions or clarifications to the scope of work are designed to protect you and your company.
  3. Warranties and Disclaimers.  A warranty is an express or implied promise to repair or replace a defective product or correct defective workmanship.  Warranty terms can vary greatly. Most warranties have time limits, and are non-transferable.  Most warranties also have restrictions designed to limit the scope of what a company is actually required to do.  Warranties are one of the best ways for a contractor to distinguish itself from its competitors.  However, you need to be very careful to make sure that your warranty is clear and that your sales people understand and are properly communicating the scope and terms of your warranty to customers.  Even if you don’t provide your customer with a warranty beyond a manufacturer’s warranty, there are also things called implied warranties, which are guarantees of the quality of goods or services that do not have to be written or even expressly stated to apply.  For example, the implied warranty of merchantability typically guarantees that a product is fit for the ordinary purpose for which it is being used.  There can also be an implied warranty of fitness for a particular purpose, which means that if you sell goods or services to be used by the customer for a specific purpose, you may be guaranteeing that the goods or services are suitable for that purpose.  As a matter of best practices, every contractor needs to make sure that it has language in its contract specifically disclaiming any implied warranties.  A contractor should disclaim all warranties, but it should specifically mention in its disclaimer the implied warranties of merchantability and fitness for a particular purpose.  A contractor should put this disclaimer language in all caps in a larger font or different color ink so your customer knows that it is important and it does not look like it is being hidden.
  4. Disclaimer of Damages or Limitation of Liability.   In addition to disclaiming implied warranties, a contractor should also attempt to disclaim particular types of damages in your contract.  A limitation of liability clause can be a useful risk management tool.  But, it is far from foolproof.  The law regarding the enforceability of these types of provisions is constantly changing.  In Missouri, for example, it’s much easier to enforce a limitation of liability clause in a contract between two commercial entities, such as on a commercial project, than it is in a residential project involving a claim by an individual homeowner.  The important thing for you to understand is that you can increase the likelihood that your limitation of liability clause will be enforced by doing a few simple things:  first, do not bury the provision in the fine print; second, do something to set off the provision from the rest of the contract, such as using ALL CAPS, bold-faced type, and/or a larger font size; and third, ask your customers to initial next to the provision.   The bottom line is — don’t let a customer argue that she never agreed to the limitation of liability provision because it was buried in the fine print and she never saw it when she signed the contract.

Obviously, these are just some of the different types of terms that you may want to consider adding to your customer contracts.  But, depending on the nature of your business or industry, the different states where you are currently performing work, and the types of projects in which you are involved, there are a host of additional contractual provisions that you may want to consider.