The most important tool for a contractor is your written contract. A good solid contract is 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, it helps to prevent misunderstandings and false expectations that can lead to a breakdown in your customer relationship, 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 contract, tailored to your company and the type of work that you do. 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. Even if you develop your own form, you should have your lawyer review it to make sure that there are no mistakes, 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 contract forms and business practices.
First, 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. Often, if you do not have a written contract a dispute comes 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. 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 force making promises that are different from what your contract says. When that happens, we are no longer dealing with simple breach of contract claims, but instead you may be exposed to fraud claims or claims under an unfair merchandising practices act. These types of claims are typically much more difficult and more expensive to defend against.
Third, do not leave anything blank in your contract. But, if you do, make sure that your customer initials and dates any additions or changes to the contract after it is signed.
Fourth, make sure that both you and your customer sign the contract, and keep a copy of the signed contract. 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 five years from the date he knew or should of 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 could keep them for ten years.
In my next post, I will discuss specific types of provisions that contractors should consider adding to their existing contract forms.