539: Construction Company Contract Traps And The Advantages Of Legal Help

This Podcast Is Episode Number 539, And It's About Construction Company Contract Traps And The Advantages Of Legal Help Mistakes can be expensive in the construction business, and as an entrepreneur, although you'll know many of the regulations that apply to your business, there are so many that you can't possibly remember all of them. Depending on the type of contracting business you run, you could face laws regarding taxation, employment, product liability, premises liability, discrimination, health and safety, and various other regulations.   Keeping on top of all the laws that affect you and the changes to those laws while still being mindful of all the other aspects involved in running a business is almost impossible.   That's why you need legal help. A legal professional can identify the rules and regulations that apply to your business and advise you on operating within those laws. They can also help you draw up necessary contracts that could prevent legal action in the future, and they can prepare a case in the unfortunate event that you wind up facing or filing a lawsuit.  

For instance, a new contractor meets an experienced customer, and money changes hands, not how you expect it.

Typically, this happens when you first get started: You bid on a project and are the low bidder. You are given the client's standard contract, which contains the client's favorite set of commercial terms and conditions, to sign as a condition of getting the project. You close and sign the contract because you don't want to ask for changes in the terms or consult your construction attorney. You put the signed contract in your bottom desk drawer and pray that nothing will happen during the project that will cause you to reread the contract.

Before it is too late, consider these contract traps to look out for:

1. Poorly defined scopes of work create claims and disputes.

2. The completion schedule is too short and exposes you to monetary damages for failure to finish on time.

3. Payment terms put you in never-ending negative cash flow by loaning the customer money at 0% and borrowing on your credit cards at 24%.

4. The customer keeps 5%-10% of the contract price as retention for up to a year or more after the entire project is finished, which could be all your profit.

5. Indemnity clauses could make you financially responsible for bodily injury and property damage claims caused by customer negligence.

6. Indemnity clauses could make you pay the customer's attorney fees and costs.

7. Your insurance company may be required to provide additional insured coverage for the project, giving the customer free insurance and full access to the policy coverage and limits.

8. Often, the terms and coverage of the warranty are beyond reasonable industry standards.

9. Dispute resolution clauses that require arbitration first and then litigation are probably the two worst ways ever invented to resolve disputes.

10. The client's pre-printed final waiver of the lien document (necessary for the contractor to receive final payment) waives all contractor's rights to recover unpaid extra work and to pursue any claims that arose during the project.

Here are three reasons you need a professional to help.

They help set up your construction business

In the early stages of your business, they can help you make vital decisions and understand the consequences of those decisions. Is your business going to incorporate? Do you know what that means from a legal standpoint compared to other business entities? Do you understand the difference between hiring employees and working with contractors? Do you know the employment laws surrounding hiring and firing if you hire employees?

Law experts understand each of those and can explain how they affect your business. They can help you make an informed decision that is in the best interests of your organization and protects you in the future.

They help with contracts

At some point, your business will enter into contracts. Whether those are employment contracts with employees, service contracts with clients, or business agreements with other partners, you will need legally-binding documents to protect yourself.

Not all contracts are easy to read or understand, and some may have confusing clauses. They will help determine if the contract is in your best interest and if there are inclusions you need to know about—such as whether parts of the contract can be assigned to third parties or how to terminate the agreement. They can also revise the contract or change anything you deem problematic.

If you're drawing up the contract, getting a qualified legal opinion can ensure the agreement represents your needs and goals. This will definitely prevent experiencing contract traps, as mentioned earlier.

We recommend seeking the advice of a qualified construction attorney to put together a contract that fits your specific needs. Your arrangements need a well-defined scope of work, clear payment terms, a reasonable schedule, and a proper change order clause. No work should ever be performed based on verbal agreements. Get everything in writing, always, with no exceptions.

They help prevent lawsuits

When you own a small business, there's always a chance you'll wind up in litigation. You could have a dissatisfied customer or an angry former employee. You may file a lawsuit because someone else infringes on your trademark or copyright.

Usually, there are steps you can take in those situations before filing or facing an expensive lawsuit, and a lawyer can help you navigate those steps, possibly avoiding the cost of going to court. If you wind up in court and already have legal representation, that person will be familiar with your business, making representing you much more manageable.

Many small construction business owners and entrepreneurs wait until it's too late to seek help. They wait until a lawsuit has been filed or need to file it. A lawyer can advise you of ways to avoid those situations in the first place, saving you unnecessary legal expenses in the long run.

Final thoughts

Yes, attorneys cost money. The benefits of having one, however, far outweigh the expenses. They will not only advise you on business decisions and contracts that protect your business in the future; they will help defend your construction company, product, or yourself if a lawsuit arises, either with you as the plaintiff or the defendant.

Smart construction business owners know there is a time and a place to spend money. Spending your money in intelligent ways saves you time and energy. It can save you money in the long run by reducing turnover and preventing costly mistakes.

About The Author:

Sharie DeHart, QPA, co-founded Business Consulting And Accounting (Fast Easy Accounting) in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations. She offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com