Don’t Let Anyone Gut Your Contract

We’ve talked about no-lien contracts and lien notices of intent, but let’s take a broader perspective now that we have less margin to absorb a screw-up. We’re shorthanded by choice, and there’s no time for do-overs. We must take care we don’t become our own enemy, and we need to ensure our systems work for us.

If we have done a good job, we have developed a construction agreement for a client that is fair to both sides. It works and we understand it. It is important we understand it well because that is the only way you will be able to explain it to a client and/or his attorney.

The only changes

The only changes to which you should agree should be job-specific notes that do not affect the body of the agreement. We’ve talked about why we don’t do no-lien contracts, but we may be asked for things like liquidated damages (late completion penalties); subjective methods for firing you from the job (failure to prosecute the job vigorously in the client’s opinion); curative language using terms such as “set asides” (client holds money you are due even after they fire you to pay someone else to finish your work); and the manning-up of the job. We avoid using terms such as “match”, “best”, “top-of-the-line” and other statements that are user-defined and subject to honest disagreement.

But what about third-party issues that are legitimate, well intentioned and reasonable?

We addressed the issue of the notice of intent when a supplier tells a client they have and will use mechanic’s lien rights; a vendor includes in a spec that they may substitute for a product that has become unavailable, one of equal or better quality (but in whose eyes?); and maybe the most challenging of them all, the statement or requirements of the clients’ lenders.

Residential construction jobs, for which your client borrows funds to pay you, are often the most secure jobs from a payment standpoint because the lender will require the owner to pay for work to complete the security, and if they don’t, the lender will come in and deal with you directly to finish the job. In every case I know of, the lender will require your contract with the owner to be signed before they will close the loan. Good news, right? Well, mostly — your contract provides for the quality standard, code compliance and timely completion, all things the lender wants, but it is with your client not directly with the lender, and they want to deal directly. That sounds fair, right? Again, well mostly.

Lender requirements

The lender has requirements of the owner, too — such things as the owner agrees to pay the lender. Imagine that. If the owner doesn’t pay, the lender takes over the job and pays you to finish it. Sure, this is a bad scene, but at least the lender has the money. The rub comes when the lender asks that you sign (accept) the conditions of the loan agreement, giving the lender the power to do all that. You want them to be able to do it, but how you authorize it is very important to you. If you OK the lender’s agreement, you can inadvertently negate some of the authority in your construction agreement.

Instead of signing the terms of the lender’s arrangement, you can authorize your client to assign to the lender their rights in the agreement they have with you. This gives the lender all the muscle they need, but it keeps you from being on unfamiliar ground when you least expect it and can ill afford to be playing by a new set of rules. The lenders balk initially but they have always agreed once we explained to them how it affected our position. It doesn’t adversely affect them if they need to take over the job. If you regularly deal with a particular lender, do this in advance with the lender’s administration. Yes, this is a little complicated but important because this can’t be fixed after the fact when everyone has their nose out of joint, while you’re here...

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