Avoiding Legal Problems in a Tight Economy

Having practiced law for over 25 years, I have seen many ups and downs of the market. In down economies I hear the same statements from contractors: “I need to cut my prices or I’m not going to get any work”; “I just want to keep my employees busy”; “I knew this would be a problem client, but I really needed the work.” Any of these sound familiar? Here is the reality of succumbing to these thoughts.

Cutting prices

When you cut your prices, what do you end up doing? You cut quality to make up the difference. When you compromise the quality of your work, it inevitably results in callbacks or, worse yet, lawyers. Not only do you get paid less for the entire project, but you end up spending money fixing problems or paying lawyers to get you out of a bad situation. Trust me, lawyers are a lot more expensive than fixing the problems, but either way it is a losing situation.

Keeping employees busy

Of course you feel responsible for the welfare of your employees. After all, they have worked for you and depended upon you for years. You can’t let them down now. While such thoughts are noble, they are very shortsighted.

What you end up compromising for the benefit of your employees is your own family. If you low-bid to get a project to keep your employees busy (and paid), you end up incapable of meeting your own personal expenses and jeopardize the existence of your entire company. If that happens, none of your employees are going to have a place to work in the long run.

Taking on the problem client

There are actually people out there who wait for a down economy just to take advantage of contractors and get much more for their money. OK, maybe I’m exaggerating, but these demanding, unreasonable people would have a hard time getting a reputable contractor to take them on in a good economy. Because the economy is bad, all of a sudden they are given some attention. The problem client is a nightmare in any economy. In a bad economy, not only do you need to put up with them, but you don’t even get paid a premium for it. Inevitably you end up in my office trying to figure out how to get out of the contract.

So how do you survive in a down economy? I am not a marketing guru or a psychologist. All I know is that when contractors make the above mistakes, the only one with more money is the lawyer. To make it through tough economic times in one piece, try the following:

  1. Work with your clients to give them the most for their money without compromising quality.
  2. Work with your employees so that everyone takes a little less with the long-term goal of weathering the storm together to come out in the end stronger. Having less money for a little while is better than having no money immediately.
  3. Never, never, never take on a client for whom you would not work in good times. You are better off sitting at home watching TV than taking on a problem client that in the long run will end up costing you money.
  4. Restructure your payment schedules so that you get paid more frequently. If you are having economic problems, your client might be having them as well. Don’t let your client owe you more money than you can afford to walk away from.
  5. Financially qualify your clients in advance. Make sure they have sufficient liquid funds to see the project through to completion. If they won’t provide you with proof of funds, don’t take the project.
  6. Work with your subcontractors on profit margins, payment schedules, etc. Make sure they are financially strong enough to make it through the entire project. You don’t want them going under halfway through the project.

Bad times do not last forever. Be creative in working through them. Don’t become another statistic — a failed business.

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