Contracts 101

If you haven’t looked at your standard contract lately, it’s time to take it out and review it. Your contract can protect you, but only if it’s well-written and spells out exactly what you are — or are not — doing on a specific project.

According to legal expert Nancy Chillag, owner of law firm Chillag & Associates, Menlo Park, Calif., and author of Building by the Book: Legal Advice for Contractors, numerous states have specific requirements that must appear in your contract. For instance, in many states, information about notice of rescission and mechanics’ liens must be provided at the time of contracting. Before you start using any contract, make sure you’ve checked to see whether the state(s) you work in have specific requirements.

If your contract doesn’t address state requirements, Chillag says, “this gives the homeowner an opportunity to void the contract, get out of paying or cause the business owner to pay penalties.”

Here are some other items that should raise a red flag if they are not in your contract.

  • Description of the project. The contract should clearly spell out what you are going to do. Chillag advises if there are plans or specifications attached to the project, you should reference the specific plans in the description. This will cover you if the plans change after the contract has been signed.
  • Bid amount. Ideally, this should be the price of the project. If you’re breaking down the numbers in any way in your contract, be aware that if you have a line item that says profit and overhead, it absolutely must reflect your true profit and overhead, not just a portion of it with the rest of your profit buried in the cost of the project. This is fraud, Chillag says. If you must break down your numbers, don’t include a separate item for profit and overhead. Instead, add a line that says, “Each line item reflects materials, labor, profit and overhead.”
  • List of items not included in your contract. For instance, spell out that the contract doesn’t cover the cost of any mold or asbestos abatement that might be needed once a wall is opened. Or, if the agreement is that you’re going to reuse the windows already in place, spell out that the contract doesn’t include new windows.
  • Allowances. Chillag says this often is an area of dispute because a homeowner will assume that the price included for, say, a flooring allowance of $10,000 means they can choose flooring material that will cost a total of $10,000. Meanwhile, the contractor assumes the $10,000 will cover material and labor. Explain what is included in the allowance so there is no ambiguity.
  • Start and end date. “Your contract must have a catch-all provision for changes to the completion date and should treat time changes like any other change order,” Chillag says. Even if the price doesn’t change, if something is going to add more time to the project’s end date, write a change order.

Other items that should be reflected in your contract include the deposit amount and a payment schedule. “Any ambiguity in a contract will go against the contractor,” Chillag says. “If unclear, the contractor loses.”

Just as contractors are experts in their field of residential remodeling, attorneys are experts in their field. “A contract should be looked at as a business investment, just like computers and software,” Chillag says. “Form contracts online are geared to protect homeowners. A lot of provisions in them penalize the contractor.”

Because attorneys — especially those who specialize in construction law — have heard all the horror stories, they can ensure you have provisions in your contract to protect against many unforeseen situations, Chillag says.

For instance, a needy homeowner could demand daily meetings that go on for hours, Chillag warns, which can be detrimental to your business. However, your attorney could add a contract provision that provides for one hourly client meeting a week, with additional hours billed at a predetermined rate.

Attorneys are aware of changes or new regulations that may necessitate a change in your contract. Plan to review your contracts at least every two to three years, Chillag says, unless regulatory changes force you to do so earlier. You can also keep your contracts up-to-date by periodically checking your state licensing board for any changes.

Nikki Golden is the marketing and communications manager for Des Plaines, Ill.-based NARI.

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