W e had a call from a contractor in an eastern state. An owner told him that he was overcharging for his work and they were not going to make the final payment.
What causes our customers to treat us this way? An even more important question is, “Where do they get the idea that we are overcharging for our work?”
Part of the problem is the perception that remodeling contractors have an “industry standard” of 10 percent overhead and 10 percent profit, and new home building contractors have a standard of 10 percent overhead and profit.
If the contractor puts language in his/her contract or an additional work order contrary to that so-called standard, the owners go ballistic. They will take a contract whose language is different than those numbers to an attorney. And the attorney says, “They can’t charge you that; that is not the industry standard.”
Boom, the fight is on.
Why do they think they can enter into a contract and then unilaterally decide to change the terms?
What are they thinking?
I don’t have all the answers. I think part of it is that contractors have a false reputation of not being well educated and the owners think they can bluff their way into new terms for the agreement.
“Let’s tell him that we aren’t going to pay the last payment and see what he does.” They may have talked with a family member or neighbor that got a substantial reduction in the total price of a job pulling that trick. Or another contractor gave freebies so he could get money that was rightfully due. Now they think
that is how the game is played.
Perhaps owners have heard most contractors are broke or nearly so and decide to push and see how much they can get for free before the contractor will fight back.
“We’ll tell him that we aren’t going to make the last payment and if he doesn’t like it, he can sue us. I’m willing to bet he doesn’t have the money to pay an attorney.”
Whatever the reason, without proper wording in your contracts, this can happen to you.
Consider these options
The solutions I offer are based on my own experience and that of a number of other contractors and attorneys. There are always exceptions and other ways to deal with these issues.
As you go through the process of qualifying your customers, you will hear questions or statements from the owner that you have to address. First, of course, you must decide if they qualify to buy from you. This includes watching for telltale questions or remarks that alert you to problems to come.
One “alert” that comes to mind is the potential customer telling me what they think the job should cost or what they are willing to pay me for overhead and profit. If you hear comments like that, you might want to reconsider working with this customer.
If they are a potential customer, you must take a position on what you are willing or not willing to do. They may tell you that they want to furnish some of the materials, do some of the work on the job or even have their brother-in-law do the wiring. You should be prepared to state your position very clearly and put that position in your contract.
Your contract should tell them what they are getting for the sales price you quote, what you expect from them, what they can expect from you and a very detailed payment schedule. Cross your “T’s”, dot your “I’s” and CYA. Then you also include language that tells the customer what you will do if they don’t perform their portion of the agreement.
If an owner pulls this stunt on you, is it worth fighting over? It all depends on how good your contract is. If you write a good contract and it is clear, force the issue and get your money. If you don’t have a good contract, then get out as quickly and cheaply as you can. Then spend some time learning how to put a good contract together.
I can tell you from many years of seeing this happen, it happens far more often to contractors with one or two page contracts. Those that write good solid contracts (lump sum contracts, I might add) seldom if ever run into these problems.
Strengthen the contract
What are some of the things you can put in a contract to prevent owners trying to avoid paying monies rightfully due?
• First, have a binding arbitration clause, specifying a non-attorney as an arbitrator. The arbitration clause should also state that you or the owner could invoke the arbitration process within three calendar days of notification to the other party that you have a disagreement.
Your best bet is an arbitrator that knows construction. The American Arbitration Association does great work, but the cost of setting up the arbitration is frequently more than the entire arbitration process if you have it done by an arbitrator that knows construction and is not an attorney or a member of the AAA.
• Second, have language in the contract that states if you retain an attorney or a collection agency to collect monies rightfully due, the owners will pay all collection and attorney’s fees.
• Third, have a clause in the contract that states there are certain fees and costs in your quote that are non-negotiable.
And the list goes on
There is a litany of other subjects like hidden conditions, code violations, owners visiting job sites, owners talking to subs or employees, charges for change work orders, animals and children in the work areas, fees and recovery, hazardous materials, missed appointments, rock clauses, right to file liens, down and progress payments and rescission notices.
These are the issues that lead to misunderstandings and the owner deciding that you are now a bad person and they don’t have to pay you. All of these issues are covered in our Fast Track Proposal Writer, including the contract form with payment schedules clearly spelled out. One trip to a courtroom could pay for our program many times over.
You may be the nicest person in the world and do the best construction work anywhere within 500 miles of your office, but if you don’t put the language you need in your contracts, sooner than later it is going to bite you.
Write a good contract, have your attorney check it, and go into the jobs you do with the confidence that you will be paid.
Michael Stone has more than four decades of experience in the building and remodeling industry. He wrote the book “Markup and Profit; A Contractor’s Guide,” published by Craftsman Book Co., and his second book, “Profitable Sales, A Contractor’s Guide,” was released in 2007.
Michael offers coaching and consulting services for construction companies throughout the U.S., as well as products for business management, and is available for speaking engagements.
Reach him by e-mail at michael@markupand profit.com, by phone at 1-888-944-0044, or on the web at www.markupandprofit.com. His newest web site is www.myconstructionbiz.com.