Small Construction Contract Bells and Whistles:

Provisions That Can Make a Big Difference

            There’s an old saying “The devil is in the details.” No one knows that better than a contract attorney. I often get calls from contractors who tell me they would like me to take a look at their contracts, but they’re pretty decent. And often they’re right, their contracts are decent, but the question is: is the contract affording you all of the right protections available under the law. When I call these same contractors, and offer them a few of the provisions which are less commonly thought of (the “bells and whistles”), they are quick to say “I definitely need that”, or “Yeah, that would really help”. Here are a few examples of additional provisions that can be added to your contract to provide an additional layer of protection.

Customer Work Provision. I often say that it is some sort of cosmic oddity that every person in the world has a brother-in-law who is a plumber. That’s obviously a joke, but it is very common for homeowners to want to perform some work on their house, or know someone who is a subcontractor who can work on their house. The first thing I tell contractors is to be very leery of allowing customers to do any major work on the home. As many of you are well aware, even if you allow an outside subcontractor to come in and do work, or allow the homeowner to perform the work, you are the general contractor for the purpose of the statutory warranties and your general contractors license is the one that is on the line. The problem is that often your specifications do not lay out every single tiny detail of the work to be performed, and without a restriction of customer work, or a broad statement, they will be performing all of the work necessary for the remodel or the new home, customers may get the impression that they are allowed to do any of the work that is not specifically listed or which is set out as an allowance. To avoid this problem, I recommend that people include an explicit statement in their contract that the contractor will be performing all of the work necessary to complete the project, and that the customer will not do any work on the home. For those of you who like to allow customers to do some minor projects, you can modify the paragraph by saying that they will not be allowed to do any work on the project, unless agreed in writing by the contractor. If you do allow customer work, I also recommend an indemnity paragraph which says that the customer will hold you harmless with regard to any claims or liabilities that occur because of the work they performed.

Change Order Payments. Nearly every contract has a provision regarding change orders. It has become more and more common, however, for contractors to charge a change order fee and require a portion of the change order to be paid prior to the next installment payment. Often when I ask contractors if they would like to charge an administrative fee for change orders, to recoup some of the overhead costs that they incur in preparing the change order (and in part to deter excessive change orders) they are intrigued if not enthusiastic about the option. Change order administrative fees are becoming extremely popular within the industry.

Similarly, it is not unreasonable to request an additional deposit at the time the change order is requested for large changes. In preparing for the change, you will be expected to spend money and have administrative costs or outlays for suppliers and it is important not only to obtain a written change order, but to obtain some money up front to ensure that the client is serious about making the change and to cover yourself in the event they should change their mind before the next progress payment.

Deposits. It has become very popular due to it’s helpful nature, for contractors to require a down payment or deposit at the time the contract is executed. Obviously, once the contract is signed the contractor immediately goes into the mode of preparing to perform the project. This may involve not only ordering of certain materials, but also expenditures for design, to line up subcontractors, and to prepare the specifications and other necessary documents to perform the job. I can not tell you how many times we have received a call from a contractor who signs a contract with the homeowner, puts in a week of hard administrative work on the project, only to have the homeowner call back and say they have changed their mind. At this point, we are left with the option of suing on the contract, which is timely, expensive, and very uncertain as to the outcome; or simply eating all of the costs that we have already incurred. With the down payment, (and the appropriate statement that the down payment is non-refundable upon the occurrence of certain events) the contractor would already have the money necessary to recoup it’s expenses and the burden would then be on the homeowner to pursue recovery of those funds.

Materials. Another place where contractors occasionally lose money or materials, is at the end of the job. Often contractors order excessive amounts of materials expecting that at the end of the job, they will simply return any unused materials or take them with to be used on a future job. A first time homeowner, or somebody who has not ever been through a remodel, may not understand the fact that you expect to take the left over materials with you at the end of the job. Even if it is your expectation that you return them to the supplier, and credit the homeowner for the unused materials, you should include an explicit statement that you will be the one to take the materials at the end of the job. Depending on how you bid the contract, those materials may be returned and credited to the customer.

Limitation of Warranties. The last item I would mention are additional ways that contractors can limit liabilities and meet their statutory requirements. Contractors are not required to provide a warranty for the actual quality or fitness of any materials installed for which a manufacturer’s warranty is provided. Please do not misunderstand, if the installation process itself is bad, the contractor will still be liable. However, if the material itself is bad, you do have the capability to limit the homeowner’s recourse to the manufacturer’s warranties. I would also encourage you to be careful to not provide any implied warranties. The easiest way to do this, is to include a statement on limitation of warranties saying the only warranty the homeowner is being granted, are those which are in black and white in the contract, or specifically provided by Minnesota Statute.

There are many lesser known provisions that can greatly enhance the value of any contract to a contractor. As a contract attorney, I understand that it is important to contractors that they not have to face customers with a twenty-two page contract. However, it is also necessary to balance the level of protection you feel is required for your company. It is possible to draft a contact that is only a couple pages long, and still includes not only the major items that pertain to your company, but also the lesser known provisions that can save you time, money and arguments with your customer. As always, my number one piece of advice with regard to contracts is to make sure that they fit the operation of your business. It is very important that you have contracts which are tailored to your operation to ensure that you are not making them completely useless by violating them, due to the fact that your operations do not match the requirements of your contract. A knowledgeable construction attorney can help you to prepare a contract which includes all of the provisions which will be important to ensure that your company is protected to the extent that you feel comfortable, including all of the appropriate bells and whistles.

© 2008 - Stefanie L. Brown and Rinke Noonan Law Firm, St. Cloud, Minnesota Stefanie L. Brown is a member of the Rinke Noonan Business and Transaction Department. She has extensive experience working in the corporate, residential construction field.

©2008 - Stefanie L. Brown and the Rinke-Noonan Law Firm
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