Sales contracts get no respect. They're signed every day. Sometimes with changes scribbled in that could cause trouble. Sometimes with prices that are flat out wrong. And sometimes with boilerplate language that doesn't say what you think it says.
Although no contract is bulletproof, a good one protects both you and your customer — and that's not a contradiction.
Read on for a checklist of important items to include in your contract. However, laws mandating what absolutely must be in a contract vary from state to state, so make sure you're aware of what's required where you do business. “What you don't know can hurt you very, very badly,” says attorney D.S. Berenson, managing partner of Johanson Berenson in Washington, D.C..
Also, if you're inclined to tweak your contract for some reason, first get legal advice. “You're not a lawyer. You're a contractor. If anything comes up, the customer will get a lawyer,” says Ken Moeslein, president of Swing Line Windows in Pittsburgh. “You should get a lawyer at the time of your contract design.”
And, of course, no matter how good your contract is, make sure your work is even better. “If you do a good job,” Berenson says, “you don't need me.”
Specify what's included. Possibly one of the most important items you need is the most basic: a scope of work, or a detailed explanation of the goods and services provided. Don't just say, “We're going to apply Company X's siding to the entire house,” Berenson says. “We in the industry know what that means. But after the job is done, the homeowner may ask why there isn't siding on the chimney. It's important to explain [the scope of work] in enough detail to avoid that kind of misunderstanding.”
Specify what's not included. Having boilerplate exclusions is critical, says Soquel, Calif., attorney and contractor Gary Ransone, author of The Contractor's Legal Kit, a book many contractors swear by. “You can't remember every exclusion that could apply.” If, for instance, you have a standard exclusion that says you don't replace landscaping if it's damaged when you're replacing windows, most homeowners will back down on that demand. Moeslein gives another example: “At times, we have to use wood products, and we don't do any painting. In the contract, it says we don't do any painting.” That prevents customers from saying, “You never told me you weren't going to paint that.”
Define deviation from scope of work. Include wording that states that any change to the scope involving extra costs or labor or any changes required by inspectors or the owner additional work and an additional charge. That takes care of the homeowner who says, “This will only take you an extra hour.”
State that oral agreements are not binding. Many homeowners will have conversations with a number of salespeople (and a number of companies) and will get confused about who told them what, says Bob Birner, vice president of Amazing Siding, Houston.
“If it's not in writing, it doesn't exist.” Berenson recommends spelling that out above the line where homeowners sign the contract and including an acknowledgment stating that they've read the contract. Texas and two or three other states actually require that all homeowners (meaning husband and wife, usually) sign the contract. “The vast majority of states do not,” Berenson says. Amazing Siding goes one step further: It requires a company officer to accept the contract after the sales rep. That protects the company in case the rep errs badly (something Birner says hasn't happened).
Include a rescission clause. Under federal and state law, homeowners have three days during which they may cancel a contract. These laws typically specify the language that must be in the contract and even the type font in which it has to be set. Often, the rescission clause must be not only in the contract but also on a separate piece of paper. “We make a big deal about giving [clients] that second piece of paper,” Moeslein says. “We make sure they clearly understand that it's not buried in the contract. We use that as a sales benefit.”
Give beginning and completion dates. But be conservative. “A lot of guys will say what the homeowner wants to hear,” Ransone says. Include language that says you're not responsible for events beyond your control, such as the weather.
Have owner authorization. Get it in writing that the customer owns the home or is authorized to act on behalf of the owner. If you sign a contract with someone who doesn't own the home, he has no obligation to pay you, and neither does the owner.
Lay out a payment schedule. A clear schedule lets homeowners know how much to pay and when, and should be based on work completed. “I don't believe in billing in advance for work not done,” Ransone says. “It creates the impression that the contractor is a crook.” Indeed, in California it's illegal to bill in advance.
Berenson, however, counsels that “the problem with not billing in advance (i.e., seeking a deposit) is that you put yourself in extreme danger of developing cash flow difficulties at some later stage.” At least a dozen states, he points out, restrict the amount of money that can be collected before work is actually performed. In California, for instance, down payment cannot be more than $1,000 or 10% of the cost of the job, whichever is less. In Maryland, contractors can request as much as a third down. In Massachusetts, down payments or deposits are restricted to one third of the contract price or the actual cost of any special order or custom made materials, whichever is greater. “The larger the down payment,” he says, the more committed the customer is to a job. You can also get burned badly if a customer cancels a job at some point, and you have all these fees and expenses with nothing to offset them.”
A tip: If you make the amount of the final payment less than the maximum allowable amount in small claims court, you may increase your chances of getting that payment. People don't tend to fight over a small amount of money, Ransone notes, and you can always go to small claims court without incurring the cost of a lawyer.
Define the warranty on product and installation. People must know that if they damage a product, the contractor is not responsible. You can even say what a repair charge would be. On the flip side of that issue, Swing Line uses its warranty coverage in the contract as a sales tool. Salespeople show that clause to homeowners, pointing out that, contractually, there will be no service charge for warranty work as long as they own their home.
Include a concealed-condition clause. Contractors don't have X-ray vision, Ransone points out. They make their bids based on what they can see. If additional work is needed because of dry rot, for example, you need to state that there will be an additional cost. Without such a clause, Ransone says, when the owners find out they need $1,800 of unforeseen work in order for windows to be installed, they think it's outrageous.
List your right to terminate the contract and stop work due to nonpayment. Swing Line defines liquidation damages if the customer defaults, so homeowners know the ramifications if they don't pay. Amazing Siding commits to binding arbitration with the Better Business Bureau.
Discuss the buyer's responsibilities. These may include providing access to the property, water, and electrical outlets. If you're doing any inside work and need to move plumbing or electrical outlets, provide details. Who will be responsible for permitting and zoning variances? Normally, by law, the contractor is responsible, but it's a good idea to put the information in the contract. “The difficulties crop up when these are not addressed in the agreement,” Berenson says.
Give a punch-out list. Every contractor has run into the never-ending job, where odds and ends keep coming up. You can minimize that problem by including language in the contract that explains how you're going to handle complaints about the job and its completion, or lack thereof. The contract should say that you will be paid the balance upon substantial completion — defining substantial completion as, say, passing inspections — while allowing the homeowner to hold back the cost of, say, one window. That way, you don't have payment for an entire job held up for a minor problem.
Include any required additional legal notices. Check with your state contractors license board or a lawyer familiar with construction law. Ignoring such requirements can result in disciplinary action or fines imposed by the board.
