Recently, I got an important reminder of a perennial truth in installed sales: Whether you are dealing with a national builder or Joe and Mary Sixpack, contracts are all-important—and often overlooked.
That reminder came via a commentary by Alexander Barthet, a board-certified construction lawyer and principal of The Barthet Firm in Miami regarding three key clauses in contracts that can hobble you. The "No Attorney’s Fees Provision" and the "No Waiver of Consquential Damages Clause" are bad enough, but I think the one that’s most telling is the "Missing Merger Clause." It’s the part of the contract which, as Barthet says “makes verbal agreements or unsigned written agreements unenforceable; basically, it says that unwritten and unsigned agreements don’t exist.”
From my days with Stock Building Supply, I can relate dozens of horror stories directly influenced by a lack of contracts or when a contract is signed without a thorough review. For instance, one of our locations was involved in the construction of a large commercial building where there were change orders issued along the way. In this case, those change orders added up to $1 million. (Yes, this was a pretty big project).
Our installed crew executed everything just as they should and had change orders issued and signed prior to progressing on the job. The problem arose when the back office noticed the General Contractor had paid all of his invoices just as agreed, but had omitted paying any of the fees associated with the change orders. Why? It seems there was a clause (overlooked by the then-manager) which specifically stated that changes must be signed by the General Contractor or his designee. The job site superintendent wasn’t designated by the GC to approve changes. Guess who had signed all of our change orders?
The new installed manager in that location was a very aggressive and professional young man who worked with the GC and eventually succeeded in getting most, but not all, of the changes approved and paid. But it was a very expensive lesson for that market.
I’ve also seen situations in which a verbal agreement was made with a homeowner for a $20,000 remodeling job in which the dealer got a 50% down payment and was to be paid the rest upon conclusion of the work. But the homeowner claimed the installer damaged some of her furniture, and until it was repaired to her satisfaction, she wasn’t paying the balance due. With no written contract, we were up a creek.
Using and managing contracts is your first line of defense in this industry. Gone are the days when we could simply agree to perform work for a customer. Whether it’s a simple remodeling job or a giant multi-family project, contract execution, and understanding those contracts, is key to being successful and profitable.
If you or your team is not comfortable with contract terminology—especially when it concerns commercial contracts or working with one of the national builders—then hire someone who is. My recommendation is to find a good construction attorney and retain them for contract review. Set a monetary limit; for instance, any contract in excess of X dollars needs executive management/legal review. It’s not that I don’t trust an OSR or installed manager, but sometimes the anticipated prize can hide the reality of the project.
Also, read closely for exclusions to contracts. Be ready to red-line items you don’t agree with and negotiate their removal. Don’t agree to anything that will put you and your company at risk. Remember that contracts are always written to protect the one issuing them, not those who are agreeing to perform work as written.
Proposals, sub-contractor agreements, scope of work documents, change orders, completion certificates … they’re all very simple to manage if you pay attention and watch the details. Miss something or omit something and you can spend more than you’ll make.