Will Your Contracts Be Used Against You? Gosh, I Hope Not!
September 24, 2008
Despite the vast history of litigation aimed at the restoration industry, many restorers continue to use inadequate contracts. In fact, some are not contracts at all, such as archaic “Work Authorizations” which do no more than grant permission to perform work while obligating the customer to absolutely nothing. Solving these problems is not as difficult as it may seem.
A contract is simply an agreement between two or more parties that creates enforceable obligations. Look at your contracts and see if they create any meaningful obligations for the customer.
Check to see if any state where you do business requires a certain title or heading on a contract for the type of work you do. For example, in California, residential repair contracts must have a heading that says “Home Improvement Contract.” If your state has no such requirement, use the title “Service Contract” or “Restoration Contract” or something along those lines. Whatever you do, just don’t call it a “Work Authorization”!
Neither restoration nor remediation should ever be performed until the customer has signed a written contract custom-tailored to the laws of the state in which the work is being performed. Ideally, it would be customized to the project as well. It must be customized to the project where there are peculiar circumstances, limitations or complexities that may impact the health or safety of the occupants, the restorer’s ability to achieve the goal of the project, or the final price.
The best contract (for all parties) is the lump sum or fixed-price contract. It prevents the customer from using the age-old excuse, “Your honor, I received no estimate. I had no idea it was going to cost this much and never would have hired this guy if I had known the true price!” Fixed-price contracts eliminate many surprises, and on larger projects will allow the parties to plan for a reasonable payment schedule. It will also help to prevent major losses incurred in performing projects for customers who never intend to pay.
I know what many of you are thinking: “I can’t give an estimate for emergency service work.” Many clients have said this to me, but after some nudging, they try it and thank me later. The cost of emergency service work may be difficult to estimate before work begins, but many judges expect restorers to do it anyway! In their defense, an experienced restorer should know roughly how many days it will take to perform a typical project. This rough estimation should be used to prepare a fixed-price contract that allows for change orders after further discovery is performed. By the second or third day, the restorer should have a much more clear idea as to how much more work is necessary to finish the project, and then propose a change order to correct the original price, if necessary. This is a prime opportunity to test the relationship. If the customer refuses to sign the change order, cut your losses by pulling out. Stabilize the conditions, leave any containment in place, and send a CYA letter to the owner with a notice of withdrawal.
Despite the name, the original “fixed” price need not be permanent. It is a basis of understanding to begin the project. The contract should state that the price is an estimate offered in good faith and is based on presently available information gathered during an initial visual observation. It should state that water damage is a progressive condition and that the price is subject to reasonable change as further information is gathered.
For non-emergency projects, the restorer has the luxury of time to thoroughly investigate the extent of damage and prepare a more accurate fixed-price contract. Of course, despite reasonable care, unforeseen damage may increase the price of the work. Before the extra work is performed to address that damage, a change order should be executed.
Change orders are one of the best legal tools available to a contractor, but are woefully underused by most. If you don’t have change orders in at least one-third of your files, you are probably not sufficiently documenting your projects. A change order should be executed every time there is any material change in the scope of work, completion date, price, payment terms or any other term of the contract.
A common collections problem is when the contract fails to properly identify the party responsible for payment. This is done by careful identification of the “customer” in the written contract. Your contract is with the “customer” and no one else. The “customer” is the individual or entity ultimately responsible for payment if insurance does not pay. Ideally, the customer will be the owner of the building. Residential tenants should sign third-party work authorizations, but not service contracts.
The customer, or the customer’s authorized agent, must sign a contract that acknowledges that: (1) he/she/it is responsible for payment irrespective of insurance, and (2) that the restorer is not hired by the carrier. This is especially important for work done under vendor programs where the customer does not locate or select the contractor, but merely notifies the carrier of the loss and a restorer magically appears.
Consider the perception of the customer in that scenario. Understandably, it leaves many thinking the carrier hired the contractor and therefore has the obligation to pay the contractor. If coverage problems emerge, the restorer is left holding the proverbial bag when the customer denies hiring the restorer and only signed a “Work Authorization” that merely authorizes work and assigns policy benefits to the restorer. In addition to the written terms, the restorer must orally explain in simple, direct terms that the customer is responsible for payment if the carrier does not pay, and that the customer will be responsible for legal expense if the payment is untimely.
Determining whether an individual is an agent authorized to sign on behalf of the customer requires care and attention. Tenants typically are not authorized agents of their landlords. Property managers are authorized agents. An agent is one with actual authority to legally bind another to a contract. Restorers must determine the identity of the party responsible for payment during the initial call, and then determine how to find that person or that person’s authorized agent.
Some states, such as California, require contractors to give customers fully executed copies of contracts (with every blank filled in) before any work may begin. This rule applies to California residential contracts, but should be implemented by contractors in every state for every project, residential or otherwise.
Have your contracts reviewed by a competent construction lawyer at least once per year. Consider including limits of liability; limits on warranties; disclosures regarding environmental conditions; the customer’s obligation to provide free access, and perhaps a limited power of attorney to allow you to endorse your customer’s signature on insurance drafts.