I get this question a lot from clients: I signed a contract, and now I want out; what can I do? The general rule of contracts is that once they are signed, the deal is done, and you can’t just say you don’t want to be bound by the contract anymore. What a contract is at the very basic level is a promise to do something. For the contractor, the promise is to perform some type of work, and the person who hires you promises to pay you for that work. A written contract prohibits someone from breaking their promise without consequences.
Now as with everything in the law there are some exceptions and since this blog article is specifically about construction contracts, I will address residential and commercial construction contracts separately.
Residential Construction Contracts
As a residential contractor, when you and the homeowner sign on the dotted line, the deal is done; you are on the hook to perform the work, and the homeowner is on the hook to pay you for that work. If either of you fails to perform your part of the contract, that is a breach of the contract, and the other party can sue for damages.
What Is The Escape Clause for Residential Contractors?
The good thing about being a residential contractor is that you get to draft the contract so you can put in some provisions that will allow you to cancel the contract and not be in breach. Enter what I like to call the “Escape Clause.” This clause will allow you to cancel the contract legally at any time. It usually looks something like this “Contractor can cancel this contract at any time for any reason or no reason at all with 24 hours’ notice.”
This clause is particularly helpful when you have gotten to the point in your relationship with the homeowner that you can no longer work together, they have become abusive, or unhappy to the point that no matter what you do you cannot seem to make them happy.
The escape clause will also include that you are to be paid for all work completed and if you have any unearned funds they will be returned to the homeowner.
When the Homeowner Wants to Cancel
What if the homeowner wants to cancel the contract? Like I said above, once you and the homeowner sign on the dotted line you are both bound to the contract. If the homeowner wants to cancel the contract, they are on the hook for damages to you the contractor. The damages you, the contractor, would be entitled to is the profit you would have made on the job.
To prove the profit, you would have made on the job, you will have to go through a lengthy court process. To avoid this, I recommend that you give the homeowner the right to cancel and charge a cancelation fee. A quick note, most states allow a homeowner to cancel within the first 3 days of signing the contract without penalty. You, the contractor, will have to honor this 3-day right to cancel, but if the homeowner wants to cancel after the 3-day period you can charge a cancellation fee.
The amount of the cancellation fee should be the profit you would have made on the project. This way, if the homeowner cancels, you can make a demand for the cancellation fee, and the battle to get paid becomes shorter and easier. This also lets the homeowner know that they cannot sign a contract and just cancel if they find someone cheaper.
Commercial Construction Contracts
Commercial subcontractors, however, are not so fortunate; you are normally given a contract to sign and have little control over what is in it. The general rule with commercial subcontracts is that once you sign on the dotted line there is no way out, you must perform the work for the price you agree to, if you do not, you have breached the contract and will be responsible for damages to the general contractor.
What type of damages is the general contractor entitled to? The increase in price of your scope of work. Meaning if you fail to do the work required by the subcontract and the general contractor hires someone else to preform your scope of work, what the general contractor pays the replacement contractor above the price you agreed to do the work for you owe to the general contractor the difference.
What Are The Termination Rights of the General Contractor?
The general contractor on the other hand normally can cancel the subcontract at any time for any reason or no reason at all. That is because most commercial subcontracts give the general contractor the right to terminate the subcontract at their convenience without owing any damages to the subcontractor. As a commercial subcontractor you can try to negotiate to make the termination for convenience clause mutual, that way the subcontractor can cancel the subcontract at any time.
It’s a scary world out there when it comes to construction contracts. If you are a residential contractor that needs a contract, check out this page on our website ______, we draft contracts on a flat fee with a 5-business day turnaround. If you are a commercial subcontractor and need help understanding or negotiating your contract, check out this page on our website _____ we can also help you on a flat fee with a 5-business day turnaround.
