Episode 7: What Makes a Contract? (Solo Episode)
INTRO: Welcome to the Quit Getting Screwed Podcast. Here, we’ll talk about everything related to contractors, construction, and information to help you run better businesses.
Karalynn: Hey guys, this is Karalynn Cromeens, and welcome to the Quit Getting Screwed podcast. Today, I just wanted to take a minute and talk about the importance of having a contract. And even if you’re signing somebody else’s contract, the importance of understanding it, having it reviewed, and knowing what it says is unmatched. So, I always get this question: What amount justifies a contract? Like what dollar amount of work would justify the contractor? There is this mindset that the smaller the dollar amount, the less likely you need something in writing. But I think the opposite is true. The smaller the dollar amount, the clearer you need to be about what work is being done and the price, right? Even if it’s just a small purchase order or your bid form and somebody signs off on it, the smaller the project, I think the more important something in writing is. Here’s why: Because no matter what, we are all different people, we all have different perceptions, and our perceptions are based on the things that happen to us in our life.
So, as well as you think you can try to explain something to someone verbally, they’re always going to have a different perception of what is expected. The best way to clear that up is by having something in writing. So, I find that, on the smaller projects, it is even more important to have something in writing and have something that clearly says what is expected. I had a client come in not that long ago, and he had a guy that wanted to redo his roof for a cheap price. And my client said, “I’ll provide the labor, and I can get this great deal on these shingles, but they’re all going to be different colors. They’re going to be good quality, but they’re not going to match.” And the guy’s like, “Oh, that’s fine. I can get a roofer for 2000 bucks? I’ll do that.”
And so, my client gets the mismatched shingles, takes the time, goes to put a new roof on. And it is like six different colors and is quite shocking when you see it, right? Like, I don’t think the owner understood what my client meant by mismatched shingles. And so, of course, now it’s all done, and my client did it for cheap. He didn’t make any money. He’s just trying to help the guy out. My client gets sued because this roof of mismatch singles does not look like a quality product or something anybody would do on purpose. My client had to redo the roof for free because he didn’t have anything in writing saying, “Hey, this was our agreement. You agreed to have these mismatched shingles.” So, the smaller the project, especially if you’re doing something outside of what you normally do, definitely have it in writing and signed off on.
It could even be a PO written from Home Depot, like a purchase order form. But guys, it’s not that expensive to get a construction contract written for your specific business. I mean, at The Cromeens Law Firm, our flat rates for contracts start at $1,500. We will ask you questions about your work, decide what is important to you, and fill it in specifically for your company. Then you have all the legalese. What I try to do with our contracts is make them in Plain English. So, you will have everything you need legally to be required, and you’re also going to be able to understand what is in your contract, and so will the person signing it. So, if they ask you, “What does this mean?” You’ll be able to tell them. I think it’s so important that we be clear on the expectations.
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Brene Brown has a saying: Clear is kind. Right? And that goes for all transactions and all situations. I’m being clear with what’s expected the work that will be done, and how much I will be paid. Including what you’re going to be paid is the best thing you can do. Having something your client signs that they don’t understand or that you don’t understand isn’t going to turn out well for any party at the end of the day. So really, take the time. If you’re going to be in the construction business and need a contract, you’re not signing other people’s contracts. So, take the time and spend the little bit of money that it takes to get a good set of contracts. There’s nothing better.
I can go through case study after case study of people that didn’t have good contracts or weren’t clear on their scope of work, who wound up getting sued time and time again. And they’re all like, “Well, I told him,” and let me tell you something. If you have to say, “I told them,” As part of the story, that is not a good story to have. You want to be able to show them where you told them in writing. It needs to be in your contract because if their dispute comes, guess what? You’ll say, “I told them,” and they’re going to say, “No, you didn’t,” and then it becomes a he-said-she-said problem. So, spend the time, get everything in writing. Get a good set of contracts.
Now, the second thing that happens in the construction industry is that you have to sign somebody else’s contract. As a subcontractor or somebody working for a general, I know there is not a lot of negotiating power. I get it. But even if you cannot negotiate, understanding what you signed is so important. So here at The Cromeens Law Firm, we do it for a flat fee and affordable price. The starting rate for a contract review is from one to 15 pages, and it’s a flat $550. And for that price, what do you get? You’re going to send the contract over to us. We’re going to go through, and we’re going to highlight the things that you need to do that you might not know, and here are the things to watch out for or try to negotiate if you can. We’re going to give that to you, we’ll walk you through it, and we’ll answer all your questions and explain it. That way, you at least know what you’re signing up for because you need to know where your company has risk and what you might be exposed to with signing a contract.
Especially if you’re signing somebody else’s contract, it’s usually for a larger dollar amount, and the risk is high. The risk to your company is high because at the end of the day if you breach that contract or you can’t perform under the terms of the contract, it’s not like you can just walk away. You don’t get just to leave and not do the work because here’s what happens. If you breach a contract, you walk away. You don’t finish your work for the price you said, and now whoever hired you will hire a replacement contractor, right? If it costs them more than what they would have paid you, even just a little bit, or a lot, they’ll come after you for the difference. So, when you sign a contract, it’s a promise. It’s a promise you’re going to do that work for that price. It’s a very serious thing, because if you don’t and whoever hired you suffers damages because you didn’t fulfill your promise, you have to pay them back those damages.
So, let’s be clear and let’s understand what we’re signing. Many subcontractors think that there’s some set of rules out there that protects them when they’re signing subcontracts, but there isn’t. Whatever you sign in a subcontract will be used against you, so make sure you understand what you’re signing. And at the end of the day, it is not enough just to do a good job, right? If you sign someone else’s subcontract doing a good job isn’t enough. You have to know what that contract says, and you have to perform all of those things under that contract. For instance, are there daily reports required? Do you have to do submittals? What is required throughout the ongoing project that you need to do? Because guess what? Failing to follow any one of those means you’re in default under the contract. And if you’re in default, they don’t have to pay you. There are a whole plethora of things, so knowing all the little details in there that you agree to sign up for is essential. For example, most contracts say you have to have a safety plan and say you have to have an employee manual. Those things can be requested on demand because you’ve signed that contract that says you have it, so what are you going to do when that happens, and you don’t have it? Here at the Cromeens Law Firm, we can help you get all of that ready for one for a flat fee and have everything set up the way you need to. That way, if something is requested from you, it’s no big deal. You know, you have it. “I’m ready to go because I read my contract. I know what I need to do. I know what’s required.”
Then there are some other provisions that you’re going to want to watch out for or try to negotiate, which I wrote the book Quit Getting Screwed to go in-depth on. All of those chapters are the Subcontractor Institute. If you want to learn more about it on your own and get the forms, there’s a whole set of classes there.
That aside, though, let’s talk about pay-when-paid clauses, right? What does that mean for your business? If there’s a pay-when-paid clause in there, which is from whoever hired you, the general contractor doesn’t have an obligation to pay you until they get paid from the owner. You have absolutely no control over that. The owner could go bankrupt. There are tons of reasons why the owner wouldn’t pay the general. So, the question is, can you afford to float the entire contract amount while the project’s going on? Can you pay it forward and put out your guys every day to go do that job? Can you afford to pay for the materials that are going to be required without getting paid? Because even with the pay when paid clause, if you haven’t been paid, you don’t have the right to stop working, so while you still need to finish your contract, you may not get paid at all. That’s the risk you’re facing when you sign a subcontractor any contract with a pay-when-paid clause. So, try to negotiate it. If you can’t negotiate it, you know that this is a financial risk so ask yourself, “Can I take it?” You need to go in informed because the reverse side of that is that you don’t go informed, you don’t realize it, and for some reason, the owner is delayed in paying the general contractor for six months. It’s not your fault, but you won’t get paid for six months, and you still have to keep working.
Can you float that amount of time? Can you float that, pay for your guys, and pay for your material? So, knowing that’s in the contract and what the terms of it are is huge. And you may ask, is there a way you can get around it? There are some ways. By state law, you can send a letter that says you don’t want it to apply to you, and it won’t. But knowing that before you sign the contract is huge. You need to know the risk. Does your contract require a bond? How do you get one of those? What is a bond? One of the biggest things you need to understand is that a bond is not insurance. A bond is basically a personal guarantee of your performance under the contract. And if you don’t perform one of the requisites of the contract, whoever you have a contract with will file on your bond.
If the bond company pays out, you’ll have to pay them back, and if you signed an agreement with the bond company, it’s not only your company assets; it’s your personal assets that are up for grabs to satisfy that amount. So, if your contract requires a bond, knowing what that is before you signed is a must, and we can explain that all to you. You know, even if you don’t have a bond, some subcontracts that I’ve seen have a personal guarantee. Don’t ever sign that unless you are getting a bond. Those are normally just for federal projects, but my point stands. There’s no reason to personally guarantee the work you do under the subcontract, but they’ll often sneak the guarantee into the bottom, so watch out. There will be like three signature lines. One for the contractor, one for you, the subcontractor, and one for the guarantor that has your name on it. Don’t sign that. Cross it off and send it back. There’s this need to have a negotiation that it’s not industry standard. It shouldn’t be required. Don’t be wrong. If you sign it, obviously they’ll take it from you, and they’ll use it against you.
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So, I’m just brushing the surface of what is in these contracts that can be so dangerous. As I said, I understand that you may not have a lot of negotiating power. You have some, but even if you don’t have any, just knowing what you’ve agreed to is essential. You know, there’s truly and honestly no reason that these contracts have to be in a format where the everyday person couldn’t understand them, and that’s what I’m on a mission to change. I want to make the contract in plain English because being clear is kind. That’s what you want. You want to be able to understand what you’re signing in a contract.
It’s unreasonable to have to sign something you don’t understand just to work, especially if that something you don’t understand could eventually put you out of business if you don’t follow all the provisions. So, I say all that to say, number one, no matter how small the project, you need to have something in writing. If you’re going to be in this business, in the construction industry, and you’re going to have to draft your own contracts, it is worth the money to have a good set of contracts. As I said, we have starting rates at $1,500. You can budget that in, and we’re going to get to know your business and draft a contract specifically for you. If you’re not drafting your own contracts, you’re signing somebody else’s. If you don’t understand what it says, we can help you do that too, for a flat fee, but it is essential regardless. That way, you understand what you’re signing, understand the risks you’re taking, and understand that it’s not always negotiable, but it will help you substantially learn the risks in those things.
So, at the end of the day, guys, we’re here to help at the Cromeens Law Firm. I have classes that go further in-depth in all these areas and things to watch out for in the subcontract at subcontractorinstitute.com, and it aligns with why the Quit Getting Screwed podcast has been developed to help people in the construction industry grow better businesses. And I think it’s important that I put in there that I know what that means, right? I know what you need to run a better business. Because growing up, I worked for my uncles that ran subcontracting businesses. I worked for my uncle that ran an irrigation company. I saw the struggles that he had with signing contracts he didn’t understand and was just trying to get paid on time. My grandfather’s company was an excavation company that ended up going out of business because he didn’t understand his lien rights.
You know, the mom-and-pop businesses? These are the businesses that I’m trying to protect. What I like to call the “Get Shit Done Tribe.” That’s what we are, and you deserve somebody to help you run a better business from the legal side. You should be able to understand what’s going on and make informed decisions about your company’s growth from the legal side, as far as your collections and your contracts are concerned. There’s nothing that I do, or that any attorney does, where they shouldn’t explain to you what’s going on, so you’re fully informed. Additionally, when I was in law school, I started a material supply company, and I’ve never worked so hard in my life. I’d go into the office at four in the morning and work all day out in the warehouse, doing whatever it takes to get it done until six or seven in the evening.
I know how hard that is. I understand the time away from your family, that time away from everything else, that is required just to focus on this and to put food on the table. That deserves to be protected. When you’re working that hard, you need a partner. You need a partner to say, “Hey, should I sign this release? And I need to know now because I really need this check so I can make payroll at the end of the week.” Or, you know, “I had a worker hurt on the job. What do I need to do?” “I needed a good employee manual.” I learned all of the things that we learned today, the hard way, about running a business. We can set it up on the front end if you come to me, so you don’t have to learn those lessons that way.
You really need to know the difference, and I’ll have a podcast on this later, between an employee and a contractor. It doesn’t really matter what you call them. It matters what the IRS calls them. If you do it wrong, you can get sued in federal court in a class action brought against you. And I’m not talking about a big company. I’m talking about the mom-and-pop shop that has three guys that are doing electrical work. It can happen to you, a certified class. They get to go look at all of your past three years of records and bring in all those employees that ever worked for you or send them to notice that they potentially have an overtime client because you called them subcontractors, but the law calls them employees.
So, these are all things you need to know if you’re going to run your own business, and I’m here to help. That’s what we’re here to do. We want to help protect you from those things, keep you out of the courtroom, federal court, or any kind of court, and help you make an informed decision on how to better run your company. As I said, that starts with having a set of contracts that you understand, and if you’re signing somebody else’s contract, understanding what it means.
So, feel free to look us up at thecromeenslawfirm.com or The Subcontractor Institute. Thank you guys for the time, and I look forward to seeing you on the next podcast.
OUTRO: Thanks for listening to this episode of Quit Getting Screwed. I hope you found it helpful! If you like what you hear, please like us and follow our podcast. If you want further information, you can find us at subcontractorinstitute.com. We’re also on Facebook, LinkedIn, and Instagram, and the book is available on Amazon. Tune in two weeks from now for a new episode. Thank you.This has been a transcript from Karalynn Cromeens’ contractor education podcast, Quit Getting Screwed, in association with The Subcontractor institute. To hire Karalynn to help you and your business, please visit our construction law firm’s website.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, consult an attorney.