There is a natural path for company growth in residential construction that practically paves itself. Small residential companies are perfectly positioned to grow by working on larger residential projects. Large residential companies can always take the next step into commercial construction if they want to scale up. Of course, scaling a construction business does not look the same for every residential contractor. However, what does look the same is the proficiency in legal best practices necessary to successfully scale your business and move on to scaling your construction business and doing work on bigger projects.
Crafting the Best Possible Contract
Bigger projects mean bigger money. Bigger money means bigger risk. So, what can you do to protect yourself? The first thing we always emphasize is to have an “in plain English” construction contract created so both you and your client can clearly understand the expectations of the project. Check out our previous blog articles to learn what the purpose of the contract is and some essential terms that should be in your contract. Another question we get from contractors around the country is, “If I use all subcontractors, do I need a subcontract?” Our answer: When was the last time you asked an attorney if you needed a contract and they said no? In all seriousness, a contract with your subcontractor will only prove to protect you. There are no cons!
Using a Master Subcontract when Scaling Your Construction Business
If you use subcontractors, we recommend utilizing a “master subcontract.” A master subcontract has two components. Let’s break down the “master” part first. This is part of the contract that the subcontractor only signs once, which acts as the terms and conditions that apply to every project they work on for you from that point on. Then, you issue an additional work order for every project that explains the work and payment terms for each specific commitment.
An essential term you can include in the master subcontract agreement that will CYA when sh*t hits the fan is a Payment Condition. Under a master subcontract, the subcontractor is not entitled to payment until the owner approves the work that has been completed. Usually, once you sign a contract with the owner, you agree to do good work in the timeframe established. That promise is not contingent upon your subcontractor doing a good job, meaning that if your subcontractor does bad work and skips town, you are on the hook to fix everything. In addition, without the above clause in your subcontract, the subcontractor could claim that they did the work and are entitled to be paid, even though you had to redo all their work. Conditioning payment to your subcontractor on acceptance of the work by the owner will protect your company from having to pay for substandard work.
Negotiate better subcontracts
The Cromeens Law Firm is here to protect you and your business. We can help you negotiate your subcontracts to protect you against losing your money and your assets. Our hope is that you never sign a subcontract that puts you out of business. Work with us to equip yourself with the ability to properly evaluate your risks and negotiate your next subcontract with greater confidence and ease.
Stick to the Schedule
Another issue that is quite common when dealing with subcontractors is making sure they are on the same schedule that you promised the owner. This means that if you promised a homeowner that their project would be finished in two weeks, but your sub keeps ghosting you, and you don’t have an agreement with the sub that requires the same completion date, they can finish their work whenever they want to, and they will still be entitled to be paid. Meanwhile, you now have a pissed-off homeowner that is not paying you because you did not finish on time.
Another huge CYA reason to have a written subcontract with your subcontractors as you are scaling a construction business is your liability if someone is injured. If someone is an employee, you are responsible if they get injured. If they are a subcontractor, they are responsible for themselves. If you don’t have a written subcontract, what defense will you have when an injured subcontractor sues you for injuries claiming that they were an employer? we know what you are thinking; my guys would never do something like that; they are good guys! We agree that they are good guys, but things change very quickly when attorneys and money get involved. As attorneys, we always encourage contracts but having a master subcontract agreement with your subcontractors is especially good for your business and will protect your operation a great deal in the long run.
Tackling bigger projects and scaling a construction business can be a massive undertaking. From making sure you are paid what you are owed, to protecting your projects on the front end, having a team to support your legal needs is a must for any business owner scaling their company. When looking at scaling your construction company and taking on projects with a larger dollar sign attached, you need to make sure your plans for protecting your company are scaling up, too! Our team here at The Cromeens Law Firm is here to help. We offer master subcontracts for a flat fee of $2,500, with a 5-business day turnaround, and are equipped to support the success of your growing business. We are also hosting a free webinar: Protecting Your Construction Business as it Grows on Thursday, July 28 at 12 pm CST where you can learn everything you need to know about how to protect yourself while scaling a construction business!
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, please consult an attorney.