Tuesday, April 22, 2008

Contractor Show on YouTube

I recently made my YouTube debut when I was interviewed by The Contractor Show in Florida. I gave advice to contractors about how to prevent disputes during renovation projects.

Here's the link: http://www.youtube.com/watch?v=KsHpXmFkS1U

Monday, April 07, 2008

Yes, You Really Have to Read the Construction Contract

One day I was having lunch with a colleague who is an in-house counsel and he told me that someone asked him, "Do you really read everything that's written in those contracts?" At that point, we both started to laugh because the answer is yes, we really do read every word.

It astounds me at times what people will sign without reading the contract. For example, I recently reviewed a Massachusetts contract that said that all disputes would be resolved by going to an arbitration hearing that would take place in Washington, D.C. How could these people agree to go to Washington, D.C.?

Another contract stated that the arbitrator had to be chosen by the Superior Court. How practical is that? It is better to say that an arbitrator will be mutually chosen by the parties. If the parties cannot agree, then there should be a secondary mechanism for choosing the arbitrator.

One of my favorite clauses is when people put in that the prevailing party will be reimbursed for his/her legal fees. Why give away legal fees? The party creating the contract should put in a clause allowing him to collect legal fees if he has to bring a claim against the other party. Let the other side negotiate to protect her interests.

Choice of law. I can't tell you how many times I've seen contracts where some other state's law controls, or the parties agree to go to a given court or county. Just make sure that these terms are intentional.

Interest and/or late fees. Payment requirements are also negotiable. Do not agree to pay interest or late fees unless you have to.

I could give many more examples, but by now, you've gotten the point. The homeowner must read the contract before signing it. The contractor must make sure that he has a contract that is in compliance with the law and that protects his best interests.

Finally, if the contract is for a significant amount of money, extremely complicated, or you just can't bear the thought of reading it, ask your attorney to review it. Dare I admit, I actually enjoy reading and writing contracts, and it is my job to protect your interests.

Friday, April 04, 2008

The Payment Schedule

Most construction contracts include a schedule for payments that looks something like this:

33% on signing

33% at completion of the rough inspection

33% upon substantial completion.

Although this would appear straightforward, in many cases it is not, and both parties need to put more thought into the payment schedule. From the contractor's point of view, he wants to make sure that he gets paid regularly, so he can pay for his subcontractors and materials. From the homeowner's point of view, she does not want to get so far ahead on payments that the contractor has an incentive not to finish the job.

In addition, payment becomes a way of monitoring performance and ensuring that each side lives up to his end of the bargain. The contractor has to perform before payment, and the homeowner has to show good faith and pay so the contractor will perform.

Most importantly, the payment schedule must allow for verifiable stages when payment will be made so both sides know what to expect. Sometimes payments are broken down further.

For example:

$x on signing
$x on the start date
$x once framing is completed
$x electrical
$x plumbing
$x at rough inspection
etc.

The advantage of this kind of payment schedule is that it gives both sides the incentive to keep to a schedule and perform.

The kind of payment schedule to avoid is one that is based on percentage completion (who will decide?) because this becomes an opportunity for debate on both sides about how to determine this percentage.

Finally, in Massachusetts, final payment cannont be demanded until the work is done to "the mutual satisfaction of the parties."

So, when preparing a contract for construction work, give some thoughts to the payment schedule. It may have more of an impact than you might think.