Many NECA members, such as my friend Timmy on Maryland’s Eastern Shore who inspired this article, have an annual volume of $2 million or less. The problems they face are, in many ways, identical to those of large, industrial electrical contractors: Accounting for changes, keeping up with the paperwork, and getting final payment.
Whether it is custom new-home construction and renovation or commercial maintenance and new buildings, the contractor relies heavily on the relationship with the owner. Typically, the owners are inexperienced in construction techniques, sequencing and costing. Problems emerge over two central issues: Time of completion and the final cost, which always exceeds the estimate.
The value of something signed
Too many contractors still rely on verbal agreements and handshakes. For example, the manager of a grocery chain store calls you on a Sunday to beg for emergency service. You wake up your crews and take care of the problem, then a month or so later send an invoice. Of course, now that the emergency is over, your bill is considered excessive.
How can you control this kind of circumstance? Have in hand a simple time and material (T&M) contract form to be signed when you first show up. Use what is known in negotiations as a “nonnegotiable premise,” such as: “My company policy requires a signed authorization before doing any work.” The form, pre-printed, should contain hourly rates for your employees, from superintendent to apprentice, with rates also for standard equipment, from cherry pickers to pipe benders.
The standard-form contract
All of you should have a form contract for use when you contract directly with an owner. The following are some, but not all, of the provisions, which should be included.
1. Hourly rates for employees
2. Hourly rates for design/engineering
3. Daily rates for equipment
4. Terms and Conditions
a. time for payment after invoice
b. right to suspend work for nonpayment
c. a well-drafted changes clause
d. nonliability for incidental/consequential damages
e. a force majeure clause
f. limitation of warranty/limitation of liability
g. an acceleration clause
The basic questions you need to ask in preparing your contract are:
• Where are problems likely to arise?
• Does my contract form cover those problems?
• Can I keep up with the documentation?
The documentation problem
Here’s the case: A contractor, with a signed, cost-plus contract, is building a small, commercial facility. During construction, the owner asks for, and gets, multiple revisions to the original design. The conceptual estimate was $125,000, but because the agreement was cost-plus, the contractor did not document all of the oral changes made while the work was ongoing. When the last invoice topped at $175,000, the owner stopped paying. Who wins in court?
This is a common scenario for smaller contractors, who often work on a cost-plus basis. If you think the owner should be held responsible because it was his design and his changes, you could be in real trouble.
The judge ruled that a cost-plus contract places a “fiduciary” responsibility on the contractor to inform the owner of any substantial growth in contract value. In that case, the owner did not have to pay the difference caused by his changes because the contractor did not justify the substantial increase in his estimate.
Of course, the legal system was attempting to protect the owner from an avaricious contractor. Because the contractor had no records to document all of the changes, the judge accepted the owner’s expert report concerning the value of the completed structure.
What should you do? You do not want to add distress to your relationship with a good client by pelting him with change orders. But you, as the responsible party for your company, need to know where and why your money is being spent.
When the client gives an oral directive for changed or added work or for an acceleration, make certain that your foreman notes the change in the report. Then, send a copy of the reports to the client on a regular basis. The client will actually appreciate the information, and there will be no surprises at final invoicing.
Protecting yourself as a subcontractor
For home renovation contracts, final payment tends to be the problem. For commercial work, progress payment estimates are the battleground.
Most states have laws to protect you. For example, Virginia has a prompt payment act, Michigan has a “trust fund” statute, and Pennsylvania provides for interest and attorney’s fees under certain circumstances. But you do not want to go to court over a $10,000 dispute.
You should include a proposal form in your contract. The terms of that proposal should include a requirement that you receive interest, costs, and attorney’s fees in the event of nonpayment. Equally important is a “changes” clause, which permits you to invoice on your estimate or on a T&M basis. There are standardized T&M contract terms, which you may want to make a part of your proposal.
To the extent you can, code all extra costs. Coding creates additional unwanted paperwork to your foreman. But even estimates, made daily, of overtime, standby costs, etc., with brief notes for the reasons, can be highly effective in convincing the owner to pay.
Your company may be small, and you may think you don’t have the time or know-how to create the forms and follow the steps outlined in this article. But I know that’s not true. If you need help, there are fine construction attorneys who can advise you. And the time you and your employees spend to keep the reports, track changes in the work, and fill out proposal forms will save you time in the long run.
Act like the elephants, even if your universe is a lot smaller and the terrain is a lot closer.