The slumping economy has hit contractors hard, especially small to mid size firms that concentrate on residential construction. There are a few simple things that you, the contractor, can do to protect your business and minimize the negative impact of customers that do not pay.
1. Put All Contracts in Writing
Never enter into an oral agreement because the exact terms almost always change through the course of the project. In the instance of residential construction, you are actually required to have your contract in writing in almost every jurisdiction in NY. But even in non-residential construction it is best to put your contract in writing so that you and the client know exactly what is expected.
2. Be Very Precise with Your Scope of Work
In a bad economy there are, unfortunately, some owners that will try to take advantage of the situation because they know that contractors are hurting. One way that owners can try to "squeeze" the contractor is be increasing the amount of work that is going to be done and claiming that it should have been included in the original contract price. Your scope of work should be as detailed as possible and list the type of materials that will be used. If the owner wants an upgrade on a certain item you can go back to the contract and point out that the upgrade is going to increase the costs.
3. Put an Attorneys' Fees Provision In the Contract
In New York, in almost every situation, you cannot recover your attorneys fees in bringing a lawsuit to collect money that is owed to you unless your contract has a provision allowing you to do so. Especially in a bad economy the attorneys' fees can be the breaking point in determining whether to move forward and collect on a case or write it off as bad debt. Attorneys fees provisions are particularly important in smaller disputes because it does not make sense to file a lawsuit if it will cost you more to file than you will eventually recover.
4. Consider Adding an Arbitration Provision to the Contract
There are differing views on whether arbitration is cheaper than litigation. However, the American Arbitration Association recently restructured their construction arbitration fees so that parties do not have to pay so much up front to file for arbitration. The high initial fee to commence arbitration was one of the big down sides to arbitration but with the new fee schedule there is less of an up front risk to file for the arbitration. Also, in general, the attorneys fees that you incur during the arbitration process should be lower than those for litigation. This is mostly because there is less "discovery" done in an arbitration than in litigation and there are court conferences that can quickly cause a legal bill to expand exponentially.
5. Insert a Contractual Provision Regarding Late Payments
If the owner is late in paying you there should be some protections built into the contract. Some common protection mechanism's are: 1) a provision allowing you to charge interest; 2) a provision allowing you to suspend work without penalty if payments are more than 30 days late; and 3) a provision allowing you to charge the owner for mobilization and de-mobilization caused by delayed payments.
6. Give Consequential Damages Some Consideration
Remember that the tough economy is hurting you too so there may be some situations where you cannot complete a project on time because of cash flow problems. If you are not able to complete the project or not able to complete it on time you may be liable to the owner for any damages that flow from your breach or delay. For that reason, it may be in your best interest to insert a provision into the contract that states all parties are waiving their right to pursue any consequential damages (one of the most commonly sought types of consequential damages in construction projects are lost rental income).
7. Visit Your Attorney
Litigation is extremely expensive. It is much more cost effective for you to visit your attorney and have him or her review your contract to make sure that it provides you with as much protection as possible before the project starts than to visit that attorney after a problem develops and you are left scrambling to recover your fees. If you use a standard form contract it is worth it for you to have your attorney spend a few hours revising it to make sure it provides you with maximum protection. For contracts on larger jobs it is always a good idea to have your attorney review that specific contract before signing.
Vincent T. Pallaci is a New York construction lawyer. For more information on how to draft a contract that protects you visit us at http://www.nyconstructionlaw.com/ or contact me at firstname.lastname@example.org