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In this shaky economy, contractors need to protect themselves. A good contract goes a long way to making sure you get paid for your work.

By Mary Helen Sprecher

In this shaky economy, contractors need to protect themselves. A good contract goes a long way to making sure you get paid for your work.

If a good tennis match starts with a good court, where does a good court start? With a good contract, says David H. Pettit, Esq. Pettit, a partner with Feil, Pettit & Williams in Charlottesville, Va., has served as legal counsel to the American Sports Builders Association since 1984.

A good contract, he adds, spells out exactly what is expected of the client and of the builder. “You want to make sure your contract is clear and concise, and sets out the terms of the agreement precisely,” he says.

The contract should define the scope of work and the terms of payment, as well as what will happen should the client — or the contractor — fail to live up to the expectations.

In an economy that has taken a downturn, says Pettit, it’s imperative for contractors to protect themselves, since owners and developers are more likely to have cash-flow problems themselves. Fortunately, there are ways to minimize exposure, and maximize the possibilities of on-time payments. In addition to that good contract, builders should be looking for the following:

• Cash payment up front: There’s no hard-and-fast rule about how much contractors should ask for. It may depend, to some extent, on whether the contractor has worked with the client previously.
• Progressive payments: Basing payments on progress made throughout the job can help payments stay on schedule. “It is preferable to have a standard plan for progress payments, that can be customized to fit the circumstances of a particular job or owner,” says Pettit. “From the contractor’s point of view, the purpose of the plan is to give the contractor an early warning if there are going to be payment problems, minimize the contractor’s exposure, and keep the owner incentivized to pay the contractor.” One contractor who agrees with this? Rob Werner of Sportsline Inc. of Villanova, Pa. “Progressive payments are common. On average, there are three to four payments for the project. We prefer a first payment of 20 percent to schedule and order materials, and the last payment of 10 percent.”
• Right to stop work if payment terms are not met: The termination clause, says Pettit, is critical. Without it, a contractor might be held responsible for walking off a job. “The contractor should always make sure the contract gives it the right to stop work promptly if payment is not made. If the contractor does stop work, it should review the contract to determine when title passes to materials on the site. Materials which still belong to the contractor should be removed.”
• Interest or late fees on overdue payments: There should be consequences to missing a payment.
• Attorney’s fees provisions: It’s simple, says Pettit: “If I have to sue in order to collect my money, you’re responsible for paying my attorney’s fees.” (The fact that a long legal fight can rack up not just those back payments and late fees but substantial attorney’s fees will give the client more incentive to pay on time).
• Lien rights: Under the laws of every state, says Pettit, there are mechanic’s lien rights. “If you work on someone else’s real property and they don’t pay you, you can file a mechanic’s lien memorandum in the local land records.” Because it was the contractor’s labor that improved the property, the client will not be able to sell, refinance or improve it without first paying the contractor. A lien is grounds for a lawsuit and can allow the contractor to have the property sold in order for that contractor to receive payment.

Document Everything

Pettit advises ongoing documentation in order to avoid billing problems. For example, if a customer keeps making additions to a project, “The change should be reflected in a written change order, which should state when the charges for the change will be billed and paid. As a general rule, the charges should be as close in time to the work as possible. If the change will require a substantial outlay for materials, it may be appropriate to bill in advance for that charge.”

In an ideal world, of course, builders and clients create a contract, the work is done, bills are paid and everyone is happy. But what happens when something goes wrong?

“The best first step is to communicate with the owner as soon as payments fall behind,” says Pettit. “Ask for an explanation, and when the payment can be expected. Often the delay is due to temporary factors and a satisfactory arrangement can be negotiated. The arrangement should be documented in a written agreement if it represents a significant deviation from the contract terms. Most payment issues can be resolved by working with the owner, but the contractor has to exercise good judgment and know when it is necessary to become more firm in its approach.”

If the contractor is working on a subcontract basis, notes Pettit, “It may be beneficial to advise the owner that the general contractor is not making payment, and the owner may require the general to pay or make arrangements to pay directly.”

Stop? or Go?

At some point, however, it all comes down to the contractor’s decision, says Pettit. “If an arrangement cannot be negotiated, then the contractor has to assess the risk presented by going forward, as compared by the risk presented by stopping work or instituting collection action.

“Threatening to stop work may put pressure on the owner to pay in order to get the job completed, but stopping work before the job is completed may make it more difficult for the owner to come up with the money to pay. If the job is in the early stages, it may be in the contractor’s best interest to cut its losses and terminate the job. If the contractor has a significant investment in the project, or if it is nearly completed, it may be in the contractor’s best interest to complete the job.”

Werner says that in more than 20 years in the industry, he has experienced few problems. If one does crop up, however, it is frustrating “because it comes with high fees that have to be dished out, timely of course, to the lawyer teams, and months and months of no payment at all happening because each side doesn’t budge off their offers for their own reasons.”

Clients can protect their interests by using liquidated damages clauses: contractual language defining the penalties, should the builder not live up to the provisions of the contract. For example, should the project not be finished when promised, the contractor could be billed a specific amount for each day (week, etc.) past due.

Contract Helpers

Pettit says these tips can help any contract or job situation:

• Know your client. The risk is certainly greater with a new client than a familiar one. It is reasonable to run a credit check or ask for references on a new client.
• Stay on top of things. The contractor who follows up on payment problems quickly and effectively will have a much greater chance of getting paid in full and sooner rather than later.
• Don’t be afraid to pass on a job. If the owner or contractor appears shaky or unethical, don’t get involved. It takes the profit from a lot of jobs to make up for the one on which you don’t get paid. Be wary of taking jobs that may be beyond your expertise. Construction problems or delays can almost guarantee payment problems.

See all articles by Mary Helen Sprecher

About the Author

Mary Helen Sprecher  is the managing editor of Sports Destinations Management Magazine, a niche business-to-business publication for planners of sports travel events, in addition to being an RSI Contributing Editor. She is the technical writer for the American Sports Builders Association and works as a newspaper reporter in Baltimore City.

From the March 2009 issue
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