Business Articles - Legal and Insurance

Improper Use of Contracts

The third major reason that contractors go out of business is the lack of or improper use of contracts.

Strange as it may sound, there are still contractors that work without contracts. This includes jobs that run into five and six digits. This is foolishness at its worst.

It has been my perception for some time, both as an expert witness and as an arbitrator that the present day attitude of the legal system is that it is up to the contractor to prove himself innocent as opposed to the other side proving you guilty. With this attitude of the legal system, you walk into any courtroom or hearing with the deck stacked against you.

An example of this attitude is the Construction Contractors Board for the State of Oregon. They are charged with licensing all contractors that work in Oregon. If you were to call them with a complaint about an owner, they will tell you (and have) that the CCB is there to protect homeowners, not contractors. On the other hand if a home or building owner in the State of Oregon files a complaint against contractor, you will get a notice to respond immediately or they will essentially pull your license.

To prevail in a hearing of any kind in today's legal climate, you must have a well-written, easily understood contract. The judges will tell you that you are the "contractor" and it is up to you to define, clearly and in writing, what you are going to do. It is not up to the home or building owner to decipher or interpret your intent.

A good contract should contain a number of items.
First, the word CONTRACT should appear at the very top of the document. This should be followed by a clear description of whom you are working for including all names, addresses, and phone numbers. If applicable, anything else that pertains to the people or company you are going to do business with should be included. Your information should also be included.

Second, should be a statement about what you are proposing to do for the other party. It does not have to be long winded, just a clear definition of what you will to do.

Third should be a description of all the work that you will do, including brands, makes, models, and specific colors of equipment you will install.

Fourth, your contract should include any and all INSTALLED ALLOWANCE AMOUNTS or MATERIAL ALLOWANCE AMOUNTS, setting a limit on the amount of money that has been included in your contract to do a particular part of the job.

Fifth should be exclusionary clauses like a rock clause, electrical service and panel clause, plumbing clauses, mold, asbestos, lead paint as needed.

Sixth should be a very clear payment schedule. The payment schedule should include a down payment, one or more progress payments and a final payment that should not exceed two percent (2%). Contracts with 1/3 to 1/2 down, and the balance on completion or similar payment schedules penalize the contractor severely. Your knowledge of contracts and how to write them is quite evident by the payment schedule you write into your contracts.

Seventh should be a clear statement on how additional work orders or change work orders are to be handled. What is the procedure for changing the job and how are you to be paid? The lack of use or improper use of change work orders is the # 2 reason that contractors go out of this business. Address that issue clearly in all contracts.

Directly above the signature line, you need a clause in your contract that says that you are going to do that work and only that work that is included in the contract.

Finally, but most importantly, is your attorney's final approval on your document. Write the contract if you must, but get your attorney´┐Żs approval before you give it to your customer for signature. We tell our customers very clearly that they should get their attorney's approval even when they use our Fast Track Proposal Writer software program to write their contracts.

The best advice I can give you is to write a good contract on every job you do and have it signed before you spend any money or start any job.

By Michael Stone Michael Stone has more than three decades of experience in the building and remodeling industry. He can be reached by e-mail at, by phone at 1-888-944-0044, or on the web at

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