In the October 2010 issue, I began a series of articles dedicated to business analysis. The first self-assessment step, which was covered in that issue, was whether your business is operating within the correct legal structure. The next step when reviewing your overall business health is to determine what agreements should be in place. The following are common agreements for contractors:

Buy/Sell Agreements

If you are conducting business with a partner, a partnership agreement is important but a buy/sell agreement, which is usually part of the partnership agreement, is critical. This agreement dictates what happens if one of you wants to leave the relationship or if one of you dies or retires. Figuring out division of assets is easier to do when the two of you get along than when you have come to blows. If your partner is married, do you want his or her interest passing to a spouse who will then be your new partner? A buy/sell agreement can provide that the spouse must sell your partner’s interest to you in the event of death. The agreement also will dictate how you will pay for that interest. Being forced to sell the business because you did not plan in advance is a bad alternative.

Client Agreements

Although most client agreements will have the basics, such as client information, project address, and description of the work and price, there are many more provisions that are important.

  • Does your contract provide limitations on the work you will be performing? If you are required to paint, do you limit the number of colors? Are you responsible for damage to landscaping?
  • Have you put any limitations in your bid that are not referenced in your contract?
  • Are your clients required to make payments within a few days of receiving an invoice? Are late charges applied?
  • If there is a dispute about your workmanship, is there a stated standard of care to which you will be held responsible?
  • If the contract has allowances, do you specify whether materials only are included in the allowance amount or is labor also included?
  • Have you set forth your hourly rates for a time and material contract or change order?
  • Have you included any state-required notices, such as right to cancel and mechanic lien notices?
  • If there are two owners, can only one sign a change order?

Check with your attorney for a multitude of provisions that could benefit you.

Subcontractor Agreement

When a subcontractor is hired, the sub usually sends the general contractor an agreement and the general contractor signs it. You must review each of these agreements to determine whether there are liability limitations or other detrimental provisions. You should have your own agreement with subs that specifies when payment will be made, change-order procedures, liability for defects, adherence to project schedules, insurance requirements, etc. Terms beneficial to you are not going to be found in the agreement prepared by your sub.

Vendor Agreements

You may not think you have an agreement with your vendor but most likely you do. When you originally asked the vendor to bill you for materials, you probably had to sign a credit agreement. Undoubtedly you signed the one-page document and never read it. Get a copy of the agreement and read the terms. If you are a corporation and you signed the vendor agreement in your individual name, the vendor can reach your personal assets if you fail to pay their bill or go out of business. You may be able to change the agreement to your corporation; this is easier to do if you have been paying your bills on time and have been a long-term customer. Discovering the personal liability when you are months behind in payments and ready to close your doors is not the ideal time to renegotiate liability.

The general rule has been that you don’t need agreements in place until something goes wrong. However, once something goes wrong it is too late to draft an agreement. Make sure your agreements are in order!
Look for the next self-assessment step in the April issue.

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