Ten New Year’s Resolutions for Contractors
The #1 reason contractors and construction companies get sued? They don’t maintain proper communication with their clients. Make sure all change orders are in writing. Tell clients if a problem develops or if you’ve underbid a job. Do not stick your head in the sand. Treat your clients properly, and you will prevent disputes.
- Use a good contract to prevent disputes.
A good contract provides some of the best protection for contractors in running their businesses. It helps to ensure that you will get paid according to a proper payment schedule and should provide for written change orders and address hidden conditions. Without a provision in your contact that allows you to collect attorney’s fees for nonpayment, you can’t get your attorney’s fees back if you have to bring a collection action. The MA Home Improvement Contractor Statute also requires written contracts for any renovations over $1000.
- Check and update insurance policies.
Contractors require a number of kinds of insurance. General liability insurance covers damage to others’ property caused by the contractor’s work. It usually does not cover defective work. Worker’s compensation is required if you have employees. Make sure your agent understands the field of construction.
- Have agreements with subcontractors.
You may have been working with your subcontractors for years, but you need to have a written agreement with them. This should include terms of payment, clearly delineated scopes of work and indemnification clauses. An indemnification clause states that if you are liable for your sub’s work, the sub must pay for your legal fees and pay you back for any damages assessed. You should also be able to back charge a sub for incomplete or defective construction work.
- Pay employees as employees and not as independent contractors.
Massachusetts is very clear. If someone is working for you and doing the same work that you do, they are your employees. If you control the means and methods of their work, they are your employees. If you pay employees as independent contractors, you could be liable for triple damages, attorney’s fees, interest and costs. It is not worth it.
- File a homestead on your home.
A homestead will protect up to $500,000.00 equity in your home. It is crazy not to pay the $75.00 filing fee and record one. If you don’t record a homestead, you are automatically covered for $125,000.00. Given that the Massachusetts Home Improvement Contractor Statute makes a contractor personally liable for a violation of the act, it is crazy not to protect your home.
- Hold assets in other entities’ names.
See #6. Do not hold personal assets in your own name. Incorporate or form an LLC to protect your personal assets from creditors.
- Avoid personal guarantees for supplies and materials.
Establish good credit and try to avoid having to personally guarantee supplies and materials. (See #s 6 and 7). Learn how to run your business so you have healthy cash flow. Learn how to estimate jobs so you make a profit.
- Establish a separate payroll account.
A client’s bank account was frozen and he was almost forced out of business. Payroll accounts cannot be frozen in MA. Do everything you can to protect your business.
- Maintain proper licensure and obtain certifications.
Be a professional. Massachusetts required home improvement contractors to maintain their HIC registration. A Construction Supervisor’s License is required for structural work. Stay up on the building code. Proudly inform clients that your licensure is up to date.
If you follow these resolutions, I guarantee you that you will end 2015 on a much better note than when it started.
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