If You're a California Contractor, You Need to Be Good at Writing Contracts

If you're a California contractor, you need to be good at writing contracts.

That seems elementary. But few construction contractors would consider themselves adept at preparing construction contracts.

That's too bad because there are good reasons and plenty of opportunities to get control of the contract drafting process on your jobs.

Reasons: The party who controls the contract also controls the bottom line. That's accepted wisdom among vendors in nearly all industries. Buy a car or a kitchen appliance or take your car to the mechanic for service and you'll be handed a document (contract) to sign. Vendors aren't dumb. They know from experience that contracts offer protection. What's true for an auto dealer, an appliance retailer or an auto repair shop is just as true for construction contractors. You need the same protection. And the best way to get that protection is with a contract you draft yourself.

Opportunities: Every contractor who enters into a construction agreement has a chance to either draft the document or negotiate terms of that agreement. Relatively few private jobs are done on a take-it-or-leave-it basis on a printed contract form. Most residential, commercial and industrial jobs are done on contracts negotiated between the property owner and the contractor. Many contractors offer to prepare the contract simply because the property owner wouldn't know where to start. On most jobs, the construction contractor starts contract negotiations simply by submitting a written bid. Attaching a proposed contract to that bid makes it easy for your client to say "Yes." Even if not accepted immediately, a contract tendered with the written proposal is likely to become the basis for further negotiation - especially if the contract has a professional appearance and is obviously custom-designed for the job.

Most experienced construction contractors (and every lawyer) will agree: When you work under a contract you drafted, you've got control of the job.

Of course, not every client will be eager to do business based on your contract. Some will offer their own contracts. Others will object to specific terms in the agreement you offer. What then? No problem. That's the way it's supposed to be ¸negotiation. The better you and your client understand the agreement, the less likely there'll be surprises and disputes.

But no matter what objection a client may have to the contract you offer, doing business on your own agreement is the best choice.

Obviously, you've got a major advantage in contract negotiations if you're good at drafting contracts:

CCW is a Little Different

For many years, construction contract forms were sold on paper, usually at a hefty price per page. If a change was needed in the printed form, you had to write between the lines or make notes in the margin or attach a separate sheet. That made for messy contracts and more than a few disputes.

Now that nearly everyone in business has a computer and a word processor (like MS Word or WordPad), it makes more sense to buy construction contracts in digital form, either on disc or by download off the Web. That's Generation II in the development of modem construction contracting practice. It's clearly a step in the right direction. Making changes, additions and deletions in a digital file is easy. But there's still a problem: flexibility. You're going to be stuck with contract clauses that don't really apply. And no stock contract covers even a fraction of the thousands of possibilities that make every construction project unique. Worse, stock contracts seldom explain what each clause means or when it should be used. That's left up to you.

CCW is Generation III

CCW isn't a digital form you change with a word processor - though it includes a word processor. CCW isn't a stock contract in portable document format (PDF) - though CCW output can be either RTF or PDF. CCW is best described as an interview. To write a contract that fits your job precisely, just answer the questions. When you click to answer, CCW adds to your contract (lower center window in Figure 1). An Explainer window (lower right in Figure 1) describes what you need to know before selecting an option. Bias icons and the Contract Bias window (upper right in Figure 1) identify who is favored by each contract clause and by the developed contract as a whole. The Interview Navigator window (left side in Figure 1) makes it easy to move from topic to topic. When the interview is completed, you'll see a string of check marks next to the subjects listed in the Navigator.

I'm going to give you a few more advantages of using CCW. Then I'm going to explain how to use CCW. If you're eager to begin exploring CCW right away, dive right in. Getting comfortable with CCW will be pretty easy for most. When you need a little help, come back to review these pages.

Where Risk and Contract Bias Collide

You've probably read construction contracts that seem biased - favoring one party over the other. Here's something you may not have considered: Every construction contract has a built-in bias. There's no such thing as a standard construction contract that's fair to everyone and fits every job in all states. For many reasons, a contract like that doesn't exist. It can't. The law in every state is different. The disclosures required vary with the type of work - residential, commercial, industrial, public or private. What's fair in one context may be completely unfair under a different set of circumstances.

Just as bias varies in contracts, risk varies from job to job. The danger zone for every construction contractor is where bias and risk intersect. To understand this point, consider a job with any of the following:

Key Options in CCW That Bias the Agreement in Favor of the Property Owner

Every time you answer an interview question that has a bias icon, CCW recalculates the bias and displays the result as a pie chart in the bias pane. Wedges of the bias pie will swing back and forth like a pendulum when you first start answering interview questions. When you've responded to dozens of questions, most movement in the pie chart will be barely perceptible.

In prime contracts, bias will favor either the property owner (orange) or the general contractor (blue). In subcontracts, bias will favor either the general contractor (blue) or the subcontractor (green). The more blue, the more bias favors the general contractor, whether in a prime contract or a subcontract. A pie chart evenly divided means contract bias doesn't favor either party.

Some questions have no bias. For example, questions under the Navigator topic Cover Page don't affect contract bias.

You have better control, more options and extra security when contract bias is in your favor. CCW makes it easy to draft contracts heavily weighted either way. But bending everything your way isn't necessary. A more balanced contract will be accepted sooner and with fewer revisions. Remember the discussion about the collision of bias and risk. If the owner is financially solid and considered easy to work with, bias of clauses on payment terms and liens may be irrelevant. There's no need to weight those clauses heavily toward the contractor. But if the same owner is in a hurry to take up occupancy, pay close attention to bias when dealing with the construction schedule. Another example: Suppose you feel the plans are incomplete and expect many revisions after work starts. Consider bias very carefully when selecting clauses that cover charges for extra work.

How is Bias Assigned?

Accumulated contract bias is a measure of protection provided by the contract. It's a capsule summary of whose interest is protected and to what degree. Some CCW options have a contract bias that's obvious. Indemnification is a perfect example. A contractor who guarantees to reimburse a property owner for any loss on the job is accepting more than usual risk. That's heavy bias. But bias for many CCW options depends on the circumstances. For example, a warranty against structural defects probably has minimal bias when the risk of collapse is very low, such as a well engineered concrete foundation set on stable ground. But if job conditions suggest higher risk of structural failure, the same warranty could bias the contract heavily in favor of the property owner. Be aware that circumstances can affect the bias in any contract clause.

If you agree that contract bias is a function of job conditions, it's possible to make some generalizations.

Heavy bias shifts a significant burden, risk or expense from one party to the other. Heavy bias goes well beyond what the law requires and beyond good professional practice.

Moderate bias is likely to add to the effort, risk or expense carried by one party. But moderate bias also (1) benefits others or (2) is considered good professional practice.

Light bias imposes a minor burden, such as extra paperwork, but adds benefits likely to (1) reduce the risk ofloss, (2) be considered reasonable, or (3) constitute first class work.

Even (neutral) bias imposes benefits and burdens likely to be reciprocal, insignificant or fully compensated.

How Bias is Calculated

The pie chart in the Contract Bias window is based on a mathematical calculation. Every time you answer an interview question with a bias icon, CCW recalculates and displays the accumulated contract bias. Checking a box with heavy bias adds three points to the bias total. Checking moderate bias adds two points. Checking light bias adds one point. Neutral (even) bias adds nothing. All new contracts begin with neutral bias.

Accumulated bias in the Contract Bias window is the mathematical average (mean) of all bias selections plus a score based on the ratio of bias selections favoring each party. That's because a contract with the majority of clauses favoring one party, even lightly, is more than lightly biased in favor of that party. Think of the bias ratio this way. If you keep bearing slightly left and almost never turn right, after a while you're going sharply left, even if you never made a true left turn.

The ratio score is 1.00 if 100% of biased responses favor the same party. If 75% of interview responses favor one party, the ratio score is .50 (.75 minus .25). Accumulated contract bias less than .49 is reported as even. Between .5 and 1.49, contract bias is considered light. Between 1.5 and 2.49, contract bias is considered moderate. At 2.5 or higher, contract bias is heavy. To reduce initial volatility, the ratio score is not considered until you've made at least four biased selections.

Getting Started

Insert the Construction Contract Writer disc into your CD drive and follow instructions on the screen. Installation takes only a minute or two. When installation is done, your computer needs to connect with Craftsman's server to receive the latest updates and activate all program features:

Next, select the type of contract you're creating. See Figure 7. If the job is in California, you need the California Edition of CCW.

You can choose to create a contract between a contractor and a property owner (a prime contract) or a contract between a contractor and a subcontractor (a subcontract).

Finally, you can choose to create a contract from scratch or a contract based on an existing contract. Since this is your first contract, you'll want to choose from scratch. When you click Create Contract, CCW will generate your interview and start the question process.

Interview questions appear at the top center of your screen. Answer the question. Then click Continue > > to proceed to the next question. The first questions cover the basics: names and addresses, the contract price, project description, start and finish dates. These questions fall under the topic, Cover Page. If you don't have all the information needed to answer a question (such as your client's email address), no problem. Leave the question unanswered.

When you're ready for the next interview question, click Continue >>. Your response is recorded and the clause is written to your contract. Clicking either << Previous or Answer Later leaves the question unanswered and nothing is written to your contract.

To see what's been added to the contract, press F10 on your keyboard. That splits the screen, Interview window above and Contract window below. Look back at Figure 1. What's just been added to the contract will be in green type. Press F8 to return to the full Interview Window.

Interview Navigator

The Interview Navigator at the left of your screen is like a road map. Use the Navigator to keep track of progress. Topics you have completed will be preceded by a blue check mark. Topics without a check mark (or with a gray check mark) still need your attention. When every topic in the Navigator has a blue check mark, your contract is done.

Let Craftsman know what you like or dislike about CCW. Click Help on the menu bar and select Send Feedback. You'll have the option to include or omit an image of the screen you have open in CCW. Including a screen shot may be helpful if you have a question on a specific contract clause.

About the 16 Sample Contracts

The California Construction Contract Writer disc in the back of this book will draft an (almost) infinite number of contracts designed to fit (almost) any job. Only 16 of those contracts appear in this book. If you're in a hurry and simply want to copy contract pages out of the book, that works fine. Contracts printed in this book have blank lines where information has to be filled in. To help you decide which contract fits your job, review the one page introduction before each of the 16 contracts.

The same 16 contracts are available on the disc in the back of this book in portable document format (PDF), rich text format (RTF) and Construction Contract Writer format (CCF). To use the PDF contract forms, you'll need Adobe Acrobat, which is free at http://adobe.com. To use the RTF forms, you'll need Microsoft Word or Wordpad, which are included in most versions of Windows. To use the CCF forms, you'll need Construction Contract Writer, which installs from the disc in the back of this book. Once Construction Contract Writer is installed, copy any CCF forms you need from the folder CA Contracts in CCF on the CD to the subbfolder Craftsman/Contracts under Documents on your hard drive.

The 16 contracts on the disc in PDF and RTF formats look like the contracts in this book. They have dotted lines where blanks have to be filled in. The 16 contracts on the disc in CCF format have a zero or null where something has to be filled in, such as the contract price. To find all places where information has to be filled in, just click Continue >> from Cover Page to Done. Along the way, change anything you want. But be sure to save the contract to your computer hard drive when finished making changes.

On the following page, you'll see a list of the 16 contracts printed in this book. To save space, contracts printed in this book don't include a glossary of terms. But every contract you print from the CCW program will include a glossary.

California Construction Contracts

These contracts comply with the following California law and court decisions:

Business and Professions Code sections 7030 and 7159 (home improvement contracts)
Business and Professions Code section 7108.5 (payment of subcontractors)
Business and Professions Code section 7164 (home construction contracts)
Business and Professions Code section 7191 (arbitration)
Civil Code section 1559 (rights of third parties)
Civil Code section 1671 (liquidated damages)
Civil Code section 1717 (collection of attorney fees)
Civil Code section 1802 (retail installment contracts)
Civil Code section 2782 (indemnity and insurance)
Civil Code section 3260 (payment due dates and retainage)
Civil Code section 3262 (lien rights)
Civil Code section 1797.94 (warranty)
Civil Code Title 7 (warranty)
Code of Civil Procedure section 337.1 (limitation on claims)
Code of Civil Procedure section 410.42 (choice of venue)
Code of Regulations section 872 (checklist and disclosures)
Acoustics, Inc. v. Trepte Construction (change orders)
C. Norman Peterson Co. v. Container Corporation of America (excessive change orders)
Capehart v. Heady (shortening of the statute of limitations)
COAC, Inc. v. Kennedy Engineers (obligations of owner)
Hawley v. Orange County Flood Control District (damages for delay)
E. H. Morrill Co. v. State (disclaimer of site information)
United States v. Spearin (plan defects)
Warner Construction v. Los Angeles (discrepancy between plans and field conditions)
Wm. R. Clarke Corporation v. Safeco (pay when paid)
Zurn Engineers v. State of California (constructive acceleration)
15 United States Code section 1638 (truth in lending)
12 Code of Federal Regulations section 226.15 (right of rescission)