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Good Contracts Save Time and Money

by Kenneth F. Cerullo, Esq., The Commercial Agency

All business owners seem to be busy these days – often working more and getting paid less! One way to work smart is to leverage the power of proper contracts with your customers and subcontractors as part of your business operations. Many contractors hesitate to invest the time and money necessary to develop and implement good contracts. However, a well prepared contract with the help of an attorney knowledgeable in construction issues will help you comply with applicable laws, and often limit your liability in the event of a claim or disagreement. By investing some time and the minimal expense of an attorney review, the average contractor can create standard contracts to use with both owners and subcontractors – and save time and money in the long run!

Proper contracts with owners serve to minimize the chance of violations by the contractor of laws such as the New Jersey Home Improvement Practices Act (which includes landscape services) or the New Jersey Consumer Fraud Act. Such violations can be costly with severe penalties (allowing disgruntled homeowners to seek triple the amount of losses caused by a home improvement contractor). There have been cases in which a contractor has been owed large sums of money from a homeowner, only to owe the homeowner at the end of the day as a result of not having a contract that is compliant with the law. Additionally, good contracts will delineate and limit your scope of work; and in turn, limit your liability to the work actually performed in the case of a loss. Many times contractors are sued for work they did not even perform! Lastly, insurance does not cover breach of contract. A well prepared contract reduces the chance of misunderstandings between you and your customers.

On the other hand, proper contracts with your subcontractors will permit you to transfer risk and liability to subcontractors performing work on your behalf. A good subcontract with a subcontractor should include proper insurance requirements (including a written requirement that the subcontractor add your company as additional insured) and a hold harmless/indemnity provision requiring the subcontractor hold you harmless or indemnify you for claims and losses arising out of the subcontractor’s work. It’s only fair! After all, why should you be responsible for problems arising out of the work of your subcontractors (e.g., landscape lighting, irrigation, tree work, etc.)? In the case of a loss, a good subcontract will provide a good defense to the attorney representing your interests. With a good defense, your attorney will be able to eliminate, or at least limit, your liability (resulting in less legal expenses and claims paid out). Less liability results in a better insurance claims record (loss runs) and lower insurance premiums. Lastly, you get the added benefit of limiting your time with lawyers!

In conclusion, good contracts with customers and subcontractors allow you to work smarter by spending your time doing what you do best – developing new business opportunities, estimating jobs, designing interesting projects, etc. – instead of meeting with lawyers and attending depositions!

Kenneth F. Cerullo, Esq. is the President of the The Commercial Agency, Inc. – Contractor’s Insurance & Bonding Specialists. Ken is a graduate of Bucknell University with a degree in Civil Engineering. Ken later received his Juris Doctor degree from Rutgers Law School, and practiced Construction and Surety Law with a large New Jersey law firm. Ken can be reached by e-mail at [email protected] or by phone at (201) 391-1324.

The author is not providing any legal advice or any professional insurance advice to a particular insured or in connection with any particular claims scenario. The author disclaims any and all liability in connection with any party’s reliance on the content of this article. Insureds are advised to consult with their own professionals as to their own insurance coverage.