Contracts: Protect Yourself and Your Business

In the old days, things were a lot simpler. Coming to terms on an agreement was as simple as a handshake and giving your word, and in most cases, people stuck to it.

Regrettably, those days are long past. Trust is hard to come by, and a handshake is insufficient to protect you and your business from a less than honorable potential business associate trying to take advantage of you. These days, something a little more concrete is required. So as I mentioned in Monday’s post, today we’ll be talking about contracts, and why they’re so important.

I want you all to imagine a hypothetical scenario. You’re self-employed,  running a small construction business doing indoor and outdoor renovations. You primarily work on your own, occasionally calling in help from a few associates or friends when the job requires it. You receive a call about a job doing landscaping around a pool. After crunching the numbers for materials and labor, you give the client a dollar figure, which he agrees to. The cost of materials to be paid right away, a down payment, and the final amount to be paid upon completion. You receive the cost of materials and down payment, and begin work. Upon completion, the client refuses to pay the remaining balance, citing financial woes, feigned unhappiness with the work you did, or any other number of reasons that ultimately all boil down to the client deciding he doesn’t want to pay you what he owes.

What do you do?

Well first of all, don’t show up at his house with some power tools demanding the money you’re owed. That’s actually really illegal, believe it or not. Your only real course of action at this point is to take the client to court. There’s just one problem. Read the above paragraph again. Go on, I’ll wait.

Back? Good. Have you noticed the problem? At no point did you get anything in writing from the client. The agreement was strictly verbal. Of course, verbal agreements are as legally binding as written ones, but any shady lawyer (i.e. almost all of them) can turn the entire process into a “he said, she said” kind of deal, and you’re left with nothing but your word that there is money owed to you. This goes double if there were no other witnesses (and will work heavily against you if the client can produce witnesses of his own). There’s a chance a judge will still find in your favor and see to it you’re paid what you’re owed, but your chances are not as good as they could be, and you could end up out money. End result? Your Personal Independent Earnings just took a potentially rather large hit. Not exactly an ideal outcome.

Now let’s go back to that same hypothetical scenario (don’t worry, I won’t make you read it again). This time, your initial quote for materials and labour is in written form (with both parties retaining a copy). The work and payment schedule (cost of materials and down payment upfront, remainder upon completion, with a full breakdown of all costs involved) is in writing and signed by both parties, forming a contract. Receipts, with each party receiving a copy, are drawn up at the time of each payment. Once again, signed by both parties. One saying yes, I paid this money. The other saying yes, I received this money.

As before, upon completion the client decides he doesn’t want to pay you the remainder you’re owed. Except now you have a paper trail. You have documented evidence that the client agreed to pay you this money for doing this work, that the work has been ongoing, is now complete, and there’s a balance owing that the client is refusing to pay.

Now you’ve got him. With all of this evidence in your favor, unless your client’s lawyer is the second coming of Johnnie Cochran he doesn’t really have a leg to stand on. You have documented proof from every step of the process that this job was being done, was going to cost this much money, this much had been paid, and this much is still owing. It is only in the rarest of instances where you’re going to lose this case. You get the money owed to you, and your PIE is preserved.

There are literally hundreds of ways having documented evidence in the form of a written contract can protect you in all of your business endeavors. This is but one. Hopefully, a scenario like this will never come to pass, and all will be smooth sailing for you in everything you do. But as I’ve grown so fond of saying…..

There’s an old saying: “Hope for the best, plan for the worst.” Making sure to use contracts is a great way to protect yourself, your business, and your PIE, should the worst ever come to pass.

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