Ep. 57 - Quit Getting Screwed - Subcontractor Agreements - Karalynn Cromeens

Hey everybody, is Jim Johnson here, your host with Contractor Radio? And we have quite the show for you today. Whenever I got introduced to, you know, we get lots of requests to be on podcast. It just happens we get them all the time. And most of them I dismissed. But when I saw this topic and I saw the title of the book called Quit Getting Screwed, I'm like, all right, this is interesting. Let me see who this person is. And it's something that's really close to me because I've actually had the problem that she's going to discuss with us today a couple of different times. And so it's this idea of dealing with contractor or subcontractor agreements whenever you're working on projects or maybe even in the employ of somebody from a subcontractor status. And so one of the little tips is, and you know, we usually start off with a tip. I'm just going to get you a real simple one. Before you get in trouble, get an attorney. Go get an attorney to look at your agreements. Go through your agreements, make sure that you're getting your rear end covered. Because our special guest today is going to help us out with that. But before we get there, I want to talk about our sponsors. We've gotten a lot of sponsors here for our show this year with Atlas and Signpost and Balance Claims, Roof Scope or Scope Technologies, Hail Trace, Kill your competition, Beacon, get the referral. All of these guys have really made this show possible this year, allowed us to kind of step up our game a little bit. And we're super excited to have them. They've all been vetted, they're all very trusted. They all follow through and do what they say they're going to do. And I just want to let you guys know that if you're looking for somebody, those folks can help you out in your contracting business to get a little bit better at what you do and serve you as a third party vendor to help you get things done in your business, getting you more capacity. Our show is always about entertainment, education, some strategy and tactics. And today we're going to talk a little bit of strategy and we're probably going to talk a little tactics. And I have a feeling there might be a little bit of entertainment in there and education as well. Just from the title of our book, we have an attorney on the show today. Her name is Carolyn Cromings. I hope I pronounced that correctly. I hope I'm close. And she wrote a book. And the name of that book is is Let me just make sure I Don't get it wrong. Quit getting screwed. And that's the whole thing. I don't want to see contractors getting screwed. Carolyn, welcome to our show today. Glad to have you on board. Are you going to keep us all from getting screwed?

That's my job. That's what I want to try to do. Thank you so much for having me and helping me spread this word that you can work in construction and not get screwed.

That's a big claim right there.

There, there is a way you can.

Yeah. And it's, it's common. This is something that happens all the time. You know, my own experience is from as a sales rep type of perspective, as a subcontractor sales rep to a general contractor. Not really much of an agreement, if anything. The first one I didn't have any agreement. The second one, it was kind of one I wrote myself. And both of those allowed me to not receive the benefit that I should have as a salesperson. And so we'll probably talk about that a little bit today. But, but before we get there, can you tell us a little bit about how you got to where you are and what's going on in your world and why you are so passionate about writing this book?

Sure. Well, I'm from the Midwest, I'm from Illinois and I grew up in a family of subcontractors from irrigation subcontractors. My grandfather built golf courses with excavation company and actually his company went out of business cause he signed a wrong contract. And so just growing up and then working in those companies when I was a teenager and seeing the struggles that subcontractors have, whether signing a contract or getting payment, just seeing that. And then I went to law school and I learned the law. And then while I was in law school, my husband and I started a material supply business. And so I had to kind of learn the laws as it relates to liens and collections and all of that. But that experience also gave me what it's like to start your business from the ground up. How many hours it takes, how much frustration and just all out effort to build something. And that's where most of these subcontractors come from, is that they're so good at what they do. They want to go out and be the best that they can. They don't realize that there's all these other things like subcontracts and collections. And that's what I'm trying to help put the whole thing together. And actually this book I wrote because I represented several subcontracts subcontractors after they had gotten sued and no matter what I did, I couldn't. They did the work right. But the subcontract that I had signed so one sided, there was no way they could win. And so after trying to fight it in the courtroom battle, I decided that education on the front end was, is, is a better way to go and let people know that there are no set of rules, you know, protecting subcontractors and subcontracts. You sign something one sided, it will be used against you. And so I want to start the, you know, the conversation about let's have a subcontract or a general contract that we can all understand and we know what's in it, we know it's required. It'd be less legal disputes, things will get done clearer and faster and better. And so that's really what the book is about, is to educate people on the things that could really hurt you if you don't take care of in a subcontract. Wow.

Passionate. That's what I would describe that reply as. So you were just, would this be a fair statement? Were you just tired of losing? Like I'm so tired of losing, it's pissing me off. I gotta go get these guys educated. So when I do go to court, I want to win. Is that really.

Exactly. And you know, it's not even tired of losing for me, but losing for my clients and unwrongfully and not rightfully so. Right. There's some situations where you did wrong and you have to make it, but when you've done everything you were supposed to do, right, but you forgot your daily reports or you have no proof that you send in your daily reports, how is that, how is that fair that you win for something like that? I just, it just. And there was nothing I could do. The judges will always hold the contract against you because you're a grown up, you're a big person, you can negotiate what they say. And although I know it's not, it's not that way, but if we would all start to say something, we can make a difference.

Have you ever had a judge say you should have got an attorney before you got here, then after being here indirectly, Right?

Yes. You know, because there's all these subcontracts have a line that say you read and you understand everything in here and so what are you going to say with yeah, I know I didn't understand, but it says that you did. So there's no, there's no argument. So we're trying to fix it. On the front end.

So before we dig into this whole topic, I ask some questions throughout there a little bit more about you, hopefully when we kind of like to get to know the people that we're talking to. To this point in your life, what's your. What's your greatest achievement?

Being a good wife, a good mother. And I have three daughters that from 17 to my youngest is 10. And watching them grow up and be adults besides my family. This book is my next biggest accomplishment. And I really hope that it'll start the conversation. You know, I write like I speak. It's very direct. I'll get to the point. I'm not full of fluff. And so I'm hoping that it'll strike a chord.

I notice that immediately. And you saved me because I usually say, don't tell us about family. What's the great. We know that's the greatest achievement, but so great job. Good save there. So what are some of the most common mistakes that you see in these agreements where, you know, if, even if they don't have an attorney, they should kind of keep an eye on out for these maybe two or three things that are really big.

The main thing that right off the bat is subcontractors think they're hired to do their bid, and that's not the case. They bid the job and then they get the subcontract. And attached to the subcontract is the scope. That is what they're hired to do. And things have usually changed a lot, if not a little bit, if not a lot by the time you bid it to the time the scope is issued. So my first thing is, once you get a subcontract back, review the scope as if it were a new bid to make sure that your price is the same, that you've included everything. Because what normally happens is they'll just sign it and then they'll realize, oh, down the line, you know, I didn't realize that this is in my scope. I just had one recently that was a door contractor who installed glass doors. He never did the electrical components, but it turned out in this one, in the scope he had agreed to. And so he had to pay the extra three or four thousand dollars to have that done because he didn't bid it and he didn't realize it was in his scope. But the consequences of not following the scope that you agree to are way greater than the three or four thousand dollars that cost him to. To do the electrical components on the door.

Okay. Anything else? So that's kind of the bid versus scope, like make sure.

Okay, that's a big one. And then the other one that I see that people need to try to negotiate is the pay when paid clause. This is a huge thing. And anybody who's ever not gotten paid on time knows how detrimental it can be. What the pay when paid clause has done is really taken. Who finances the construction project and flipped it on its head. Because the owner gets bank funds to pay for the construction, which they are holding onto. The subcontractor puts out labor and material and then waits to get paid. Right. So they have already spent the money to pay their guys, you know, paid their material suppliers, and now they have to sit here and wait, wait till they get paid. Well, what the pay when paid clause does is now makes their payment. Now the general contractor has got to pay. Now the owner has got to pay the general contractor before the general contractor is required to pay the sub. And that is something that the sub has absolutely no control over. So you do your work, you do it right, and then you submit your pay app, and now you have to wait for some situation to happen that you have no control over. So the book has some great ideas in there, how to negotiate those terms.

I was just about to ask that, like, how would I. So these two examples, bid versus scope. So I go out and, you know, they give me blueprints, plan, whatever, you know, what, whatever I'm supposed to bid off of. And I go out and I bid it appropriately, I get it. And they say, yes, you have the job. Here's the scope and subcontractor agreement. And obviously I want to read through that and make sure that it matches what I bid. But if I get to the point where, hey, wait a minute, this is what I bid and this is what I have, and this is what you have as a scope. And you got this electrical stuff that I never bid. You never said to bid or anything like that. We need to renegotiate the bid. Is that usually what happens? Or are people scared of, like, losing the job? Is that a pot?

I mean, they. They are. And I have a letter. And basically the best thing you can do. I don't think it's done on purpose. Sometimes, yes, but most times it's not done on purpose. And so if you just send a letter, hey, you know, when I bid this, this wasn't part of what I was supposed to bid. Now it's here if you want me to do this. We're going to have to add on X funds. But. And the main thing Is once you make that request, wait for the contract to be reissued in that new amount before you sign. Don't ever just say, oh, yeah, sign it. We'll get to it later. Because whatever you sign will be held against you. And the fact that he said something won't over overdo the contract.

Yeah, I wouldn't say that. You're in a bad position there. Because first off, they've settled on somebody, they've gotten it all written up, they know what their numbers are, all that good stuff for them to go back and try and find another contractor at that. So you have a little leverage just on that one. I think on the other one, you're a little bit of a catch there. Like, if they have that pay when paid clause in there, how would I negotiate? Like, that would be a tough one for me to negotiate. I wouldn't know how to do it. Any pointers on that?

Yeah, and in the book, I have some ideas. And the main thing is you just gotta be real about it. Unless you can afford to front the full contract, your full contract amount. Because even if you're not getting paid, you still have to keep working. Just say, hey, guys, I couldn't handle this if I had to front this whole thing. Let's come up with something in the middle. It's like some of the ideas I have in there is, okay, I submitted my pay app. It's been 30 days. I haven't gotten paid. The owner hasn't paid the general, but it's not my fault. So pay me 50% of the payout so at least I can pay my expenses and keep going. Or you can pay me, reimburse me to file a lien so I can get my payment directly from the owner. Or you know that if you don't get paid from the owner, and it's not my fault, I have the right to stop working. And so you can tell the owner, hey, I got to pay these guys or this job is not going to keep going. Because I can't make them work if they're not getting paid. So there are things to split the risk. You know, I'm not saying the GC should have to take all the risk, but the subs shouldn't have to take all the risk either. So let's negotiate something in the middle.

Yeah, I'm sitting there going, okay, if I was going to be a sub to a general, I would probably have set pretty good expectations in the first place. This is how I did. This is what happens whenever I get the scope and the Subcontractor agreement. And this is what happens if I see the paid when pay calls like if I see that no I get paid when I get done. That's when I get paid or 30 days or whatever type of timeframe I would want to put on that. I could see a little bit of a lag but I mean I've been in big general contractor jobs before where it might be a year, a year and a half before somebody gets paid. And then I'm having a whole. It's really fracturing my business. And I performed, I did my work. Maybe the general contractor didn't perform somewhere else and that's why he's not getting paid. Not my fault. I did mine. It'd be like me going to work for a week and not getting a paycheck because my boss didn't want to pay me.

No other industry is there something like that that where you, your performance, your, you know, being reimbursed for the work that you did is conditioned upon something completely out of your control. Which it's just not reasonable. There's got to be some middle ground.

I would agree with you on that. So in our, in our world and a lot of the contractors that we work with they have these sales guys. Sales guys are some kind, we've been talking a lot about the guys actually perform the work and do the install and those type of things of whatever trade is being performed. But we have these sales guys that operate as 1099 and I would say they loosely follow the rules. It could be gray here and there, there's there's a lot of verbiage and a lot of you know, I know it's black and white. If I look at the rules, the rules are black and white. You can't do this, you can do that. But if you were to say hey, something like, like I really want people to attend a sales meeting, I can't make them right. I can't say you have to be a sales meeting to work with us. But I could say hey, we do bonuses based on attendance of the. And I'm good, right?

Yeah.

Okay.

And the main thing that those type agreements have that are rarely enforceable is the non competes. They're normally not written correctly. So that because first off enforcing a non compete against the individual is very hard to do. Judges don't like to enforce it unless you know it's a non competes against companies. Yes. But non competing against individual salesmen are very rarely enforced and they're probably not usually there has to be what's called independent consideration for that type of thing. So they got to pay you something extra and above for that to be enforceable against you later on. And it's usually got to be very small, like only in Harris county for six months after you leave. Most of the ones I've seen have like two years. The whole state of Texas, something like that would never be enforced. But it's scary enough to think that it would be that, you know, people leave it in there and it's not. That's the big thing I see there. But whatever you put in the contract, it will be the agreement, it will be what's, what's used. You know, except for the.

Yeah, so that non compete clause, that's always one. That's a little bit of a, I don't know, a kicker because all these contractors, like, and I'm kind of on their side, they're sharing some proprietary information on how they do what they do. These guys come into work, they go, wow, that was really good. Why am I selling all this stuff, making this guy a bunch of money? I'm going to do this on my own. Little do they realize how much of that back end stuff you got to do and they go out there and start selling in the market with the proprietary tools of the other guy. So I can see, I want to protect it, but I also know it's not really enforceable unless it's really hammered out tight by an attorney. Is that a fair assessment?

Correct. And I think it's fair that way too. Right. It's small enough that where if something goes south between them really they could still live, they could still survive and start a job somewhere else. The ones that are really enforceable, you know, the ones that are overly broad, won't be enforced. But at the same time you're protecting the proprietary information, their documents. You know, if somebody's going to go out, they need to start with and get their whole new set of things and go get their whole new set of clients and you know, I think they definitely have a place. But if they, you know, written as small type where the person wouldn't like starve if they had, if something went wrong and you fired them or they were terminated and they could, they could pick up and start somewhere else that's not in your jurisdiction.

Yeah. You know, I've seen some agreements written that were the standard practices of contracting. We're not worried about this proprietary stuff. The way we do things is protected. It is IP electrical property and I have seen those pursued in one by contractors it's just making sure it's written right and having a good attorney do that on the reverse side of that, you know, salesperson wanting to protect themselves. You mentioned it. It's a lot harder to have a non compete hold up against an individual than a company. And our coaching advice is usually to set up some type of entity, whether it's an llc, an S corp, something like that, to protect something more than a sole proprietorship. And that way if there was a non compete in there would be against your company. And I go start a new company right, if I really had to, to do what I'm doing. I also worry about the subcontractors that are sales guys getting paid and I also worry about the contractor overpaying for what a person has done. And so normally what happens? And I'm gonna ask your advice here, like I'm gonna talk from the contractor perspective mostly. Most of the time there's not even an agreement. And if there is an agreement, it's something somebody wrote up office and said, hey, here's our agreement, right? And so, so there's nothing. And so when it comes time for the breakup to inevitably happen, this salesman leaves and the contractor says, I'm not paying it. Like it just completely drops off, which I think is unfair. The guy has performed some work, maybe not all of what he was required to do, but he has performed some work on the sales guy side of it. He goes, screw you, I'm going to go get an attorney and I'm going to sue you. And almost every time they win. So there you go. Subcontractors that are sales guys, if you go and sue them over the money, you're gonna win because you had an agreement to sell the job. I think the contractor needs to be more specific about what the responsibilities are of the salesperson. Like if it's more than sales, like if they have to sell it, they have to create an order, they have to watch a job, they have to collect it, like that kind of stuff. They can delineate out saying a third, a third, a third for these duties that you perform. And then when somebody leaves, you can pay them a third of the project, two thirds of the project or the whole project, depending on how far they have gotten with that particular project. Do you see something like that holding up in court?

No. Most definitely. And that's the thing, is that something is better than nothing. Even if it's a handwritten note that says, here's kind of what our agreements are, I'm going to pay you third Here, pay you third here, and pay you third here. Yes, that would definitely. Because that's the agreement between. If everybody signs off on it, you know, and that's how we were acting then, yes, you could still do it without the agreement, but it's going to be a way bigger battle because if you have no agreement, all he said the agreement was one thing. The other side said the agreement is one thing, and somewhere in the middle is the truth. But to get to that truth is awful expensive and takes a lot of time, which, unless you're talking about a substantial sum, is normally not worth it just because of the legal battle to get there.

Yeah, you know, usually these guys are. Commissions can be anywhere from a couple thousand dollars up into 40, $50,000. But even then, getting an attorney involved, I spend almost all of it. Right. So might as well just pay the guy, just go away, because I'm going to end up probably paying him in the long run anyway. So the point of that was like, hey, you know, general contractor, protect yourself and pay him for what he did. And sales guy out there, make sure that you have an agreement in place that you will get paid for the work that you. What's the worst situation you've ever seen of somebody not having a good agreement in place and the ramifications of that?

Well, actually, the worst one that I've dealt with was one that actually had an agreement, but it was. They had a scope that they didn't agree. There was $100,000 more than what they had agreed to, and they knew it was a problem. They tried to talk to the gc and the GC said, no, you got to finish it. But on this particular job, they had a bond. And so what? They had to provide a bond to the gc. And so what ended up happening? They finished as much as they could. They couldn't finish the whole thing. Of course, what they thought was 100,000 ends up costing the GC $250,000 to finish their scope. And then the GC files on their bond and they don't respond. And I don't know, there's this misconception out there that a bond is insurance. A bond is not insurance. If someone files on your bond and you don't respond, the bond company will pay out and then come after you, and mostly individually and your company to satisfy the amount paid out. So that's what happened, is that they didn't, you know, respond to the bond, and the bond company paid out the $250,000 to the General contractor and Then the bond company came after my client individually and, you know, forced them into bankruptcy and everything was gone. So, you know, that's twofold. That's make sure your scope, you know what it is. And then also subcontractor bond, realizing that it's not insurance and when you get one, make sure that you put protections in place. And I talk about this in the book, in the subcontract or in your agreement with the bond company that they won't just pay out when they get a claim letter and you have some control over when they will actually pay. Pay out. I don't, you know, that was, you know, a huge mistake. And, you know, there were some thoughts on my client that the general contractor knew when they sent them the subcontract and asked them we had a bond that this was going to be an issue and then ended up making money off of it because their bond just paid them out. So, you know, that's a whole plethora of, you know, the scope being what you agreed to, making sure when you get a subcontractor bond, you know, what it's involved and that it's not insurance and just being an understanding, you know, having these documents be something clear that everybody can understand.

Yeah. Bond is really more like having a guaranteed loan on lack of performance. If I don't perform, whoever needs to get paid is going to get paid. And I think most people make that mistake. They think, oh, well, if I screw up, if somebody's covering it, right? No, you're going to pay it. It's like any other loan that you might default on.

Exactly.

All right, so we have contractors that are, is this the two main things that they're missing is the bid versus the scope thing, getting them caught, and then the pay when paid thing.

There is 20 chapters in there which I recommend you read them all, because in the subcontractor Institute, actually I teach them. But there's another one that is the way currently most subcontracts are written, that if you don't catch the mistakes of the sub before you, that then becomes your responsibility. And so, and then when you see these lawsuits where they have all of these subs brought in, that's how they do it. Right. You didn't, you didn't catch and point out and like, okay, you know, I have some suggestions in the book about how, yes, I'll have a duty and I'll report it, but if I don't, if I miss it, I'm not responsible for that work. I mean, that's just I mean, who would do that? I mean, how can I be responsible for somebody. Work that's either already covered up and hidden or, you know, just. It just, you know.

Yeah. So this happens, like, with homeowners, too. You're working on somebody's house and. And it could be years. Like somebody did something a long time ago. You come in, you do your work, and you're like, hey, hold on a second. This thing is going on. The homeowner goes, not my problem. You said you're going to do the work for this amount and get it done. I'm like, but there's an air conditioning line underneath the decking, and we poked a hole through it. I didn't do that. You know, how am I supposed to know? Right? So those agreements, also quite important.

I agree.

Second question. On the personal side of things, what's the most valuable piece of advice you've ever gotten from a mentor?

Valuable piece of advice? Never give up.

Like, you know, starting a company, right? You don't just automatically go, hey, I'm an attorney. And all of a sudden you're doing attorney stuff. You got all kinds. You're in business, too. You're setting up a business. You have the finances of business. You have marketing. I get a customer, listen to a whole story about a guy getting his license and being attorney, setting up his office and nobody being there. And he finally has his first customer walk through the door. So he picks up the phone and he's. He's acting like he's talking on the phone. He says, no, my fee is 50 grand. That's my fee. And that's. I'm not coming off of it. And. Well, I understand. No, I still. No, I can't be 45. It can't be 49.99. It's $50,000. That's my fee. That's what it's going to take for me to get you out of this. Great. Come down to my office, get the paperwork signed, the whole bit. And he hangs up the phone and he's like, so, how can I help you? And the guy goes, well, I'm here to hook up your phone.

That's a good one. And just like a subcontractor, it took me a while to learn how to run a business. They don't teach in law school how to run a business. But no.