Shop Owners Discuss the Importance of Pre-Build Contracts

Aug 21, 2012

Having customers sign a contract prior to starting a job will establish a positive working relationship with both sides knowing exactly what to expect.

Pre-build contracts describe the details of any build, define your customer’s vision, outline exactly what will be done, how much it will cost and when the finished product will be delivered. If you’re not already convinced that a pre-build contract is necessary for your hot rod, street rod, muscle car or restored classics business, all it will take is one customer who swears he told you he wanted this when you gave him that.

“Having done builds in the past without a contract or written agreement, and now doing [contracts] on all major projects, we wouldn’t do without them,” said Walt Anders of Classic Nova & Performance LLC in Ashland, Oregon. “The pre-build contract is used for a reference by both parties to make sure that the project stays on track. It also spells out exactly what the project is and who is responsible for certain aspects of the job. We give the customer a time line so they know approximate stages of the project and when it should be complete. It also gives clear expectations for both parties. Contracts are very beneficial and definitely worth the time required at the start of the project.”

Ray Ballew of Ray’s Hot Rod & Speed Shop in Calhoun, Georgia, agreed.

“Pre-build contracts are good for both the customer and the shop owner,” he said. “Both will know what to expect from each other and there will be no surprises when the job is finished. Otherwise, you are at the mercy of the customer, which could mean non-payment or other complaints.”

In addition to protecting your business, your reputation and your work, contracts offer other side benefits. Even if you’re just starting out, operating with professional business practices establishes the level of professionalism of you and your shop.

Randy Lofquist, owner of Dynamic Rides, Rods and Customs in Kearney, Nebraska, researched the restoration business to develop a contract policy.

“Another restoration builder strongly suggested that the only way to establish your boundaries in beginning a successful working relationship between your business and the customer is to spell things out before getting started-spelling out strong points such as hourly rates and parts markup,” he said. “As we have continued the contract policy, I have gotten some positive feedback from customers. They have stated that it has made them feel more secure in beginning a large endeavor such as restoring or customizing a vehicle, along with feeling that you are a professional facility and not a fly-by-night shop.”

Ray Younkin of Milton, Florida-based Stripmasters Inc. agreed.

“I have had no problems using a contract,” he said. “The customers welcome it because it gives them some assurance that you are a legitimate business and have no problem showing the costs involved with building or repairing their car.”

A contract protects your business by defining your customer’s vision and the project so that there are no surprises.

“Far too often, a relationship that starts out as one of the happier days of the customer’s journey with a car project goes sour over the build period and bad feelings arise on both sides of the build,” said Tracy Lewis of RX Performance Products in Palmetto, Florida. “Addressing the unforeseen, and even the usual unexpected issues that, as a builder, we should know pop up all too often, right from the start, letting the customer know delays are and will be part of his build, make the experience much less disappointing than having to notify him/her with no warning. The unexpected is a part of the type of builds we do and the customer needs to be as informed as possible.”

Younkin agreed.

“The contract covers you and the customer,” he said. “As long as you do your part and do the work you say you are going to do, and do it correctly, there should never be a problem. We have a very detailed billing system, on some cars it can be 30-40 pages. The customer is required to sign when they are invoiced and upon delivery. This creates a paper trail and the customer has record of payment and we have a signature [proving] that they agree to the invoice. We love what we do, but this is a business.”

So where do you begin? If you’re not an attorney, and you don’t already have one, this is a good time to find an attorney, schedule a sit-down meeting and get some bonafide legal advice. A consultation should be reasonably inexpensive, especially when you consider that you’re protecting your business.

In preparation for your meeting, here are a few things to keep in mind.

“This can be a difficult business to develop a contract [for] and a way to bill,” Younkin said. “We have worked hard to make it easy for the customer to understand. When a customer drops $100k-“250k, or sometimes more, on a car, you need to get it documented for yourself and the customer so they have records to show for insurance and resale. This all starts with a contract to build or repair.”

Each build presents its own set of variables, but the first task is to translate the customer’s vision, identifying all the details needed to craft your contract.

“Whenever possible, we like to sit down with the customer face-to-face to go over exactly what they want to accomplish with their project,” said Anders. “This is not always possible, so sometimes it’s done with a combination of phone calls and e-mails. Either way, it normally takes several meetings/phone calls/e-mails to be sure to address all of the points of the job.”

“Once the information is gathered, a contract that specifies the parameters of the project is drafted,” Anders continued. “The completed contract is then sent to the customer for their review.”

“Once it is confirmed that all areas of the project are covered, the customer signs and returns the contract,” he added. “We provide a copy that is signed by both parties to the customer that they can reference during the build process.”

What should you cover in a contract? The specific elements of the contract depend entirely on the scope of the job, but here are some tips.

Ballew, who’s been in business for eight years offering full-line service, except for interiors, noted that the type of contract depends on the project.

“If the customer needs a component replaced, like a new front or rear suspension upgrade or a panel replacement that I can price as a flat-rate job, I would use a simple contract outlining what work will be done, any parts needed and purchased by me or the customer, and the total price for the job with the understanding that no work will be released unless the total amount owed is paid in full,” he said. “On the other hand, full builds need a little more since it’s sometimes difficult and often risky to give a set price.”

“These contracts can be a time-and-material-type, in which you and the customer agree to invoice dates when payments are due and what will happen if payments are not made, that no work will be released unless the total owed is paid in full,” Ballew added.

Anders attempts to cover all aspects of the build and the major components that are going to be used for the project in the contract.

“For example, [we cover] manufacturer, tire/wheel package, colors, etc., how the customer will be advised of the progress of the project (for out-of-town customers we e-mail pictures at two-week intervals), how payments are to be handled (payments for major components are paid for at the appropriate stage of the project prior to the parts being purchased) and what happens if the customer decides to hold up the project once it has been initiated,” said Anders “We’ve found that spending some extra time at the beginning will save time in the long run and help avoid misunderstandings down the road.”

For most builds, many shops require a deposit up front and staggered payments throughout the build.

“Our contract states the requirement of a deposit that is determined by the size of the project,” said Lofquist. “We are accustomed to $7,500-10,000 [deposits] and have [taken deposits] as large as $12,000 or $15,000. I have heard of other shops getting larger sums of money, but I feel that the initial down payment should be manageable enough that the customer realizes this is a serious undertaking, yet can stop anytime if desired. If they see progress from the start, it builds a level of trust so that they can understand the complexity of a complete restoration or custom build.”

“They are then asked to maintain a credit balance of at least $500 before another payment is required,” Lofquist continued. “While it is tough for us to stop on a project midstream, it is a must to get the positive credit established. If they are not current with payments, the contract states the penalties of having the project come to halt. They have storage fees for 30 days and then the project must be removed. As a shop with limited space, this is very important to keep the flow of vehicles going and not taking up stall space.”

Lewis goes over each and every step, the processes and the time each step should take, with his customers. He then provides them with frequent progress reports.

“We make sure we have the customer’s e-mail so as the project progresses, we can update them so they don’t feel ignored and forgotten,” he said. “This seems to be the area that’s most overlooked when a customer is going to be without their baby for an extended period of time.”

“We also let the customer know that there most likely will be changes, additional parts or fabrication needed that may not have been anticipated at the time the build was decided,” Lewis continued. “Customers don’t like surprises, especially surprises that increase the cost. We all know these are part of any big project, so letting them know up front makes this less painful should unexpected costs arise.”

Sometimes, the customer increases the costs with  midstream additions or changes, which could impact your contract.

“Changes on full builds are expected and are handled as they come up with no changes to the contract if both parties agree,” said Ballew. “However, if changes occur on a flat-rate project, then a new contract is made to include the new work added and the price change.”

Lewis handles changes differently.

“We amend the original [contract] as this keeps the entire process from start to finish in one document,” he said. “The customer is often 1,000 miles or more away and will want to approve or disapprove changes via telephone or e-mail.”

There will always be those customers who are never 100-percent happy, but pre-build contracts reduce the chances of a disappointed customer and are well worth the effort.