Tuesday, February 21, 2023

Contracts and Their Future

 A long time ago, a new customer came to us to work on a project. Many years before, we had talked to this customer through a referral from a design engineer. At that time, we created a referral bonus for that person. If the customer gave us the contract to manufacture their product, we would pay some percentage of the revenue to the engineer. That particular project didn’t happen. But then the customer came to us directly ten years later on a different project that didn’t involve that design engineer. We struggled with the question of whether the engineer should still get the referral bonus or not. Was there a time limit/expiration on the contract? No. Were there any qualifiers, such as the involvement of the engineer in the project? No. After asking and answering many other considerations, we ended up paying the engineer a bonus but rewriting the agreement. At the time, the original contract was written, we had not foreseen or we had ignored the possibility that a customer would find us on their own and we might still have to pay a referral bonus even though an engineer had not made any effort in the project or involved in making an introduction.

Recently, I was involved in a discussion as a real estate broker was contemplating how to hook a construction company with an exclusive marketing/listing deal. An option under discussion was offering a portion of the commission (or ownership) to the construction company, besides providing a benefit of faster turnaround on their properties and spec homes, as well as improved cash flow and quicker repayment of construction loans. One of my questions was: Currently, they focus on residential construction, which you’re interested in, and they only dabble in multi-family rental unit construction. What happens when that shifts and you end up paying them a percentage of residential sales for which they have no involvement?

After pondering that for a bit, the broker admitted that wouldn’t be good so he was going to draft an agreement that was limited to the units the construction company built. I also encouraged him to consider other scenarios that might instigate a voiding of the agreement.

Too often we project situations as continuing in perpetuity. We don’t foresee that something may change for one of our business partners: divorce, death, distraction with another business venture, dissolution of their company in its present state (sale, merger, acquisition) and so on. So we don’t prepare for those “inevitabilities.” 

I strongly encourage you to project any contracts or agreements into the future and at least explore more likely and foreseen scenarios.

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