Red Flags, Lessons, and Advice

I don't think it would be an exaggeration to say that we have learned a lot about hiring contractors over the last couple of years. We spent some time distilling this down to a list that, with luck, other people can learn from before they get into a potentially horrid situation, like, say, what happened to us last year.

The first big piece of advice is, before you do anything, go out and find the best construction lawyer you can find and get their advice on everything, including the advice in this article. Have them tell you what should be in a contract and what can be left out, and have them ready to respond when you have a contract to be reviewed.

Some things you want to have in the contract

This applies mostly to large jobs, costing more than $10,000.

Require a performance bond for the full amount of the contract

A performance bond will give you the money to complete the job if the contractor walks off in the middle. The penal sum of the bond (the amount payable to you should this happen) should be the amount of the contract, and as change orders are signed the amount should be adjusted. Performance bonds cost usually 2 percent of the total contract price. Any contractor who cannot get a bond is not a good risk to hire as a contractor, and any contractor who refuses is telling you that they are not willing to back up their contract with a possibly serious impact on their professional future. (Contractors who walk off the job and force the bonding company to pay out for them have a hard time buying future bonds.)

Yes, it is unusual to require a performance bond for residential work. On the other hand, most of the fraud and deception in construction happens in residential work. I think the two are related.

Make sure there is significant retainage

"Retainage" is the amount of money held back from each payment by the owner, to be paid to the contractor on completion. The usual amount is about 10 percent. It's totally reasonable to put that money in an interest-bearing account and give the entire balance to the contractor at the end, as soon as the work is finalized. Basically, retainage ensures that you have some leverage over the contractor even when you are at the punch-list stage of the project.

Tie payments to completed work

Payments should be made on a schedule tied to the value of the work that has been completed. In our contract with Counterforce, we came up with a work schedule, and a payment schedule to go along with it. If the scope of work changes, the schedule should change. This should be an addendum to the contract, not just a note or a memo from the contractor.

Require lien releases before payments are made

Contractors hire subcontractors who are entitled to put a lien on your property if they are not paid. You want to see a lien release before giving any more money to the contractor, or you will have to hunt down all those subcontractors and get releases from them yourself.

Make sure to make explicit anything important to you

We've recently decided that all future contracts will include a no-smoking clause. Another thing you might want to see in the contract is explicit detail about how contractors will deal with household pets, special hours for noisy work, and whether contractors can use the bathroom in the house or will need to provide their own porta-potty. Yes, it seems fiddly and overly picky, but good contracts are all about avoiding conflict by spelling everything out.

Red Flags to Watch for Before Signing a Contract

The contractor refuses to give you a written estimate with a signature on it

Does this need saying? Don't do any business with a contractor on a handshake. Not even repairing a leaky faucet or installing a new lock. Get it in writing. Anybody who won't give it to you in writing is telling you that the price might be very different.

The contractor doesn't want to tell you what their breakdown of costs is

Sometimes this makes sense. If somebody's installing a water heater, the scope of work is pretty small. If they're putting in a new kitchen, they should be able to provide it, because they had to estimate the job in the first place to give you a written estimate.

You want to see their breakdown of costs for two reasons: 1) To be sure they included everything in their scope of work (which should also be written out in explicit detail), and 2) to be sure that they did not significantly underbid the job. Contractors who underbid jobs have a strong incentive to find "problems" or "unforeseen conditions" that require expensive change orders and send you much further over budget than you were expecting.

The person negotiating the contract won't actually be doing the work

This can only lead to disaster. The person who signs the contract will spin it in one way, while the people who work on the job will understand it in an entirely different way. Even if the negotiator will be on the job site, there are still myraid possibilities for misunderstandings. Get the scope of work written down in excruciating detail and have that information incorporated into the contract. Get your lawyer to do this for you, if need be -- it'll be worth the money you spend.

The contractor provides references for jobs that happened more than two years ago

A good contractor is leaving behind happy customers all the time. A bad contractor has to pick and choose from long-past customers to find the ones who will speak well of him.

The references say the job site was left messy

When you call all the references (and you should do this), ask them whether the contractor left the site clean at the end of the day. This is a minor thing that will greatly influence how you feel about the job while it is going on. This is especially important for anything that happens inside the house.

The references say the job went over budget

If the reference says the job cost more than the original estimate, ask them by how much, and why. This was one of those red flags we should have noticed about our foundation contractor's references. This could be a sign of a contractor who habitually underbids, then makes up his profit on change orders or duplicate charges.

The contractor asks for a significant retainer

You should not start paying money until the work is started. A stable, good contractor has working capital to rely on to get the job started. And whoever has the money is in charge: remember that if the contractor walks off the job in the middle of work, any extra money you've given him that has not gone into the job is essentially lost, and you've going to have to pay somebody else to complete it (hence the performance bond, discussed above). Pay for work after it has been completed to your satisfaction and as spelled out in the payment schedule.

The contractor isn't willing to give you a copy of the contract to study before signing

Don't let the contractor breathe down your neck while you read the contract. Have him mail or fax you a readable copy before you agree to sign. If he won't, this is a very bad sign. A contractor who doesn't want you to studying the contract is trying to hide something. Also, you need to take the contract to your lawyer (see above) for review and to add your own clauses. Be sure to send copies of changes to the contractor for his own lawyer to review before sitting down to sign.

The contract should get longer and more detailed as the cost and scope of the job increases

If the job costs an amount of money that makes you gasp and feel weak at the thought of losing it, get a lawyer to read it over for you (your local Bar Association will refer you to a lawyer for a quick, cheap consultation, but as I mentioned before, you should find a lawyer to have on retainer even if it does cost more). The contract is there to cover you when things go bad. Even the best contract will not protect you from a dishonest contractor, but a contractor who presents you with a detailed contract is one who has at least considered what should happen if things go south.

You, of course, should pay a great deal of attention to any contract, even boilerplate on a pre-printed contract. That's why you asked to have it before signing.

Red Flags to Watch Our for After Signing

The contractor uses your tools or equipment without prior agreement

If this starts to happen, stop work and speak to somebody in management in the company and the job foreman. Don't shrug it off. These are professionals. They should have their own extension cords and ladders and shovels. Construction is very hard on tools, and you're already paying (as part of the included overhead in the the price) for maintenance for the contractor's tools. Why should you also pay in damage to your own?

And if anything of yours happens to walk off with the contractor, be even more firm. There's no reason for that to happen, even "honest mistake." Be sure the tool is returned in exactly the condition it was in before they stole it, or have them buy you a new one. Theft is actually a crime, you know. We've lost numerous tools and household items to contractors, either because they walked off with them or because they used them and broke them (and didn't even bother to tell us).

The contractor pressures you to pay as soon as an invoice is delivered

Anybody who pressures you to pay them quickly is trying to hide something. They don't want you to pay attention to the work that was done, or to be sure the invoice is correct. The more they pressure you, the more you should slow down and examine what they claim to have done. Don't buy sob stories about not having money to pay the rent or their suppliers. All contractors have lines of credit and work with their suppliers on credit, so if they can't pay them right away they just have to pay a minor interest penalty. It is not unusual for contractors to have to wait 30 days to have an invoice paid, no matter what they tell you.

I can't stress this enough: without fail, whenever a contractor has pressured us to give them money, it has been the case that either the work was not actually complete, or the invoice is for more than it should have been, or it was an invoice for work we'd already paid for. This should send up huge, flapping red flags all over the place for you.

The contractor does not provide you with a written release of lien from every subcontractor as the work is completed

You can actually get this yourself. They sell pads of boilerplate release of lien forms at stationery stores. As a subcontractor finishes work, get their card and call them to be sure they have been paid, then have them sign and give you a release of lien. On the other hand, you should not have to do it. As I said, lien releases should come before payment, and they should come regularly. If they stop showing up, or if the contractor won't give them to you, withhold payment.

The contractor tries to get you to stay away from a subcontractor, an inspector, or some of his employees

When a contractor doesn't want you to talk to somebody, it's probably because he's hiding something. You want to have your finger on the pulse of your job. You should know the results of every inspection, the status of the job and subcontracts, because all of this has a financial impact on you and your property. As soon as a contractor tries to keep you from talking to somebody, go and talk to them right away.

Inspect the work often and document it

Look at the progress of the work every day. Write down a description of what happened on the job and take pictures of it every day. If you've got a large job, hire an independent inspector to check over the job progress on a regular basis, but especially before payments are made to the contractor.

Make sure permits are acquired before work is performed

Seems like common sense, but we've seen many of our contractors forge ahead without getting permits. This has resulted in huge delays as well as disagreements about scope and legality of work. If you see your contractor doing work without a permit, tell the contractor to stop. Period.

Get the permits yourself

When our first foundation contractor walked off the job, he refused to sign over the multiple permits on our project to us. We had to pay extra to open new permits. In the future, we will be applying for all permits ourselves, even though that takes more time and energy on our part. Not only does that help us keep a finger on the pulse of the job and know immediately about any building department problems with the plans, but it leaves us in control if a contractor bails out.

OK. This is long enough for now. We may add more to it later, but you get the idea: Hire a lawyer, get it in writing, police it diligently, and hold onto your money until you are satisfied.

posted by ayse on 01/24/06