The Contractor Agreement: 7 Steps to an Iron-Clad Contract

Article by HouseLogic.com
By: Barbara Eisner Bayer
Published: February 24, 2011

Follow these seven tips to make sure your contractor agreement works in your favor—not your builder’s.

Step 1: Hire a lawyer

Contractors use their own forms, which are drafted for their benefit, not yours. You’ll benefit from hiring an attorney to review your contractor agreement or draft one that’s you-friendly. Even though this may cost around $250 to $500, it can save thousands of dollars later if there’s a dispute.

Step 2: Take the home court advantage

Add a “choice of law” or “forum selection” provision, which says that disputes will be litigated on your turf. This provides protection against out-of-town contractors or suppliers—you don’t want to have to drag yourself across multiple state lines for a lawsuit.

Step 3: Create an incentive to finish

Define when the contactor will deliver on his promises, and when he’ll get his money. Within the contractor agreement, create a payment schedule in your favor by holding money back until the work is fully completed and you’ve verified the final payments to subcontractors. Maintain control by holding the purse strings.

Step 4: Reeling in a runaway contractor

The most common problem you’ll encounter is a general contractor who gets paid, but doesn’t pay his subcontractors and suppliers—possibly leaving you on the hook, according to Craig Robelen, a home builder in Boca Raton, Fla.

Robelen advises protecting yourself upfront by requesting the names of all professionals your builder will work with. Verify that your contractor has paid his subcontractors by requesting conditional partial lien releases during the construction term, and a final lien release at completion. (Have the general contractor collect them and present them to you.) These are essentially formal acknowledgments from subcontractors that they are being paid for work done. Also, see if your contractor has a “payment bond” that guarantees subcontractors will be paid.

Step 5: Corral unauthorized costs

Your contract should state that any changes that will affect the price of construction should be in writing and countersigned by both you and your contractor. This protects you from unauthorized charges.

Step 6: Avoid kickbacks

Protect yourself from kickbacks—where contractors gets bonuses from their subs for referring business—by requesting that builders sign affidavits that they’re not getting any “fees” from subcontractors as a prerequisite for doing business with them. Keep costs well-defined by asking for a “bid summary,” which should show a minimum of three quotes in every cost category of your budget.

Step 7: Binding words

If you’d like to avoid going to court in case of a dispute, add a clause in the contractor agreement for binding arbitration. If there’s a problem, you and your contractor will plead your case in front of a non-biased arbitrator, whose decision will be final.

If your contractor balks on any contract point you feel strongly about, do some more research. Maybe what you’re asking isn’t typical for that kind of job. Talk with neighbors who have had similar work done and sound out other contractors regarding their policies on the disputed issue before you sign anything. This helps you determine what’s customary for your particular area.

Barbara Eisner Bayer has written about personal finance for the past 17 years. She recently completed a home renovation on time, on budget, with the aid of a cold compress on her forehead.

The Contractor Bond: When a Handshake Isn’t Enough Assurance

Article by HouseLogic.com
By: Nancy Mandell
Published: February 24, 2011

“Word is bond,” the saying goes, but with home improvements, the contractor bond should be in writing. Though you may have gone through the relevant processes to ensure that you are hiring the best contractor for the job, from somewhere like multi-m-contracting.com, for example, it is always a good idea to get your agreements and everything else that may need speaking about down in writing to ensure that they can adhere to what they have set out to achieve. In fact, doing this may just be the best thing that you ever decide to do.

What is a contractor bond?

When a contracting company tells you it’s bonded, that means it’s purchased a product, typically from insurance or bond companies, called a “surety bond.” This is a three-part agreement between:

  • You, as the customer, called the “obligee.”
  • Your contractor, called the “principal.”
  • The surety company that issues the bond.

The surety bond is a guarantee that contractors will offer certain services to you, as outlined in the work contract, and if they don’t, you can report the problems to the surety company and get a cash payment.

Different kinds of contractor bonds

Surety bonds have wide application in the business world, but only a few types are relevant when dealing with home improvements contractors:

  • Performance and completion bonds. These ensure the work will be performed and completed to your satisfaction, as outlined in the contract. As attorney Jack Harari of Weidenbaum and Harari in New York says, if the contractor bungles the job, just walks away from a half-finished job, or even goes belly-up right in the middle, you’re covered. Insist on these bonds for any building jobs.
  • Payment bonds. These protect you against claims from subcontractors. If the contractor you hired to build a garage doesn’t pay the supplier who sold him the cinder blocks, the supplier will have recourse against the contractor. Why should you even care? Because a stiffed subcontractor could come after you, even if there wasn’t a direct contract with you. These bonds are only necessary if your contractor is making major outlays to other suppliers and contractors.
  • License and permit bonds. If state authorities require licenses or permits to do business, they may require contractors to purchase these bonds. Provisions may vary from one location to another.

It can be comforting to know that a license automatically means a bond, but don’t assume that these bonds will be enough: They may not have a high enough financial ceiling to cover your job, and they might not include a payment bond for subcontractors.

Read the bond’s fine print

Since each bond’s provisions may vary, you have to sweat the details:

  • Before any contractors start work, find out who has bonded them and exactly what for. Does the contractor bond specifically cover what is outlined in your contract? Can they show you a “certification” providing they have the bond?
  • If bonding comes with a state or local license, make sure the contractor’s license is up-to-date. Your town or county may have an online list of local contractors who are licensed, and the builders themselves should have proof.
  • Never assume, says Wayne B. Heicklen, Co-Chair of the Real Estate Group at New York law firm Pryor Cashman. He advises you to read the financial details of the bond so you know what you’re going to get and under what circumstances.
  • Don’t skimp! It’s true that premiums for bonds are expensive and as a result, a bonded contractor may charge 1% to 3% more for a project than an unbonded one. But if you go with an unbonded contractor to save a few bucks, you may regret it later. The unbonded contractor may have been unable to get a bond because of past mistakes, just as a driver with multiple moving violations would have trouble getting car insurance from a reputed insurance company (click here for an example).

Nancy R. Mandell is a New Jersey-based financial writer who has worked for On Wall Street and Wealth Manager magazines. A longtime home owner, she has had to work with her share of contractors over the years.

Published on: Mar 18, 2011

How To Fight Back Against a Bad Contractor

Article From HouseLogic.com
By: Oliver Marks
Published: March 4, 2011

If you are having a villa or property built alike to The Villas At Rancho Pacifica, you need to be prepared for misconduct by your contractor. Although this is unlikely to happen, don’t take contractor abuse lying down. If your contractor has fouled up your home improvement project–or disappeared altogether–you have recourse. Maybe the contractors took on more work than they could handle or their credit dried up in the middle of a job. Worst-case scenario, they’re out-and-out scam artists. Ideally, before having employed someone, you will have covered all bases by making sure they have the correct insurance (on a side-note, if you need contractors all risk insurance , visit constructaquote.com). However, this may not have been the case. Fortunately for you, read the rest of this article to find out what to do next.

Don’t get mad: Get motivated to defend yourself. Here’s how.

Fire the contractor

Firing is the obvious, but not an easy, step when things go seriously wrong. Your contractor could challenge the firing in court as a breach of contract: You must show that he or she breached the agreement first.

Document each time they didn’t live up to the specifics of the contract, such as substituting inferior materials or failing to stick to the schedule. Then send a return-receipt letter to their business and home addresses stating that unless the problem is rectified within a specified number of days, they’re in breach of contract, and you will be terminating it.

The catch: Contractors probably won’t refund money you’ve already paid. If you’ve written any checks up front, this tactic can be costly.

Request a hearing

Some construction contracts include a binding arbitration clause, where parties agree to resolve disputes by arbitration, rather than in court. Arbitration is a relatively low-cost process in which each side presents its case to an independent authority, who makes a final decision.

Even if your contract has no such provision, you can request a similar hearing. The Better Business Bureau, a national nonprofit association, offers mediation services for free or for a nominal fee of around $50. Neither the home owner nor the contractor needs to be a member of the organization.

The catch(es): You must get the contractor to agree to mediation (good luck!). And mediators and arbitrators look to the contract for guidance. If you have a badly written one, you may be out of luck in mediation.

Hire an attorney

Hire a construction attorney who knows the ins and outs of state statutes and can work around weaknesses in the contract. If there has been a clear breach of contract, you could contact a commercial litigation lawyer. Unlike BBB hearings, the contractor can’t opt out of a lawsuit.

If the contractor has disappeared altogether, you may be able to collect money from a state contractor recovery fund consisting of contractor licensing fees, or from a bond the contractor posted at the start of your project, which is required in some states.

The catch: Attorneys charge $100 to $300 per hour for these cases. So unless you’re dealing with a big-ticket project, you’ll likely spend more on the attorney than you will collect from the contractor.

Take your case to small claims court

In small claims courts, you represent yourself and pay just a few dollars to bring a case. The rules depend on your local jurisdiction, but typically a judge hears from both parties, asks questions, and then resolves the issues.

The catch: Small claims are just that. In most places, award limits range from $3,000 to $7,500. In Kentucky, coming in lowest, it’s $1,500; in parts of Tennessee, highest, it’s $25,000.

File complaints and bad reviews

A slew of websites allow you to post information about bad contractors, including angieslist.com, franklinreport.com, and contractorsfromhell.com. You can also file a complaint with the state contractor licensing board, which could make the information public if it receives enough complaints.

If you are a business contractor and you don’t want this to happen to you either, then you should make sure that you have a good business plan. You can find out how to grow your business properly using a site like http://yoursgi.com as this can help you not get any complaints from people and that would just make your life easier as a contractor.

These steps won’t fix your crooked tile, but you may take comfort in knowing that you’ve protected a fellow home owner from the same fate.

The catch: A contractor could sue you for libel over a bad review. State laws vary, but truth is a strong defense, says Atlanta attorney Alan Begner, president of the First Amendment Lawyers Association, a trade group. Still, a big contractor with deep pockets could force you to spend tens of thousands in your own defense.??To decide how–and whether–to go after your contractor, ask a construction attorney to review your situation. You’ll pay between $500 and $1,000 for a consultation, but you could save far more money (and aggravation) in the long run.

A former carpenter and newspaper reporter, Oliver Marks has been writing about home improvements for 16 years. He’s currently restoring his second fixer-upper with a mix of big hired projects and small do-it-himself jobs.