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Posted at 05:30 AM ET, 09/19/2012

How to work with a contractor

Construction is not easy. Whether you’re fixing up a home to flip or renovating your own home, it is very important to be realistic about the project.  Home improvements are hard work and very time consuming.  And, let’s face it, we all have very busy schedules. Getting your hands dirty on a good construction project is certainly good for the soul but it is very hard on the body. So, when it comes time to bring in a professional, you need to take a few simple steps to protect yourself and your project.

 ●Get at least three bids. Call as many contractors as you have time to interview. Collect written offers from all and compare the bids as evenly as you can. The best way to do this is to write up a specific list of items that you want completed and have the contractors estimate their price on a line item basis. It can be very difficult to compare apples to apples if your contractors are giving a bulk number or if they are listing and grouping items differently.
When it comes time to bring in a professional, you need to take a few simple steps to protect yourself and your project. (Patrick Fallon - BLOOMBERG)

Once you have a good pool of bids it’s time to screen the contractors. There are three easy steps to screening. Most everybody knows the steps but many people neglect to follow them.

License  Make sure your contractor is licensed for the work they’re doing. Many people think they can get a deal by hiring unlicensed contractors but oftentimes the discount is not enough compared to the potential costs later, which can be enormous.

Most contractors pay at least 10 to 20 percent in overhead expenses associated with trade compliance. At one time, I employed 20 construction workers. In one year, my workman’s comp insurance was over $30,000. Many people hire unlicensed contractors and think they’re getting a deal because they’re saving 5 to 10 percent. Believe me, it’s not worth the risk.

Plus, when the deal goes bad you have very little recourse. A licensed contractor has a lot to lose and it’s easy to file a complaint with the department of licensing if they fail to perform or do poor work. And, it’s so easy to check a contractor’s license that there’s no excuse. Simply go to any search engine and type in “department of licensing” and the state where you’re working. In Virginia, the Web site is www.dpor.virginia.gov. Make sure the contractor is licensed for the work they’re bidding and note any complaints filed against the license.

Insurance All reputable contractors should at least have liability and workman’s comp insurance. Many small contractors won’t be bonded. But make sure they’re properly insured with the right type of workman’s comp. Don’t let a contractor do a major addition if he only carries workman’s comp for painting. Framing is the most expensive type of insurance and many contractors try to cut corners. If a worker is hurt on your property you may end up paying the tab if your contractor isn’t covered. This is also easy to check. Just have the contractor put you in contact with his insurance agent and have the agent send you a certificate of insurance. This is fast and easy if the contractor and insurance company are legitimate.

References Yes, check references. Have the contractor refer you to his last three clients. Don’t let him cherry pick. If the last three jobs he did were not similar to the work you’re having done, then ask for additional references, but make sure they’re recent. Even the best contractors run into troubles, usually financial. Make sure you’re not dealing with someone who is on the financial brink.

Contract with scope of work and pay and progress schedules Make sure you have a written contract.  You don’t need a lawyer but make sure you at least write down the work that you’re having done and the price for the work. A pay schedule is useful. Just have a basic agreement on when the contractor will get paid based on progress points.

Also include a basic agreement about when the work will be completed. I often add arbitration into my contract. Many times, contractors want to be paid if the work passes inspection. Sometimes very ugly work will pass inspection because the building inspector doesn’t inspect for ascetics. An inspector isn’t going to fail construction because of a sloppy paint job or ugly finish work. So, a third party such as a representative from a trade association like the local home builders association can be a neutral judge. 

I like to add something in there about my expectations. I expect superior work on all work undertaken by the contractor. I’ve had contractors try to claim that I told them to do sloppy work because I wanted to keep the price down. Now I make my expectations clear in writing beforehand. I’ve never had that excuse used since. Licensed contractors are obligated to warranty their work, but adding a warranty paragraph in the contract won’t hurt. Construction projects are extremely hard to litigate. Take every reasonable step to avoid the courtroom.

Don’t get ahead on payments We all know this, but so many people make the mistake of overpaying the contractor. It’s a delicate act because cash flow is so important to contractors. Be fair but don’t pay for more than has been completed. A draw schedule — an agreement on when funds will be paid out — in your contract can really help here. It’s not perfect but it will keep you close. Once you’ve paid a contractor, you lose a lot of leverage.

This is a very basic and brief overview of the process. I’d encourage you to seek additional education if you’re taking on large projects. But, following the suggestions I outlined here is a great start to help your construction project go smoothly and drastically increase the chances that you’ll be happy with the final outcome.

Read more about Pierce’s experiences as a real estate investor

Justin Pierce is a real estate investor in Northern Virginia. In his occasional column, he will write about investing in real estate.

 

By Justin Pierce  |  05:30 AM ET, 09/19/2012

Tags:  investor

 
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