Contracting? Cover Your Bases.

By Benny L. Kass
Saturday, November 24, 2007

If you are planning to work with a construction or remodeling contractor, there are a number of steps you should take to protect yourself.

First, the contractor must be licensed in the jurisdiction where your property is. Insist on seeing a copy of that license. Call the government agency that issued the license to confirm that it is current.

Next, contact your homeowner's insurance company to determine the extent of your coverage should accidents or damage occur.

Negotiate all terms and conditions, including the cost of the job, with the contractor. When you have an agreement, it should be put in writing.

Many contractors use what I call the "two-page special" contract. This simple document merely states who the contractor is, a general description of the work to be done and the total cost of the job.

Such a contract is not in your best interest. Instead, you should consider the contract forms published by the American Institute of Architects.

There are a number of AIA forms, varying by the type and size of work. For example, Form A105 is a standard agreement between owner and contractor for a residential or small commercial project. Form A107 is more comprehensive but can also be used for projects of limited scope.

Every 10 years, AIA updates its forms to reflect industry trends. The newest set was released this month and includes a number of significant changes:

¿ No arbitration requirement: Older AIA contracts required that if the homeowner and contractor could not resolve disputes, they had to go to binding arbitration. The revised forms permit the parties to negotiate alternatives, including litigation.

Many consumers are learning that arbitration may not be the best way to resolve problems with contractors, even though litigation can be more expensive and time-consuming. Often the arbitrator does not issue a written opinion explaining how and why a decision was made, which leaves everyone in the dark. And our legal system will generally not reverse an arbitrator's decision unless it can be demonstrated that he or she was biased or arbitrary. And how can this be presented to a judge when there is no written opinion?

Initial decision maker: Previous contracts "assigned the architect the role of serving as a neutral party to decide disputes between the owner and contractor," according to AIA. "The 2007 update provides the owner and contractor with the opportunity to hire a third-party initial decision maker . . . for dispute resolution."

Access to financial information: The new forms prohibit the contractor from requesting financial data from the owner after the work has begun, even if the contractor may have reason to be concerned about the owner's ability to pay.

Dealing with subcontractors: Homeowners often learn that although they have been paying the contractor, the subcontractors who are working on the job are not being paid. The AIA said, "The revisions also allow the owner a greater opportunity to learn of contractor/subcontractor payment problems, and address a contractor's failure to pay a subcontractor by allowing the owner to write joint checks."

One of the most common problems that homeowners encounter with contractors is that they pay most, if not all, of the contract sum when the work is far from completed. Some contracts call for a down payment, with the balance due when the work has been finished. Other jobs, especially large ones, have a draw schedule that's part of the contract. This schedule will spell out when additional payments are to be made based on performance of the work.

If an architect is involved, he or she will normally be the gatekeeper for the draws. The contractor submits requests for payments, which must be approved by the architect. However, many homeowners do not use an architect, and thus rely on the contractor's representations as to what was done.

It is critical to keep a portion of the final payment until you -- or your architect or designated initial decision maker -- are satisfied that the work has been done and that all subcontractors have been paid.

It is a good idea to have the general contractor and all subcontractors sign a statement to this effect. You do not want to discover later that the subcontractors have filed mechanic's liens against your property.

Perhaps the most common complaint that arises in renovation projects involves changes to the scope of work. As the job progresses, the homeowner may ask the contractor to add another cabinet or install more electrical outlets. The contractor does the work and, at the end of the job, submits a bill. By that time, because memories are short, the homeowner disputes that the work was ever authorized.

All change orders should be in writing, spelling out the work to be done and any additional cost. Both the homeowner and the contractor must sign this document.

Contractors are notoriously lax about this, which is why there are so many disputes.

Contracts should also include a provision on ending the relationship. If you become dissatisfied with the quality of the work or find that the contractor has taken another job and has slowed or stopped work on your project, what can you do?

Most "two-page specials" are silent on this. However, all AIA contracts have clear language that protects the homeowner. Form A105 states: "The Owner may terminate the Contract if the Contractor (1) repeatedly refuses or fails to supply enough properly skilled workers or proper materials; (2) fails to make payments to subcontractors . . .; (3) persistently disregards laws, . . . or (4) is otherwise guilty of substantial breach of . . . the Contract."

If any of these happens, the homeowner, after giving seven days' notice, may terminate the contract and hire another contractor. If the unpaid balance owed to the contractor is more than the cost of finishing the job, the homeowner owes the original contractor the difference. But if the cost to complete the work is more than the original contract price, which is often the case, the homeowner can look to the fired contractor to pay the difference.

It is often easier and faster to enter into a simple two-page contract for the work that you want done. And because many contractors are competent and honest, everything will probably work out.

But an overly simple contract could backfire if there are problems. A judge will honor any binding contract that you have signed, even if it is one-sided in favor of the contractor.

The AIA contract forms are designed to protect you. You may want to tailor those forms to your needs, but they are accepted in the industry and should be used by all homeowners.

The forms can be purchased directly from AIA. See its Web site, http://www.aia.org, or call 800-365-2724.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.