Q: We have now decided that we cannot afford to buy a large house. However, because we need additional space, we plan to expand our present house by adding at least one new room. We have obtained what we consider a good proposal from a contractor, but would like to learn whether there are any special legal considerations involved when dealing with remodeling contractors.

A: Because of inflation and high interest rates, more and more home buyers are improving and adding onto their personal residences. Selecting a legitimate, licensed contractor is often a difficult task. Once you find a contractor, ask for references. You should also inspect prior jobs cared out by the contractor, to assure yourself that you are satisfied with this person.

Once you have selected a contractor, it is expremely important to enter into a written contract spelling out in detail all of the terms and conditions under which the remodeling or renovation job will be done.

Here are some suggestions for mandatory provisions in any home improvement contract you sign:

Do not sign the typical one-page proposal that might be submitted by your contractor. If you do, it will be a contract legally-binding on you. Unfortunately, these one-page proposals provide very little, if any, protection for the homeowners. The American Institute of Architects (AIA) sells standard form model contracts, which you should use in your dealings with the prospective contractor.

The contract should contain a carefully worked out payment schedule. Regardless of whether you or your bank will be making the actual payments it is recommended that at least 15 percent of the total contract price be "retained" until final completion of the job. There are too many cases where contractors have been paid in full but, because the job has not been completed, there is no more money to pay anyone -- including sub-contractors -- to finish the task. Your bank or your attorney will be able to suggest a reasonable payment schedule for you.

What kind of warranty is the contractor willing to provide? This should be discussed in detail before you sign and the exact terms of warranty should be spelled out in writing.

The contract should state that "time is of the essence." A common problem with remodeling contracts occurs when the contractor is unable to finish the job within the estimated time. It is also suggested that the contract provide for a daily penalty from the contractor for each day the work is not completed after the time specified in the contract for completion. This provision will give the contractor a real incentive to complete the work within the promised time period. As an additional incentive, some homeowners offer a bonus to the contractor for early completion.

Are you properly insured against possible claims by workmen who may be injured on the job? Insist that the contractor be adequately insured. If not, check with your own insurance company to determine the coverage and limits of your liability insurance.

Arbitration must be stipulated in the contract. You should not have to go to court to resolve any disputes that might arise between you and your contractor. Legal fees, court costs and the time involved can be a real deterrent to a prompt resolution of any dispute. Your contract should provide that all disputes be resolved through binding arbitration under the rules of the American Arbitration Association.

There are contractors who will balk at entering into a written contract. But I have seen too many problems where the contractual agreement between the contractor and the homeowner was, at best, vague. Thus, a written contract, as outlined above, is essential.

Recently, the Consumer Federation of America reported that home improvement abuses are more in need of remedy than any other type of consumer fraud.

It should be kept in mind that early negotiations and a well-drafted contract can save you subsequent headaches and possible litigation.