Q: Having looked around for a larger house, we have now decided we cannot afford to buy. 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: With today's high interest rates and the uncertainty of the marketplace, more and more home buyers are improving and adding on to their residences. Selecting a legitimate, licensed contractor is often a difficult task.

Ask every contractor you interview for references. You should also inspect prior jobs of the contractor, to assure yourself that you are satisfied with this person. Also, make sure the contractor is licensed in the jurisdiction where your property is located.

Once you have selected a contractor, it is extremely 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.

You must have a written contract. Do not rely on good faith, promises and a handshake.

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

Do not sign the typical one-page proposal 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 homeowner. The American Institute of Architects sells standard form model contracts, which you should use in your dealings with a prospective contractor.

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

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

The contract should state that "time is of the essence." One 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 many homeowners offer a bonus to the contractor for early completion.

Are you properly insured against possible claims by workers who may be injured on the job? Insist that the contractor be adequately insured, and check with your own insurance company to determine the limits and extent of your liability.

You should have the absolute right to terminate the contract if, after reasonable notice to the contractor, you are dissatisfied with the way the work is progressing. Of course, you have to be reasonable, and cannot arbitrarily terminate.

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