Q: We are considering making a substantial addition to our house, the addition to consist of two rooms and a bath. What protection should we include in the contract?

A: It always amazes me that homeowners will hire a contractor for major renovations in their house, and either have a loosely written one-page "letter agreement," or have nothing in writing at all.

In my opinion, it is absoutely essential to have a written contract with your home improvement company (the contractor) that will spell out all of the terms and conditions of the proposed renovation.

We lawyers have to be concerned with the "horrible hypothetical," since all too often these turn out to be real life situations, which if anticipated in advance could avoid unhappiness, and additional expenses.

With the uncertainty of today's market place, 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. It is also important to make sure that the contractor is licensed in the jurisdiction where your property is located.

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

Do not rely on good faith, promises or a handshake.

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

* Do not sign the typical one page proposal submitted by your contractor. Although this is 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 contracts that you should use in your dealings with a prospective contractor. You may contact the American Institute at 626-7332, and ask for AIA document A107, entitled "Abbreviated Owner/Contractor Agreement Form for Small Construction Contracts." It's 85 cents for non-AIA members.

* 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 final payment be "retained" until final completion of the job. There are too many cases where the contractor has been paid in full, but 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 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 for completion in the contract. 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.

* Before final payment is made, have the contractor give you a signed statement releasing all mechanic liens. This means that the general contractor--as well as all of the subcontractors--should sign a release of liens form before you make the final payment. We have seen too many cases in recent years where the general contractor was paid in full, but conveniently "forgot" to pay the subs. Under the laws of all three jurisdictions, the subcontractors have the right to file "mechanic liens" on your property. You want to avoid the unnecessary expense and hassle of having to defend against such liens.