We plan to add two rooms and a bath to our house. What protection should we include in the contract with our architect and contractor?

I receive a number of questions on this topic every year. It always amazes me that homeowners will hire contractors for major renovations to their homes having only a loosely written, one-page "letter agreement" or nothing in writing at all.

It is absolutely essential to have a written contract with your home improvement company (the contractor) that spells out all the terms and conditions of the proposed renovation.

We lawyers have to be concerned with the "horrible hypothetical," because all too often it turns out to be a real situation. If problems are anticipated in advance, homeowners can avoid unhappiness and additional expenses.

With the uncertainty of today's economy, more and more homeowners are improving and adding on to their residences instead of buying new ones. Selecting a good, licensed contractor is often a difficult task.

Ask every contractor you interview for references. Also inspect the contractor's previous work to assure yourself that he or she is right for you. It is also important to make sure that the contractor is licensed in the jurisdiction where your house is located.

As I have said, 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 renovating job will be done. Do not rely on good faith, promises or even the proverbial 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. Although this is a contract -- which would be legally binding on you if you signed it -- these 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. Contact the American Institute of Architects at 626-7332 and ask for document A107 entitled "Abbreviated Owner-Contractor Agreement Form for Small Construction Contracts." This is available to non-AIA members at a nominal cost.

The contract should contain a payment schedule that has been worked out carefully.

Regardless of whether you or your bank will be making the actual payments, it is recommended that at least 15 percent of the payment be retained until the job is completed to your satisfaction. All too often, a contractor will leave a job unfinished after he has been paid in full, and homeowners are caught in a double bind. There is no more money to pay anyone, including the subcontractors, to finish the task, and you have already paid the contractor the full amount of the renovation price. 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 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. I have talked to many homeowners who have had to wait several weeks, if not months, after the due date before the contractor finished the project.

It is also suggested that the contract provide for a daily penalty on 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. 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 the contract.

Arbitration must be provided for in the contract. You should not have to go to court to resolve any disputes that may arise. 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. I have seen too many cases in recent years in which the general contractor was paid in full, but conveniently "forgot" to pay the subcontractors. Under the laws of all three jurisdictions in this area, 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.

Most of these recommendations can be found in the standard form American Institute of Architects contract. It is a balanced form, and should be used for all home remodeling jobs.

Benny L. Kass is a Washington attorney. 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, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.