Top 7 Pitfalls of Hiring a Contractor and How to Avoid Them
As always, the information contained here is for general informational and educational purposes only and should not be constituted as legal advice. Consult an attorney for specific guidance and counsel.
1. Not Knowing Your Contractor
I can’t tell you how many times someone has called with a dispute with a contractor. “He ran off with my money,” they say. After a quick background search it is quickly discovered that the contractor has liens, judgments, criminal charges, and a bankruptcy in Florida (this is a real example).
A top concern when hiring a contractor should be doing a bit of background research on each of your prospective hires. In Tennessee, we have something called a Home Improvement License and separately a General Contractor’s license. A Home Improvement license allows for remodeling on existing residences from $3,000 to $25,000, and jobs over $25,000 should be supervised by a general contractor. An easy way to check if your contractor is licensed is to look them up on verify.tn.gov.
You should also quickly scan for Better Business Bureau complaints. Ask the contractor if they have a list of references, and if they have another active job site you can visit before making a final selection. You can even elect to do a quick background search – if you are spending tens of thousands of dollars, a background check can well worth it. Also, it is vitally important to actually call the references! Here is a sample list of questions to ask references:
- Did the contractor complete your project in a timely manner?
- Did they adhere to the budget as planned?
- Are you satisfied with the work product? Were there any problems after completion of construction?
- Was there anything about the work or process of working with this contractor that made you uncomfortable?
If visiting a job site, you should be inspecting for cleanliness, safety, and organization, among other things. Pro Tip: check out a job site on a Saturday morning. If there is a crew working, that is a good sign of a contractor who knows how to efficiently manage jobs.
2. Not Verifying the Contractor’s Insurance
In today’s litigious society, it is imperative that you request a copy of your contractor’s insurance just in case there were to be a claim connected to your property or project. Your contractor needs a commercial general liability insurance policy I(can potentially cover poor workmanship, personal injuries, or property damage to third parties). For significant projects, request as the owner to be added as an additional insured under the policy. Make sure that it is discussed with the contractor whether you or the contractor will be obtaining a builder’s risk insurance policy.
If a contractor were to be uninsured and an injury or accident were to occur on your property, a claim may be made against you or your homeowner’s insurance.
Make sure the policy limits make sense with the scope of project you are working on. For example, if you are building a $2,000,000 home and the builder is only covered up to $1,000,000, then raising the policy limit is probably necessary.
3. Only Getting One Bid
Never only get one bid for your project. With the rise of the Internet, it is easier than ever to schedule a project walk-through or even get quotes online with pictures and video information.
Consider the risks you may be taking (both known and unknown) of hiring a cheaper, yet unlicensed, worker. Generally speaking, it is wise to get at least three bids. This gives you an idea of a reasonable price for your project. You will likely have to call more than three people to get three people to give you bids. Those that make it through the calls, scheduling, meeting, and follow-up to get you your estimates are showing signs of a well-run business.
Cheaper is not necessarily best. Many investors make the mistake of simply hiring the cheapest contractor. But often they end up spending more than the other quotes on overages, delays, or poor construction. Hire the contractor who is the most likely to do the construction in a quality and timely manner at a fair price.
Also, if you are not experienced with construction have someone with experience review the bids with you. If you do not know what to look for, you may not realize that a bid is simply cheaper because a contractor has left out important items in the scope of work.
4. No Contract (or a bad one)
Get what you are agreeing on in writing. If this contract comes from your contractor, it is usually worth your while to have an attorney to review it. Keep in mind that the documentation you have or keep may be the only information you have available to fight for fixing mistakes later.
Important provisions to pay attention to in the contract include provisions regarding:
- Cost plus vs. flat fee
- Scope of Work
- Payment schedule
- Timeline and ability to hold the contractor to the timeline
- Change order and overage provisions
- Warranty Information
- Termination, Default, attorney fee, and Dispute resolution provisions
A bad contract can be worse than not having one at all.
5. Paying Up Front or Paying Too Much Too Soon
***This is probably the #1 Mistake when the general public hires a contractor.***
Many issues arise when a contractor is paid too much too soon. As the consumer, you want to pay as little up front as possible. The general rule is to NEVER pay for the construction labor up-front. Needing a large sum of money up front is sign of a poorly managed construction company. If you must pay something up front, make it as small of a deposit as possible.
As a general rule, you never want to pay the contractor for more work than they have actually done. For example, if they have completed 50% of the project, you want to have paid them for no more than 50% of the job.
Many disputes begin when the owner has unwittingly paid the contractor for 75% of the job but the job is only 25% complete. This is a very bad idea. This contractor is much more incentivized to finish all other projects first; they’ve already made most of their money on your project! Do not fall into this trap. You need to be able to incentivize the contractor to stay on task.
Review your scope of work in detail throughout the project. You want to be sure they have completed and charged appropriately for all the items agreed on in your contract. Also, make sure there is enough payment left at the end of the project to ensure that punchlist items will be completed in a quality and timely manner.
6. No Lien Waivers or Notice of Completion
With your final and largest payment to your contractor, you should ask the contractor and their subcontractors to sign lien waivers. A lien waiver essentially states that they have been paid for the agreed-upon work and are waiving their right to file a mechanic’s or materialman’s lien against your property in the future. If you want to be especially protected, have the contractor and subs sign interim lien waivers throughout the project.
A Notice of Completion (“NOC”) is a document executed by the owner or general contractor of a property that is filed with the Register of Deeds Office in the county which the property is located. A properly executed and recorded NOC can be a great tool to protect against unknown lien rights.
7. Bad Documentation
In a worst-case situation where you have made your best effort to hire a contractor and there is a dispute over payment or poor workmanship, your documentation can save you. Keep all contracts, change orders, e-mails, text messages, receipts, and take frequent photographs or videos. It is wise to keep all this documentation for at least 3 years from the date of completion of your project. Simply keeping your good records and documents can save you thousands of dollars in legal fees should litigation be necessary.
8. *BONUS TIP*
Retain a construction lawyer before you are in trouble. Most of the time, by the time I am retained there is a serious problem. This means it is usually going to cost some serious money in attorney fees.
A lot of times, if the person would have called me before entering into the construction contract the dispute would have been avoided entirely. In my opinion, it is much better to have a good attorney retained before you find yourself needing one desperately. It will be an extra cost, but often times it will actually save you a lot of money in the long run. Do not step over dollars to pick up dimes.
Also, a good lawyer will help EDUCATE you in addition to steering you in the right direction. A good education is worth every penny. You will use the things you learn working with your lawyer in every deal you do in the future. A good contract and system on the front end will save you countless headaches.
This is a self-serving bonus tip, no doubt. But I believe it to be absolutely true.