Tips on Dealing with Contractors for Home Improvements

Following are some tips in dealing with contractors:

1) Up-Front Payments: Initial deposits are negotiable. California law requires that the amount of the down payment for any home improvement contract (except for swimming pools) may not exceed $1,000 or 10 percent of the contract price (excluding finance charges), whichever is less. The down payment for a swimming pool shall not exceed $200 or two percent of the contract price (excluding finance charges), whichever is less. Most good contractors maintain open credit accounts with their suppliers and don’t require payment up front for materials.

2) Progress Payments: Negotiate that the contractor shall provide you with a sub-contractor unconditional lien release for all payments to subcontractors to confirm that the subcontractors have been paid and that they will not lien your home with a mechanics lien for non-payment by the contractor. Even if you have paid the contractor for the full amount of the contract, if he has not paid the subcontractors, they can demand payment from you. Legally, you would have recourse against the contractor, however many times this situation arises because of financial difficulties by the contractor which ultimately leads to the contractor’s bankruptcy, and the homeowner is left holding the bag.

You can protect yourself from unwarranted liens by identifying subcontractors and materials suppliers in your written contract and getting signed conditional lien releases from the subcontractors and suppliers. After you’ve made a payment for work or materials, get signed unconditional lien releases.

Another preventive step is to file a Notice of Completion with the County Recorder’s office after work on your project is completed. This notice reduces the amount of time a contractor, subcontractor or materials supplier can file a mechanic’s lien against your home.

3) Make sure that you negotiate the progress payments to the contractor payable at the time of actual observable milestones for the project. For instance, pay the contractor the cost of all plumbing work after certain observable milestones such as completion of rough plumbing or completion of fixture installation, with a portion of the contractors budgeted overhead and profit as a percentage of the cost of the work completed, less a “retainage”, usually 10%. Other milestones may be completion of framing, completion of electrical work, completion of drywall installation, completion of painting, etc. The important point to remember is that you want the contractor to have money invested in the job at any point in the project so that if they stop performing, that you have the value of work in place at least equal to what you have paid to the contractor, and that you have proof from the contractor that any subcontractors have been paid for work completed related to the milestone payments. Another solution is to pay your contractor by joint checks. When the contractor presents you with a bill for materials or labor, make the check to both the contractor and the supplier or subcontractor. Never let your payments get ahead of the contractor’s work, and make sure the contract provides for a “retention” – a percentage of each payment or of the total job, ordinarily 10 percent, which you retain until the job is completed.

Kitchen Before Remodel

Kitchen after remodel

4) Make sure you do your due diligence in investigating the contractor before signing the contract with the contractor. This should include the following:

a) Visit the contractor in his office. If he doesn’t have an office, this may mean that he doesn’t have as strong a financial commitment to his business
b) Beware if the contractor says the work doesn’t require a permit. Any work requiring substantial foundation work, plumbing, electrical or work requiring the removal of a wall or work where it is questionable whether a structural engineer is needed, usually requires a permit. Although you may save money in not getting the permit, the permit process also provides inspections by the city to make sure the work is being done in accordance with building codes to protect you from shoddy work. In addition, if an inspector sees that work is being done without a permit, they will shut your job down and may require penalty fees to obtain a permit.
c) Make sure the contract is extremely detailed as to what work is to be completed. Verbal commitments from the contractor is not enough.
d) Try to require the contractor to obtain multiple bids from subcontractors for work to be performed to ensure you are receiving the most value for the money.
e) Try to avoid a “cost plus” contract where the contractor is paid for his costs plus a certain percentage for his overhead and profit. Try to negotiate a fixed price contract, and if this is not possible, at least get a “maximum guaranteed price” included in the contract.
f) Try to keep track of all materials delivered to the site and the vendors delivering the material, and when requested to make progress payments to the contractor, make sure you get paid invoices from the material vendors showing that they have been paid. If the contractor says that he needs payment from you to pay his vendors, make out your check to both the contractor and the material supplier.
g) Ask how long the contractor has been in business , how many employees he has, and how many projects like this he has done. Talk to at least 3 references for jobs that the contractor has done similar to yours.
h) Make sure that the contractor is properly licensed by in the state you are located in (see http://www.cslb.ca.gov/ for the state of California for the status of his license as well if any complaints have been filed against him by the state licensing board as well as the local Better Business Bureau.
i) Ask for a copy of his workman’s compensation insurance policy as well as other insurance required by the state, such as liability insurance policies.
j) Try to negotiate time deadlines for completion of the work, with penalties for non-performance. If you want to include this protection, the contractor will normally also want included a provision for a bonus if the job is completed prior to the deadline. If this is not possible, still put in the contract the date of estimated completion and the right of the homeowner to cancel the contract for non-timely performance, but this would include the obligation of the homeowner to pay the contractor for the value of work completed to date

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