Hiring a Contractor

[Paul T.]

The following is not legal advice.

Having read numerous horror stories here on BP about failed projects and lost money due to less-than-honorable contractors, I feel compelled to try to provide some guidance to those who are interested in avoiding some of the pitfalls.

1. Either learn the contractor licensing laws and mechanics’ lien laws of the state in which your project is located, and how to protect yourself, or retain and be willing to pay an attorney who is knowledgeable about construction laws in that state. There are no shortcuts. Would you knowingly hire a contractor who was insolvent? For decades in CA, to obtain a contractor’s license, one had to “affirm” that he/she/it had a net worth of $2,000. Actual proof of that net worth was not required. Today, even that modest requirement has been eliminated. Are you sure you want to entrust your $100k rehab to someone who is already potentially insolvent? At a minimum, wouldn’t you want to know what the financial requirements are for a contractor in your state? And how to protect yourself from contractors who take your money, but don’t pay their bills and subcontractors, so your property is subject to mechanics’ liens? Or the maximum limits on advance payments by contractors?

2. Independently verify that the contractor’s exact name and information on your construction contract, has a valid contractor’s license. In CA, that information is all available online. Make sure that all of the information the contractor has provided you, matches the information in the state records. If something does not match exactly, consider that your first warning bell. Yes some unscrupulous folks have been known to illegally use other’s licenses. (Under CA law, if you employ an unlicensed or improperly licensed contractor, “you” become the contractor and are thus responsible for all injuries or deaths on the work.)

3. The contract that the contractor prepares and asks you to sign, is likely written by attorneys for the contractor, and is designed to protect the contractor, not you. Exceptions are very rare. Use a contract form that is either neutral or designed to protect owners, not contractors. After all, it is your money. If you are not willing to pay to have an owner-friendly construction contract drafted by an attorney for your use, at a minimum, use a neutral construction contract like the AIA A105-2017. Although the A105-2017 is not perfect, it offers at least some owner protections.

4. Know and understand the contract form that you use, before you sign it, or be prepared to employ an attorney to explain how it is to be used. This would seem self-evident to many, but the construction contract details the rights and obligations of the parties. For example, a well drafted contract will have a time of commencement, time of completion, a detailed description of the work to be provided, how the work is to be paid for, when the work is to be paid for, insurance requirements and who provides and pays for the insurance, indemnity agreements, and much, much more. If you don’t know the ins and outs of the contract, how can you possibly expect to follow it, or require that the contractor follow it? Does the contract allow the contractor to perform work “outside the scope of the agreement” without your written consent? If so, why? If not, then why would you want to pay for that work?

5. If you are not knowledgeable about construction in the area of the work, then be prepared to hire someone who is, to periodically inspect the contractor’s work for compliance with codes, the contract, and best practices. If you are not knowledgeable, and don’t employ someone to protect your interest, there are contractors who will take advantage of that situation, all at your expense. “Oh, but I trusted the contractor!” Why? Isn’t the contractor doing the work for the contractor’s own interest and profits, first and foremost? The contractor does not owe you any fiduciary duty to protect you. “And why should I pay someone to make sure the contractor’s work is to code? The building department inspects the work.” Who is going to do a more thorough inspection of the work? (1) A building inspector who has 32 inspections on his/her list for that day, and has budgeted 5 minutes on your jobsite, or (b) someone you are paying who can spend a couple of hours once every couple of weeks, monitoring the work? How else are you going to know if the work is performed correctly, or if the work is unsafe or shoddy and will cause you endless maintenance or other problems?

6. Any time the contractor asks to be paid in advance of work being performed, operate under the assumption that any money you pay, will simply disappear. By relying on that assumption, hopefully you will take extra-ordinary steps to make sure that you have the maximum protection to avoid having that money disappear. “But the contractor said he needed to pay for the permits.” Fine. After he/she/it pays for the permits and provides proof of payment, reimburse the contractor (while obtaining the appropriate lien release from the contractor). If the contractor does not have the funds to pay for the (usually) modest cost of a permit (except in CA), shouldn’t that set off alarm bells for you about his/her/its financial condition? (CA, for example, by law, limits advance payments to contractors, to $1,000, or 10% of the contract price, whichever is LESS.) If a situation arises where you feel that an advance payment should be made by you (i.e., permits, cabinet order, custom manufacturing order, etc.), then make the payment directly to the payee (not the contractor; or jointly with the contractor), and exchange that payment in return for the appropriate lien release (for your state).

7. Assuming the construction contract has provisions to protect you from unauthorized extra work without advance written authorization, follow the terms of the construction contract to the letter. Do not “waive” the protections set forth in the construction contract by being lazy and giving verbal approval for extra work over the phone, or otherwise not adhering to the construction contract. How can you claim the contractor breached the construction contract, when you didn’t adhere to the contract yourself?

8. Obtain appropriate lien releases from the contractor, subcontractors and material suppliers, before issuing payment to the contractor. Always. Don’t know what the appropriate lien releases are? See #1, above. If this requirement is set forth in the construction contract, a reputable contractor will provide all of the signed releases along with the contractor’s request for progress payment.

I’m aware that this short post does not cover every possible scenario and contingency, but maybe it will help someone.