Selecting A Contractor
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Members' Homepage When you need to choose a contractor, how do you distinguish between a competent, experienced contractor and a corner-cutting swindler? A little research and some probing questions can help you make the right decision and save you time and money. Unless otherwise stated, most of what is discussed on this page applies to selecting a general contractor for a construction or major remodeling project or to selecting a specific trade contractor, such as electrician or plumber, for a re-wiring or re-plumbing project. Much of the discussion will obviously not apply to choosing an electrician to install a ceiling fan or a plumber to replace a kitchen faucet. However, keep in mind that even for the smallest job, issues of (1) employee vs. independent contractor, (2) liability insurance, (3) workers compensation, and (4) permits and codes can be important. For example, these issues should be of concern when hiring an unlicensed vendor for a small job such as installing a water heater. Seldom will you need to follow every procedure discussed herein. If you review and thoroughly understand what is discussed you will be able to decide which items are imported for a particular project and set of circumstances. Licensed or Unlicensed
Most landlords probably use unlicensed vendors more often than they use licensed contractors. The reason for this is simple - they're often cheaper. There is probably nothing inherently wrong with using unlicensed vendors for many routine non-critical tasks so long as you are aware of the risks and take the necessary precautions to protect yourself.
Many states that license contractors set maximum dollar limits for which a license is not required. For examples, in Arizona, a license is not required for work performed where labor and materials total less than $750 dollars, for which a building permit is not required, and the work is not part of a larger project. An unlicensed vendor doing work not meeting the conditions of that exemption is in violation of Arizona law. In California, the limit is only $500.
There are certain advantages to using licensed contractors. Sometimes these advantages outweigh the one major disadvantage - cost. However, sometimesan initially perceived lower cost turns out to not be lower after all because the unlicensed vendor may also be less skilled and less experienced.
Although not every advantage applies in every state, the advantage of using licensed contractors usually includes the following
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Provides access to a state Recovery Fund in the event of poor work done by the licensed contractor
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Provides assistance to consumers in resolving conflicts with the licensed contractor
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Provides procedures for filing complaints, with penalties of license suspension when the licensee is found in violation of laws and regulations
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Requires that licensees be bonded
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Requires that licensees carry liability insurance
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Requires that licensees carry workers compensation insurance for employees
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Requires that licensees obtain required permits
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Require that licensees do the work per building codes
Some of these subjects are covered in detail below. In many states, the vendor cannot file a mechanics lien against your property, or even sue you in some states, if he performed work that requires a license without being properly licensed. Other than this unique circumstance and the fact that unlicensed work is often cheaper than licensed work, a licensed contractor should be preferred over an unlicensed vendor. Independent Contractor or Employee
Whether you are hiring a licensed or unlicensed vendor, it is very important that the vendor be legally considered an independent contractor rather than your employee - unless you do in fact intend forhim to be an employee. There are times when it is an advantage for the person to be an employee, primarily because an employee can be fired, whereas, firing an independent contractor can leave you owing him for a job not done. The fact that a vendor possesses a contractor license does not per se make him an independent contractor.
The fact that the vendor might be considered an employee, even though that was not what you intended, can become an issue in a number of ways. Among those ways are the following three scenarios:
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IRS or State Equivalent - The vendor is audited for non-payment of income taxes and to protect himself, claims that he was your employee and he thought that you were withholding payroll taxes on his behalf.
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Workers Compensation - The vendor is injured, on or off the job, and makes a claim for worker compensation, stating that he was your employee and he thought that you were carrying workers compensation for his benefit.
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Unemployment Benefits - Business falls off, and the vendor makes a claim for unemployment benefits, stating that he was your employee and he thought that he was covered.
In the above scenarios, there is a real chance that the associated government agency will find in the vendor's favor and that you will be liable for the following:
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IRS or State Equivalent - You could be found liable for taxes that should have been withheld, penalties for failure to report and withhold, and interest and late penalties until paid.
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Workers Compensation - If you had a policy in force at the time of the alleged injury, you may be covered as to the vendor, but the insurer may seek penalties and cancel your policy because you failed to report properly, making it more expensive to find replacement coverage. If you did not have a policy at that time, you could become liable for all costs related to the injury if it were decided that the injury occurred while working for you..
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Unemployment Benefits - You could be found liable for the cost of his unemployment benefits as well as be assessed significant penalties for failure to report and pay the tax.
So, how do you avoid this risk? First, understand the legal definitions of an employee and an independent contractor as defined by these agencies. The twenty things that the IRS looks at to determine status are discussed in detail on our Determining Employee or Independent Contractor Status page. Second, if there is any doubt about the vendor's status, require that he sign document regarding his independent contractor status. Two samples of Independent Contractor forms are provided on our Forms Web.
In many cases, there is no need for concern about this issue. For example, if you ask Sears to send out a repairman because your 4-year old Kenmore washer isn't working right, the serviceman drives up in a Sears truck, and he hands you a bill on a Sears billing form, it's very unlikely that there is any reason to even think about the issue. The same would apply to most licensed contractors that you called out of the yellow pages.
However, if you call an unknown unlicensed vendor out of the local Penny Saver newspaper, he drives up in an unmarked pickup, and he doesn't give you a written invoice, you should be somewhat concerned. In this case it would be smart to have him sign the appropriate document before he begins work. Two samples of Independent Contractor forms are provided on our Forms Web.
How can a vendor possess a contractor license and be considered an employee? One example is if you hired one, currently laid off from his regular employment at a large contracting firm, to be on site 4 hours each day and take care of all maintenance in you 100-unit apartment complex. Depending upon the details of the relationship, it may be impossible to make this person a legal independent contractor.
Additional discussion regarding hiring vendors is found on our Maintenance Madness page. Licensing Requirements
You should determine the licensing requirements of your state. The degree of regulation of your state will to some degree influence how much care you must take in finding contractor candidates. You can make this determination by checking the Web site or calling the offices of the agency, if any, that licenses and otherwise regulates contractors in your state. The web sites of many states provide a tremendous amount of detailed information about licensing requirements, selecting contractors, dealing with problems, and a lot of other related issues. We advise you to visit the site of your state.
Find Contractor Candidates
If you are undertaking major construction or remodeling, or repairs it is important to use a contractor with significant experience in the type of construction, remodeling, or repair that you need done. A contractor may be very good at building garages, but know little about the intricacies of remodeling kitchens or bathrooms.
The best way to select a contractor is the same as the best way to select a dentist, lawyer, real estate agent, or veterinarian; by having personal knowledge of the individual and of his abilities and experience. The next best way is to get a referral from a trusted acquaintance who has the personal knowledge. If possible, obtain two or three recommendations sot that you can get more than one estimate.
If neither is possible, for example because you are new to the area, the alternative is to do some research on your own. Determine who is doing the type of work of interest in your area. There are a number of ways to do this, including checking the yellow pages, talking with knowledgeable employees of hardware stores, lumber yards, and home improvement stores, and asking architects for recommendations. Make a list of possible candidates.
The worst way to choose a contractor would be to choose one at random from the yellow pages or based on the size of their ad. It is not exceedingly difficult for anyone to obtain a contracting license in even the most highly regulated states.
If you have no contractor of whom you have special knowledge, then you must undertake a careful formal selection procedure. Even if you have one highly recommended contractor, you might want to find another candidate or two from which to obtain estimates.
Start by selecting several individual contractors or contracting firms in the area from the best sources possible. Interview each firm's qualifying individual or other firm members. Make your selection of the candidates from this list based on the interviews and the results of verifying their credentials.
A professional contractor usually advertises and waits for customers to call. Always be cautious if someone comes to your door looking for work. Once you've narrowed your search to perhaps three candidates, set up appointments for interviews. Interview Candidates
When interviewing a contractor, be sure to give each contractor the same information regarding the project. For larger projects, detailed drawings and specifications allow the contractor to more accurately estimate the cost and length of time involved, so it is usually best to have at least basic plans drawn up by a designer.
If you are interviewing for a general contractor who will be responsible for a major project, keep in mind that, while the general contractor must know technical aspects of construction, it is just as important that he be a good manager, as he must coordinate the efforts of sub-contractors and/or employees.
When you interview the candidates, you should seek answers to the following specific information. The answers to most of these questions can be verified by the agency that licenses and regulates contractors in your state or by documentation provided by the contractor.
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Is he a licensed contractor in this state and city? Check to see if your state requires a license. If the contractor has a license, get the license number. Does he have licenses as might be required by city and/or county levels.
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Obtain the names and phone numbers of at least three customers from the past two years. Use these references to check the contractor's current and past work history.
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Ask for banking and/or financial reference. Check financial stability. If the contractor is unable to pay for materials, labor, and overhead costs, the job could go unfinished.
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Is he a member of professional/trade organizations? Check membership standing in the organization provided.
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What insurance coverage does he have? At a minimum, contractors should have Workman's Compensation, general liability (including property and personal liability), and automobile insurance. These policies help protect you and your property from potential legal problems should an accident occur. Have the contractor ask his insurance agency to mail written confirmation of coverages provided by the insurance policies directly to you. Do not accept a photocopy It's a good idea to require that the contractor have you named as an additional insured (co-insured) on his policy. If required by state law, he should also be bonded. The insurance issue is discussed further later in this page.
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How long has he been in business? A contractor with at least five years experience usually has been successful in the business and is more likely to be reliable.
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Determine what permits may be required? The contractor should be familiar with local building code requirements.
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If available, view a "before and after" picture portfolio? Most contractors have pictures of past work.
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Obtain a blank copy of the contract form that will be used. It is best to read and understand the contract well ahead of time rather than when you are being asked to sign it. This gives you time to compare the contracts of the candidates, research certain issues, ask questions about clauses, and even have it looked over by an attorney if you wish.
Verify Credentials
Call the state regulating agency to validate the license number, experience, record, etc. Many states provide this information directly from their Web sites. It is also constructive to review the licensing requirements of your state, as the value of being licensed is directly related to the degree of difficulty in becoming licensed. Contact the Consumer Protection and/or the Better Business Bureau to see if any of the contractors have been named in lawsuits or have otherwise been subject to complaints. Check References
Call all references and ask:
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How did you find out about this contractor?
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When and how long ago did this contractor work for you?
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Did the contractor recommend a contract, including a written estimate? If not, did you request a contract? Did the contractor balk at the idea?
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Did the project go over the original estimate? If so, by how much? What changes from the original project did you request? Did the contractor provide an acceptable detailed explanation?
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How was your relationship with the contractor during the project?
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What was the quality of the contractor's work and was the quality of the finished project acceptable?
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Did the contractor use a written change order form before making changes to the original estimate?
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Did the contractor stay on schedule and report to work in a timely manner?
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Did the contractor have a good attitude throughout the project?
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Did anything unusual or unsettling happen during the course of the project?
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How qualified were the workers and subcontractors?
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Was the contractor on-site enough to adequately supervise during the project?
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How accessible was the contractor when not on-site?
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Was the site clean and safe at all times and was it left clean upon completion?
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Would you use this contractor again and recommend this contractor to your family and friends?
Check A Work Site
If possible, visit at least one previous work site, preferably where work similar to your project is currently underway. Look for the quality of workmanship and detail. For instance, if a new door and window were part of an addition to a house, are the corners and joints on windows and doorframes tight? Are there paint runs on the woodwork and walls? Does the addition fit with the previously existing structure? In a remodeled kitchen, do the oven, dishwasher, refrigerator or cabinet doors interfere with each other? Also, pay attention to how well the contractor keeps the construction area clean and organized. Select Candidates
Hopefully, there are at least two, preferably three, from those you have interviewed who you liked and who checked out as being well qualified. Obtain Estimates (Bids)
Now that you have two or three contractors who all seem highly qualified, you should next review the project in detail with each candidatecontractor. If you already have plans that were drawn up by your architect or designer, go over these plans with each candidate. If you do not have plans, provide a written detailed description of the project to each candidate.
After each qualified candidate appears to fully understand your project, ask him to provide a written itemized estimate that will include the materials, labor, overhead, and a time frame to complete the project. Review and Choose An Estimate
Once you receive all estimates, take time to compare them. Keep the following steps in mind before you make your decision:
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Compare all items on the bids. Make note of any items on one bid that is not on all bids and check with the other candidates to be sure that this is included in their bids.
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Check the cost of materials. Some estimates may contain lower quality materials, which reduce the cost of the project. Review any items you do not understand with the contractor.
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Be cautious of an extremely low bid, particularly if there are missing items compared to the others. Don't base your decision on price alone.
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Time frame is an important factor. If one bid is higher in labor cost, but the contractor can finish the job in two weeks instead of two months, the additional cost may be justified.
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Do not sign anything until you understand all aspects of the contract.
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Keep all documentation related to the project.
Contract Information
Written contracts are essential when hiring a contractor for a major project. A professional contractor has a responsibility to provide a written contract with detail on all work to be completed. Having all of the information in writing helps minimize possible problems during the project and after the work is done. Be sure to include everything in writing. Remember, if it isn't documented, it never happened. Once you receive the contract, take a couple of days to read and review it carefully. Hopefully, you had received a blank copy from your initial interview and can now concentrate on what is in the blanks. Don't sign the contract until you are completely comfortable with all included terms. Think about having an attorney review the contract as well. Several key elements should be in a contract. If any of the information in the following checklist for contract information is not included, and should be, request an addendum or revision. Contract Information Checklist
Read the proposed contract carefully. There are certain items that should usually be in a contract. The following list is not meant to be all-inclusive, and certain information may not apply for all projects.
Contractor's name, mailing and physical addresses, phone number, state license number
Needed to contact the contractor and to verify information when calling a bank, vendor, reference, and state regulatory agency.
Name(s) of the property owner(s), location of job site, and address of property owner(s)
Specifies parties involved. Tells who is making the decisions, especially as related to changes.
Current date
Starting and estimated completion dates
Contractor and property owner are in agreement on the beginning date and proposed completion date.
Estimated cost of work
Necessary to establish boundaries as related to work billed.
Payment schedule
Details the amount due the contractor and when it is to be paid. Make specifications related to special order items and cash advances. Check with your state regulatory agency for information on percentages allowed for advance cost deposits - many states have a limit. One payment option is to pay 1/3 to start, 1/3 halfway, and the final 1/3 after completion and all work is satisfactory. Another option is to pay on a cost-plus system where you receive monthly bills. In any case, do not pay without receiving lien releases. Don't make the final payment until all inspections and change orders are completed and you have lien releases for all materials and labor. Never pay in cash - always write a check made out to the contractor's business or even better, if possible, pay by credit card.
Release of lien clause
If subcontractors are not paid and the contractor has been paid, they can sue the contractor for payment rather than the homeowner.
Written warranty
Covers materials and workmanship. Name and address of contractor, distributor, or manufacturer should be listed for those honoring the warranty. The limitations and length of the warranty should also be listed.
Dispute resolution
In the event of any problems that may arise, include a dispute resolution clause to determine how problems will be handled. Arbitration or mediation is the easiest and least expensive way to handle contract disputes.
Right of rescission
The Federal Trade Commission's three-day right to rescission allows the homeowner three days from the date of signing to void the contract legally with no repercussions. The homeowner is not liable for any service or finance charges.
Purchasing permits
The contractor agrees to purchase all required permits in his business name.
Inspection failure
The contractor must correct any problems related to inspection failure at no cost to the homeowner.
Insurance
Contractor must present proof of general and personal liability, workman's compensation, and automobile insurance. Contractor should be required to verify the same insurance information on the subcontractors.
Duties clearly outlined
Who will be responsible for what? Responsibilities include: clean up during and after the job, use of personal facilities, use of phone, repairing damaged personal property (i.e. broken driveways and lawn damage). Include who will be responsible for ordering materials and scheduling workers and subcontractors.
Scope of work
Exactly what work will be done including a list of materials with brand names, sizes, and colors and code requirements for materials such as lumber and electrical components. If blueprints are used, reference a dated set of plans. Also, include any charges for work that is done in addition.
Change order
A change order is a defined change process. Change orders should be used whenever work is added, materials and equipment are substituted, or any other changes are made. Change orders should be in writing and include an itemized list of the additional cost. The homeowner should approve all change orders.
Signature section for contractor and property owner Insurance & Legal Issues
Whether the project is large or small and whether you are using a licensed or unlicensed vendor, there are certain things that should be considered because ignoring them can be costly, in some cases result in financial losses that are far in excess of the cost of the project itself. Liability Insurance
If your vendor, licensed or unlicensed, is doing any work that has a potential for causing injury or damage to others, including the tenants, be sure to confirm that he has adequate liability insurance. If your vendor causes injury to others or damage to their property, you as property owner, are primarily responsible and are open to lawsuits. If the vendor does not have liability insurance or sufficient assets to cover the problem, the burden will fall on insurance that you might have or on you personally, to the limit of your net worth and beyond.
Although most states that license contractors require that each contractor carry liability insurance, you should verify that the contractor has adequate liability insurance currently in force. What should be considered adequate may be more than required by state law. Require that the contractor's agent provide you with written proof of coverages including the limits of the various coverages. Do not depend upon the contractors' word that he has coverage. Even if he is truthful, he could be wrong. It is very important that your contractor carry liability insurance because you are otherwise at risk for substantial financial loss if something goes wrong.
For example, if your handyman cuts down a tree that falls on your neighbors' new car, you're looking at damages as high as $50,000, or even much more if he drives a Rolls Royce. If your neighbor is sitting in the car and is permanently injured or killed, your liability can easily be millions of dollars, even tens of millions if he is a young neurosurgeon.
If the contractor is not insured, you must depend on your own insurance, which may or may not provide adequate coverage or any coverage at all for the particular incident. Suing the contractor is often not a viable alternative because contractors usually operate as a corporation to shield themselves from personal liability and the corporations often have little in the way of assets. Workers Compensation
This issue can be just as important as liability insurance. If the contractor, licensed or unlicensed, is the sole worker on the project, then this is usually not an issue so long as he is truly an independent contractor and cannot be considered your employee. If he is later determined to have been an employee rather than an independent contractor, then you were required to have your own workers compensation insurance and would be liable for any job-related injury to the vendor.
For example, if the vendor stains his back lifting a water heater out of his truck, you could be held responsible for his medical bills as well as his living expenses for the rest of his life and maybe those of his wife and 9 kids, maybe even for an ex-wife or two.
If you use a licensed contracting company there is usually little risk of the worker not being covered by workers compensation. If you use a handyman, care should be taken to insure that he is legally an independent contractor and that he will not be using other workers unless he has workers compensation insurance.
Some property insurance policies provide a limited amount of workers compensation coverage. Most homeowner policies provide limited coverage. Check your policies.
Although most states that license contractors require that each contractor carry workers compensation insurance if he has any employees or uses sub-contractors, you should verify that the contractor has adequate coverage currently in force. As for liability insurance, require that the contractor's agent provide you with written proof of coverage. Do not depend upon the contractors' word that he had coverage. Building Permits
Improvements made without the required permits can have an impact in a number of ways.
First, some jurisdictions require inspection of a property prior to closed of escrow. The results of this inspection are compared to original building plans and modifications done with permits. Discrepancies can result in delays in closing escrow until corrected and in penalties.
Second, even when there is no governmental inspection, the buyer or his property inspector may question whether certain improvements were permitted. The buyer may then require correction as a condition of closing or negotiate a lower price because of the problem. Building Codes
Improvements that are not performed in accordance with building codes can have an impact in a number of ways.
First, they may be discovered by a vendor doing related work at a later date. For example, a plumber called out to repair a gas water heater may determine that the existing installation is not per code and will insist on correcting the discrepancy if he is to do the repair for which he was called - you will pay for his service call either way.
Second, the discrepancy may be discovered by a future buyer or his property inspector or by a governmental inspector and result in a delay or cancellation of a sale.
Third, and potentially most costly, the discrepancy may result in damage, injury, or even death to a tenant, leaving you open to lawsuits - even possible criminal liability in extreme cases. Homepage |