BUILDING CONTRACT BASICS
If adding a new room, installing a spa or remodeling a kitchen is more than you can handle and you decide to hire a building contractor, keep in mind the maxim “let the buyer beware.”
According to the Contractors State License Board, homeowners are sometimes cheated by unscrupulous contractors, and people posing as contractors, through illegal contracts and botched or incomplete jobs. The board offers the following information to help consumers select a contractor and negotiate a contract.
Contractors are licensed according to their specialties. If you need just electrical, plumbing or painting work, seek a contractor with a license in that area. Contractors performing work costing less than $300--for labor and materials--need not be licensed. Unlicensed contractors usually do not have adequate bonding or insurance. If your project needs several kinds of work, such as electrical, carpentry and plumbing, a general contractor can be hired to handle the entire project.
If a subcontractor suggests that you become the general contractor for the job, be aware that you--not the people you hire to do the work--assume liability for the overall project. That includes state and federal taxes and worker’s compensation insurance. Experience in construction is needed before taking on the “owner/builder” arrangement.
If the contractor asks you to obtain the building permits for your project, it may be a tip-off that the contractor is not reputable. Insist that the contractor obtain the permits. The contractor will then assume responsibility for taxes, accidents or property damage.
Ask the contractor for a list of jobs recently completed in the area. Talk to the contractor’s previous customers and ask them questions such as: Did the contractor keep on schedule? Were you pleased with the workmanship? Did the contractor listen when you had a problem? Were corrections made willingly?
If possible, personally inspect a contractor’s previously completed work.
Obtain references from material suppliers, subcontractors and financial institutions.
BIDS A bid is an offer to do work.
Request three written bids based on identical plans and specifications and compare prices.
If one bid is substantially lower, it probably indicates that the contractor has made a mistake.
The bid you sign may also be your contract. Make sure you ask questions and agree to all terms before signing anything. You may want to consult an attorney before signing.
THE CONTRACT Assume nothing and get everything in writing.
If bonds, added work, substitutions of materials and equipment or changes in the completion date have been discussed, make sure the “change orders” are clearly worded in the contract.
If you sign the contract at any place other than the contractor’s place of business, the contractor is required to notify you in writing of your right to cancel the contract within three days of signing it. Use the time to review the contract again. If something bothers you, cancel both verbally and in writing before the deadline.
When reading the contract, look for:
The name, address and license number of the contractor, and if applicable, the name and registration number of any salesperson who solicited or negotiated the contract. Verify this information. To check the contractor and salesperson numbers, call the Contractors State License Board office in Santa Ana at (714) 558-4086.
The approximate calendar dates (not the number of working days) agreed upon for work to begin and to be substantially completed.
A description of what constitutes substantial completion of work.
A notice that the contractor’s failure--without lawful excuse--to substantially complete work within 20 days of the approximate date specified violates the Contractors License Law.
A description of the work to be done, including all preparatory and finish work, and the materials or equipment to be used or installed.
The price of the work and a schedule of payments showing the amount of each payment in dollars and cents. (See payment information below.)
A statement that the contractor will do any necessary cleanup and removal of debris after the job is completed.
COMPLETION BONDS If you want to ensure that your job will be completed, you may ask the contractor to obtain a completion or labor and materials bond in the dollar amount of your job. The cost is usually 1% and 5% of the contract price, and ensures that funds will be available if the job goes sour or the contractor is unable to complete the work.
Many competent, but small, contractors may not be able to get a bond. If a larger contractor is unwilling or unable to obtain the bond, it may be a signal that the contractor is not financially solvent or is otherwise unsuitable.
You may also ask for a “notice to owner” regarding state lien laws, and the rights and responsibilities of the home and property owner. If a contractor you hire to work on your property fails to pay a subcontractor or material supplier on the project, the subcontractor or supplier could file a lien against your home--even if you have paid the contractor in full.
PAYMENT Set a payment schedule based on the contractor’s performance. Do not let payments get ahead of the contractor’s work. Make sure the contract provides for a payment retention. You retain a percentage of money--usually 10% of each payment or the total job price--until the job is completed. Do not make final payment until you are satisfied with the completed job.
If a down payment is included in the payment schedule, the down payment should not exceed $1,000 or 10% of the contract price, including finance charges. This rule does not apply if the contractor provides performance and payment bonds, lien and completion bonds, a bond equivalent or a funding control.
For a small percentage of your contract price, you may choose to use a funding control, or joint control, company to disburse the payments. Ask your lender for recommendations. Basically, a funding control company is a licensed escrow company that specializes in construction. You give your money to the control company, and the company pays the contractor, subcontractors or companies that supply labor or materials to your project.
Source: Contractors State License Board
