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Categories: Hire a Contractor

Real Estate Mentor: Finding the Right Building Contractor – Part Two: Insight and Tips from a Licensed Contractor and Real Estate Mentor & Investor

Part TWO of a TWO Part Article

One of the most important questions that your Potential Contractor must answer in addition to “Are they Licensed” is . . . are They Bonded and Insured?

Real estate investors; How to hire a contractor

How to Hire a Contractor, Part 2 of 2

Some bonds are designed to protect buyers against substandard work that does not comply with local building codes. All bonds do not always assure the financial strength or professional integrity or competency of a potential contractor.

Most States and Canadian Provinces, require contractors to have “Contractor’s License Bonds.” It is imperative that homeowners and real estate investors understand that this type of bond does not provide a financial guarantee. What is worse is that “Contractor’s License Bonds” provide homeowners and real estate investors with little or no assurance or representation about the potential contractor’s competence, the potential contractor’s financial strength, or their financial responsibility.

The good news is that on the other hand a “Construction Contract Completion Bond” from a reliable bonding company or insurance company does actually guaranty the homeowners and real estate investors, and their lender. The contract bond guarantees that both the job will be completed and that all subcontractors and materials supplied will be paid, and that no contractor or materials liens will be recorded against the property.

Homeowners and real estate investors should know that virtually all lending institutions, such as commercial banks, credit unions, and savings and loans require contractors to secure a “Construction Contract Completion Bond” for large jobs for which the institution is lending money to complete. Lending institution’s rigid bonding requirements keep a contractor with a poor track record from bidding and qualifying on potential jobs.

A potential contractor who has a “Construction Contract Completion Bond” from a reputable bonding firm or insurance company does guarantee homeowners and commercial real estate investors of both job completion and payment of all labor and materials.

In many States, licensed contractors and licensed sub-contractors are not required to carry general liability insurance to protect the homeowners and real estate investors. The general liability insurance only covers the acts of the contractor, their workers and their property.

If the potential contractor does not have general liability coverage, then the homeowners or real estate investors need to review with their home insurance agent what additional coverage they need to add to the standard homeowner’s policy in order to protect the homeowner and/or real estate investor from potential liability from third-party bodily injury and/or property damage.

Most State’s do require a contractor or subcontractor who has employees to have workers’ compensation insurance coverage. As the homeowner or real estate investor, this is very important because there could be serious liability from an employee injury. Unfortunately, many homeowners’ policies have serious exclusions or limitation on potential workers’ compensation claims. Always verify the potential contractor’s workers’ compensation insurance coverage, general liability coverage, and third party injury coverage.

I also recommend that the homeowner or real estate investor get from the potential contractor a copy of the various certificates of insurance/or policies, and then verify current coverage with their insurance agent.

I recommend that the homeowners or real estate investors have the contractor’s insurance company add the homeowners or real estate investors as “additional named insured and loss payee’s” on the contractor liability and property damage insurance policies. Most construction lenders will require that they also be added as “additional named insured and loss payees.”

Note: If homeowners or real estate investors separately hire casual labor, then they will need to have a workers’ compensation liability.

Always get at least three detailed written bids from each of the potential contractor
Homeowners or real estate investors should always obtain at least three written detailed bids for every job from three potential contractors. These three detailed contractor bids should be broken down by sub area (such as the kitchen and bathroom each separately detailed), and the potential contractor should be required to provide the breakdown of materials, labor, overhead, and profit using identical plans and specifications. This will provide homeowners or real estate investors with “apple to apples” comparisons, so they can compare the sub area prices and the overall bids of the potential contractors.

Note-not every contractor will want to break down all their costs, but homeowners and investors should stay firm so they get the detailed information they need. This will help enable homeowners or investors to make the decision as to which of the potential contractor(s) they want to work with, based not only on overall relative merits but on price.

Negotiate the Contract that you want-do it your way!
Never have any part of the construction contract as an oral agreement! My lawyer tells me “An oral agreement is not enforceable and it is not worth the paper it is not written on.”

Homeowners and investors absolutely need to be clear and detailed. In a written contract, signed by both the contractor and the client, there should be listed exactly what is to be done, the scope of work and the exact specific materials, how much it will cost, what will be the specific criteria for subcomponent or full completion, when will the contractor(s) provide lien releases or partial lien releases prior to payment, and when will payments be made to the contractor(s). The contractor’s liability and property damage insurance, bonds, and workers’ compensation information also needs to be written into the contract.

If you have any legal questions, please consult a good local attorney that specializes in negotiating construction contracts with contractors. Make sure that you completely understand every element of the contract, the plans, specifications, and bench marks or criteria for job completion, the time frame for completion, penalties for job completion delays by the contractor, and when progress and final payments are to be made by the homeowner or real estate investor.

Homeowners and investors should not let payments get ahead of work. They should keep records of payments and not make final payment until they’re satisfied with the job.

Never pay cash to any contractor or any sub contractor!!

Warranties and Representations
Homeowners or RE investors should get written warranties and written representations/guarantees from the contractor(s) for their labor and all materials used in a job.

The contract should specify which parts of the work are covered and the duration of the warranty. The homeowner or real estate investor should require in the contract that they will receive any written warranties offered by the manufacturers of materials or appliances installed by the contractor.

Managing the Real Estate Remodeling Project as Homeowner or Commercial Investor
Both the homeowner or real estate investor needs to keep a Job File of the project.

The Job File should include all papers relating to your project, including:
1. A signed original construction contract
2. Job/work schedule timetable with dates of scheduled completion and actual
completion dates.
3. All agreed to and signed change orders to the contract.
4. Complete set of approved Plans and detailed Specifications.
5. All bills and invoices for labor and materials from the General Contractor.
6. A detailed project ledger showing all expenditures for the job
7. A detailed project ledger showing all lender disbursements for job
8. Copies of all Cancelled checks.
9. Signed Lien releases from all subcontractors and material suppliers.
10. All warrantees for materials and appliances
11. All letters, notes, and correspondence with your contractor.
12. A complete set pictures before, during, and after the job completion.

GOOD HUNTING FOR THE RIGHT CONTRACTOR!!

PART I of this article “FINDING THE RIGHT BUILDING CONTRACTOR” can be found on www.RealEstateMentor.co
Copyright © 1985-2016 Howard Edward Haller, Ph.D., Haller Commercial Real Estate, and Real Estate Mentor Co.
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