5 Ways to Get Ripped Off by a Contractor

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A friend of mine recently told me his horror story about doing a major remodel to his home.
Sadly, his story is all too common in the residential construction world.
I explained to my friend that there are specific safeguards against all the problems he experienced.
These safeguards are common on commercial building projects, and they can and should also be used for residential projects.
You can't avoid every problem, but normal bumps in the road won't become a disaster if you know these 5 common ways to ripped off by a contractor.
1.
Hire the lowest bidder.
If you use a Design-Bid-Build structure, (which means you hire the architect to design, then bid out the drawings and pick the low bidder for construction) you become vulnerable to the scenario in which a contractor gives you a tantalizingly low number up front, then later claims change orders for more money due to "problems with the design drawings" or "unforeseen conditions.
" If the number is significantly lower than competing bids, this is almost guaranteed.
Solution #1: Hire the architect and general contractor as a team (this is called Design-Build or Integrated Project Delivery, depending on what kind of contracts you use).
This means the contractor is no longer entitled to increased funds later if there are "problems with the design drawings" because the contractor is liable for the drawings since they are teamed up with the architect.
Solution #2: If you do not hire the architect and general contractor as a team, hire a contractor whose number is in the same ballpark as the other bidders.
Then have a frank discussion with them before executing the contract about the types of things you will and won't allow as change orders.
Often a strong stance on this will communicate that you are a savvy client, and will deter some bad behavior.
2.
Don't check the size of the bond.
When a contractor is bonded, it means they have stored some money in a special account, against which the bank issues a performance bond.
The bond is for you to hold until the project reaches Substantial Completion.
It is a protection against the contractor disappearing before your project is finished.
If the contractor fails to perform and you must issue a notice of termination, you can cash in the bond certificate for money to hire someone else to finish your project.
Unfortunately, just because the contractor says he is "licensed and bonded" doesn't mean the bond is big enough.
In my friend's case, his contractor disappeared with more than $45,000 left to complete, but the bond was only good for $7,500.
Solution #1: Require proof of a performance bond that applies specifically to your project, in a large enough amount to cover your whole construction cost.
Because banks charge for these bonds, your contractor will likely pass these extra bank fees on to you.
It is worth it.
To lower these costs, you can sign off on lowering the bond amount upon certain milestones.
Solution #2: Instead of going through a bank for a bond certificate, you may choose to keep a retainer.
In other words, holding back 25% or 50% of the contractor's pay for the first several months will build up a safety cushion of funds from which you can draw to finish the project if the contractor abandons you.
Like a performance bond, this money should be reserved until you reach Substantial Completion.
3.
Allow substitutions.
When you and your architect choose products like plumbing fixtures, paint, carpet, etc.
, your contractor is legally required to provide what is in the construction documents.
Sometimes the contractor says they can give you something better for a lower price, and it's tempting to say yes.
Especially in the shady residential projects with non-professional builders, it is rarely the case that the contractor is acting in your best interests when they suggest substitutions.
Typically a substitution is suggested because the contractor can save money or time in installation, and only a portion of this gets passed to you.
Any substitution should be run through the architect to verify that it meets the quality and performance standards you previously agreed upon, which costs money.
So the savings potential from the substitution must be big enough to account for paying the architect to look into the new product.
Solution: Before setting the construction cost with your contractor, require him to review the design documents and make a case for any substitutions he believes will be necessary, up front.
Make it clear that no substitutions will be allowed after this up-front review process.
This allows the contractor to contribute valuable knowledge he may have from his real-world experience, but in a controlled manner.
The architect will assess his input on products, and any changes will be made and incorporated into the design documents before the contractor gives you his bid.
4.
Take their word on % complete
.
Every month your contractor will submit a pay application, requesting you pay him according to the % of construction completed.
Dishonest contractors routinely overstate the % complete so they can get more money out of you faster.
If the contractor is able to extract a large % of their fee early on, they have a high incentive to abandon your project.
If they do abandon your project and you've signed off on, say, 80% completion, the bonding company will only give you up to 20% of the construction costs to finish the project.
Solution: On commercial projects, it is typically part of the architect's duty to verify that this % of completion is accurate.
As part of the architect's monthly job walk he or she will verify the % of construction that the pay application claims is complete.
The architect is the most qualified and knowledgeable about the full scope of construction, since the architect is the one who designed it.
5.
Don't check that sub-contractors got paid.
My friend had the unhappy experience of paying his general contractor month after month, only to discover several of the sub-contractors were never paid.
Sub-contractors who do not get paid are entitled to place a lien on your property to ensure payment, even though it is the general contractor who stiffed them.
After the general contractor abandoned his project, my friend was forced to double pay several of the sub-contractors.
Solution: Each month when you receive the pay application from your general contractor, be sure to require certification that all sub-contractors were paid for the previous month's work as a pre-requisite for signing the current month's pay application.
Traditionally architects provide these services described above, although it is very common now for clients to perform many of them on their own or to hire a third-party project manager.
No matter who performs them, remember that the same care should be taken on residential remodels as on large commercial projects.
If a contractor has a problem complying with these measures of protection, pass them by in favor of a more professional outfit.
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