Category: Managing Construction


All About General Contractors

On a building or remodeling job site, scheduling, budgeting, and more are the responsibilities of the general contractor.

General Contractors

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A general contractor or GC is hired to take a set of plans and turn them into a building. He’ll orchestrate the comings and goings of the workers, order mate­rials, inspect the work done, coordinate an ever-changing schedule, and handle a lot of the paperwork, which will include material bills, payroll, and issuing invoices to you, the homeowner.

The GC will also arrange for the subcontractors—the excavation contractors, plumbers, electricians, dry-wallers, tilers, roofers, and foundation crew, whatever and whoever is needed. It is the GC’s responsibility to make sure the subs do their jobs on time and in strict accordance with the plans.

As with an architect, you sign a contract with the general contractor that obligates you to make certain payments at specified points during construction. In return, the GC assumes responsibility for the entire building process. The GC makes a profit by marking up the labor and materials costs by a percentage. That percent­age varies considerably. The typical range is 10 to 30 percent.

Carpenter-Builder vs. Construction Company
Many GCs began their careers in the building business as carpenters but at some point decided they wanted to run their own companies and assumed overall management responsibility. In a large construction firm, the GC is actually a company rather than an individual, and an individual project manager will assume day-to-day responsibility for a given job. The project manager may or may not have hands-on building experience but does have business training. Increasingly, the tools of the GC’s trade consist of a notebook computer and a cell phone rather than a hammer and a circular saw.

The carpenter-builder GC probably has only one or two jobs going at a time, while a construction company will need more and larger jobs to pay its overhead. The carpenter-builder may have a desk at home that functions as an office and a workshop in a converted garage or basement. The construction company will have an office with an accountant, payroll clerk, and other staff; trucks and miscellaneous vehicles; a warehouse or other building that functions as the base of operations with equipment, materials storage, and workshop equipment, and a variety of other accouterments of a good-size business.

The large and small general contractors each have certain advantages. You may be able to shape a more flexible working relationship with the carpenter-builder than with a larger company. On the other hand, the construction company probably has a much greater capacity and can do a broader range of work. If your project is large, you may benefit from the larger crews of a construction company.

Logic might suggest that the smaller contractor will be able to give you the best price, but despite the extra overhead costs at the larger concern, there are also some economies of scale. In general, though, the odds are that as a small, one-time buyer of construction services, you’ll do better with a carpenter-builder for your remodeling. He is accustomed to dealing with individual owners, may have more time and patience for your special concerns, and he may well price the job a little cheaper, too. If you’re in doubt, get both companies and carpenter-builders to bid on your job.

When hiring a smaller general contractor, determine how much experience the head man has. If the candidate you’re thinking of hiring is a carpenter who’s just branching out and trying his hand at being a carpenter-contractor, think carefully before making the hiring decision. He may master his profession quickly, but the truth is it’s actually a new line of work, one that requires fewer building skills and more business sense. If your remodeling job is modest in scope, hiring a rookie GC may work to your advantage, since many people starting out on a new career have a pride in accomplishment that fades over time. Make sure you are confident he has the scheduling, budgeting, and other skills to handle the expanded duties.

Subcontractors
Subcontractors get their name from their relationship to the general contractor. When you hire a GC, he will contract with individual subcon­tractors to complete specified tasks for specified prices.

You may need several subcontractors or none, depending upon the nature of your remodeling job. Among the subs that may be needed for a residential project that involves extending an existing foundation are a surveyor, earth-moving sub­contractor for excavation and site preparation, and foundation contractor for the footings and cellar walls (though another sub, a mason, may be hired to build the walls if they are to be of block). Electrical, plumbing, and HVAC (heating, ventilation, and air-conditioning) subcontractors may be necessary and, depending upon who your GC or carpenter is, roofing, drywall, painting, and clean-up contractors may also work on your job.

Usually any vinyl flooring, tile, and countertop needs can be filled by one contractor, while another will sell and install your carpeting. If there is land­scaping to be done, you may need one or even several additional subs to plant trees, lay walks or patios, build walls, seed the lawn, and so on. Depending on local and state requirements, at least the electrician, plumber, and surveyor will be required to be licensed. Electrical, plumbing, and other inspections should be the responsibility of the appropriate subs.

If you have a general contractor handling your job, he’ll be in charge of hiring, scheduling, paying, and supervising the subs. If you are your own GC, you’ll be hir­ing them yourself.


How To: Hire a General Contractor

Take the time to get estimates and check references before you hire a general contractor.

How to Hire a General Contractor

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The routine for hiring a general contractor is not radically different from that of hiring a designer. You want to hire someone with proven skills, somebody you can work with, and someone with a sound business sense for schedules and managing personnel. If your architect is supervising your construction, he handles the hiring of the general contractor for you.

If you are on your own and you don’t know where to begin, ask for recommendations from friends or acquaintances who have had home construction done. Personal references are always best. Personal to you, that is, not to the contractor—sometimes people refer a favorite nephew or the son of a friend out of regard for their relationship rather than a knowledge of the person’s skills or qualifications. You will probably do best hiring a local contractor with an established business and reputation.

If the referrer has had work done by the contractor, ask for an assessment of the work. Did the contractor finish at or near the budgeted price? If not, were the change orders reasonable? Was the work completed on schedule? Did the contrac­tor willingly return to correct problems? Would they use him again? Are they happy with the finished product?

Another source of contractors is your local lumber yard(s). Not houseware stores where nails are sold by the dozen, but real building supply houses where con­tractors do their bulk business. The proprietors of such places know who the reliable contractors are. They know which contractors pay their bills on time, whose orders are always confused, and which ones are always returning merchandise.

Meeting the Contractor
Once you’ve identified candidates, you will need to meet and talk with each of them. The contractor will need to see the plans and will want to examine the structure to be remodeled. Only after looking at the exist­ing home or apartment and reviewing the changes to be made can an estimate be prepared.

Checking References
When you meet them, ask each GC for four or five local references. That’s a perfectly reasonable request, and no reputable contractor should hesitate to provide them. Getting the names and numbers, however, is only the beginning, next, you need to make a few calls.

Telephone the previous clients, identify yourself as a homeowner in the market for building services, and ask the key questions: Did the GC in question finish the job on time? Is the completed job satisfactory? How much did the price change along the way? Were the workers neat or did they leave a hopeless mess behind? If possible, ask if you might be able to take a first-hand look at the work, too. Only by inspecting it yourself can you judge the caliber and acceptability of a contractor’s work. You may get additional insights into the contractor from talking with the clients in person, too. Lessons previous customers learned may be helpful to you.

Call the local Better Business Bureau and ask if there are any complaints on file against the contractor(s) you are thinking of hiring. A call to the local building department inquiring about their professionalism and courtesy may be revealing. Ask each contractor who his primary supplier of materials is, and then call that sup­plier.

A quick call to a local credit bureau is also a good idea. Ask how long the company has been in business. If you uncover any pending suits or liens, walk away. You don’t need the problems that can occur when a contractor is in litigation, like the sheriff arriving to impound the contractor’s tools—or your building supplies. It happens.

Other sources for references are banks and subcontractors. Ask the GC who he has dealt with and call them, too. The banks can tell you about his fiduciary responsibility and the subcontractors about how well organized he is.

Another word of caution: Treat your contractors, subs, and the other people you hire with appropriate respect. They’re not your employees, they are businesspeople from whom you are buying services. A modicum of courtesy and basic con­sideration will be rewarded. That goes for the men and women who work for them, too.

On the other hand, resist the temptation to get too friendly with any of your contractors. Keep your relationships strictly professional. They aren’t your friends: again, these are people with whom you have a business relationship. Invite them to dine with you after the job is done. A friendly but professional distance is appropriate until then.


Being Your Own General Contractor

You may have some sleepless nights, but being your own general contractor can help ensure you get exactly what you want.

Be Your Own General Contractor

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There is no mystery to being a general contractor, though some skills with peo­ple, finances, and general good sense are required. For someone who has never done it, a willingness to ask questions, some of which may seem elementary or even silly, is necessary. And a knack for solving problems is certainly helpful. I wouldn’t recommend that a novice act as his or her own contractor if the job is large—say, a new house or a large addition—but an interior remodeling of moderate size can be quite manageable.

Yet that still begs the real question: It isn’t Can I do it? It’s Should I do it?

The best argument for trying to be your own contractor is the payoff. Con­tractors are, after all, in business to make a profit, so adding 20 or 30 percent to the cost of materials and labor as profit is perfectly reasonable.

If you are your own GC, you don’t have to pay anyone that percentage.

On the other hand, there are arguments against being your own contractor. For example, if you aren’t satisfied with the finished product, you can’t complain to your GC that the job isn’t good enough and refuse to make the last payment. You would be talking to yourself because you are the general contractor.

That may be the biggest single reason not to be your own GC. If you hire someone to do the job for you and then something goes wrong, it probably won’t be your problem because GCs are paid to solve problems and get the job done. When you hire a general contractor, you are paying for his experience, competence, ability to anticipate problems, and, more than anything, for his willingness to assume final responsibility for the whole job. And he’ll get the permits, do the scheduling, and handle disputes between subs and suppliers.

So if you opt to do the GC’s job, you’ll have some sleepless nights. Should major problems arise, you won’t have the same simple recourse to call your lawyer and tell him, “Sue the damn GC, it’s his fault.” Acting as your own contractor does not mean buckling on a tool belt and swinging a hammer all day.

Being your own contractor can mean you increase the odds of getting exactly what you want. GC’s make money by executing each job simply and efficiently so they can get on to the next one. Changes along the way and variations from the usual that make a job last longer can be the cause of irritation and uncooperativeness from a GC. Thus, if you are very detail conscious and plan to be looking over everybody’s shoulder anyway, it may make sense for you to be your own GC.

According to a 1996 survey conducted by the Consumers Union, roughly half of the reader respondents used a GC to oversee their renovations. The degree of sat­isfaction was roughly the same for those who did and those who didn’t. Perhaps the average Consumer Reports reader is more careful and savvy than the average person … but perhaps you are, too.

Now let’s talk about the key elements of the job.

Hiring Subcontractors
This will be your responsibility, and it’s a crucial one, since these are the ladies and gentlemen who will actually remodel your house for you. They’re the carpenters, plumbers, electricians, and other tradespeople who translate the plans into your living spaces. As with any manager, the key skill is find­ing the right personnel.

The most important player will probably be your carpenter. He’s the person who will shape the structure that defines the spaces. He builds the framework that will be the matrix for the electrical wiring, piping, vents, phone lines, and insulation. He’ll return after all that has been roughed in and cover it with finished surfaces. The carpenter is the pivotal player and should be hired first.

The carpenter will be your primary sub, so ask him for help in finding an elec­trician, plumber, or mason. And don’t worry too much about cronyism here. Most carpenters can be counted on to recommend people they like to work with but few will recommend subs who don’t know their jobs. They know which are the guys who mess up the schedule and who do sloppy work and make trouble for everybody else. They don’t want those headaches any more than you do.

To find carpenters or subcontractors, ask friends and neighbors. The Yellow Pages are a good source, too. Another option is to visit job sites in nearby residential areas. Walk right in and ask for the head carpenter, plumbing contractor, or the elec­trician. The chances are excellent that you’ll come away with a business card, a phone number, or possibly an appointment. You may even get an estimate on your job if you have the plans with you and the boss has an hour to kill.

Another good source of subs is supply houses. Ask at plumbing, electrical, or tile shops that deal with the trades. You should get a couple of names. Ask other subs for the names of the tradesmen they respect and with whom they’ve worked.

Check each sub’s references (customers, suppliers, banks, and others). Get several subs to estimate on the big jobs and at least two on the small ones (replumb- ing an existing bathroom durtng a remodeling is a small job, plumbing two new baths, a laundry room, and a hot tub in a large addition is a big one). Do your home­work on the people you are hiring before you hire them.

When it comes to dealing with subs, keep in mind that most of them bid a lot of jobs and some take on virtually every one they are offered. The bad news is that you, as a one-time customer, may get a place toward the bottom of their priority list, well below the GC’s who are going to be building many houses in the future and therefore may be continuing customers for the subs’ services.

You need to steel yourself for the frustrations and scheduling hassles but, on the other hand, you’re not taking on the world all alone. Your subs will also be key allies in getting your job done. They are there not only to get your house built, but to help you do it. You may be surpnsed to find the pride that many individual operators in the construction business take in their work. Try to use that pride and spirit to your advantage. Good planning on your part and constant communication with the vari­ous subs are both essential.

Many states and municipalities require that general contractors be licensed and properly insured before they can legally hang out a shingle identifying them­selves as GCs. However, no such requirements exist for the homeowner acting as his own GC. If after you do it yourself you like it so much you want to do it again for someone else, then you can find out what the requirements are.

Insurance
When you act as your own GC, you’ll need a builder’s risk or fire policy. In most states, prices tend to vary only slightly from company to company because they are usually closely regulated, but check with the insurance agent who handles your homeowner’s policy to determine the paperwork required and the cost. You will want to arrange for the insurance to be effective the moment the building materials arrive or the first worker sets foot on the site, whichever is earlier. If you have a construction loan, the bank will probably insist you have a valid insurance binder on hand at the time you close on the loan. When the work is finished, you can then amend the policy once again to standard homeowner’s coverage.

Don’t take the decision to be your own general contractor lightly. Don’t let the possibility of saving a substantial amount of money blind you to the potential for complications and conflict. You may find a great deal of satisfaction at having man­aged the whole process yourself, but you should also be confident that you have the time, interpersonal skills, organizational abilities, and just plain desire to stay the course, even when the going gets a bit rough. And it will—no construction project is without its ups and downs, its setbacks and frustrations. For many people, the markup a GC adds to the actual costs of construction is a fair price to pay to man­age the process. There is a potential for savings, but there must also be an invest­ment on your part of time and commitment. You’ll have to coordinate the activities of the subs, establish schedules, pay bills, and perform a number of other functions. But there’s another role you will have to assume as well.

As GC, you’re the person with the “buck-stops-here” sign on his desk. The decisions, large and small, are yours to make. There’ll be professionals around to help answer questions and advise but, finally, yours is the voice of authority.

So ask yourself whether you have:

The time.
No, it isn’t a full-time job. You probably won’t need to spend more than two hours a day during construction. Yet you must be on call for surprises and emergencies. Is your workplace close enough to your home and is your schedule flexible enough that you can make the trek to the job site during working hours? How about at lunch hours? Are you accessible by phone most of the time?

The commitment.
Don’t take on the job of general contractor on a whim. You probably won’t be able to hand it off to someone else partway through without costing yourself most of the money (or more) you were hoping to save.

The personality.
All right, now let’s really talk. You will have to be a manager. That means you will need to be tough at times with your subs. Yet you can’t interfere with their work. It’s a fine line. Do you have enough patience, critical distance, and savvy that you can both let the pros do the work they know how to do better than you yet know instinctively when to step in?


Hiring a Construction Manager

Here's how to decide if hiring a Construction Manager is necessary.

Construction Managers

Photo: forbes.com

A construction manager is another alternative to hiring a general contractor. It may be a good way for the homeowner who has no building experience to get some of the benefits of being his or her own contractor yet, at the same time, to have a pro at hand to lend confidence and guidance.

One key difference between hiring a GC and a construction manager is financial. In a traditional homeowner-GC arrangement, the contractor calculates his costs, gets estimates from subcontractors, and then marks them all up a percentage to give you a single price. In contrast, the construction manager won’t give you one price; your checks won’t all be payable to just one payee. Instead, you will hire all the contractors and there will be no middle man to mark up costs. You will pay the construction manager a fee, but that will be less than the GC’s markup would have been. You should end up ahead.

With a construction manager, you sign an agreement specifying that his (or her) fee is a percentage of the total time and materials costs. A typical fee of 10 to 15 percent would translate, on a job with a time and materials cost of $50,000, to a construction management fee of $5,000 to $7,500 for the manager’s services.

Another advantage of the construction manager is that you will retain a high degree of control and involvement in the process. The construction manager is essentially a consultant who lends a professional hand. The construction manager will help solicit bids, review estimates, coordinate schedules, and oversee construction. But you will be closely involved with every step along the way.

The basic service provided by architects usually includes some routine construction supervision, but for an added fee, many architects will assume the construction manager role. Some carpenters and small general contractors will also work on a manager/fee basis. But whoever does it, the estimating, negotiations, scheduling, and supervision are the manager’s responsibility.

What’s the downside? A general contractor assumes responsibility for a job; a construction manager does not. Disputes, poor workmanship, and other difficulties become your problem. It’s only fair, really: you save some money and assume some of the risk. But if you find an experienced construction manager with good references and negotiate a thorough and fair contract, the chances are good you won’t have major problems.

Whatever arrangement you decide upon, remember you’re the boss. Insist that the work be up to your standards.


Getting Professional Help

Your attorney, accountant, and insurance agent can be important players in your construction project.

Hiring a Real Estate Lawyer

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In order to be assured that you’re not embarking on a trip straight to debtors’ prison, it’s a good idea to consult a lawyer and probably to seek other guidance as well. These counselors won’t be wearing flannel shirts and work boots, and they may never even visit your home, but your attorney, accountant, and insurance agent can be important players.

The real estate attorney. You may resent it, but the fact is we live in a world where good legal counsel is essential to conducting business. While you might like to think of the home renovation process in warm, emotional terms, it is also true that buying construction services is to sign a series of contracts. By definition, you’re entering into a string of business deals.

The bigger the job, the more you need a lawyer to look out for your interests. Your banker, the contractor, the architect, and each of the other players will have different concerns. Their counselors—and they’ll probably have them, even if you don’t have contact with them directly—cannot be counted on to protect you.

Even if you hire a GC or use an architect to supervise the whole process and never visit the site, you will need legal guidance for reviewing contracts and checking out zoning restrictions and numerous other matters. You may find that an experienced real estate attorney can help in ways you have never considered. He’s seen his clients through most of the hassles you’ve never faced before, so his experience and advice can be invaluable, whether it is in negotiating the right contract at the start, resolving a misunderstanding in the middle, or resolving a dispute long after the job is completed.

If you have an established relationship with an attorney, be sure he is well versed in real estate law. Does he do a reasonable volume of real estate law? Even if he was your college roommate, check it out because real estate law has its own complexities and can get just as arcane as any other area of the law. And mistakes can be very expensive. If you don’t have a suitable lawyer awaiting your call, try calling a couple of nearby real estate agencies or mortgage departments at local banks and ask them for references. The local bar association is another potential source; ask for the chairman of the real estate committee.

Other professionals. If you have an accountant who prepares your taxes, get his or her opinions and guidance early. Sit down with the accountant and discuss your budget, loan arrangements, the cash flow of the project (you expect which bills in which month, which are this year, which next), and your income. There may be tax credits (some credits are available for rehabilitation of older buildings), certain tax advantages, and other issues that could save you money. Even though your contractors should provide you with Certificates of Insurance describing their insurance coverage, you should also consult with your insurance broker. As you improve your house, you may wish to up your coverage for the added property value. You might also wish to check your liability coverage to be sure it is adequate. Should someone fall and break a leg, you—as well as the contractor- might get sued and you’ll want adequate insurance protection. Construction sites have many potential dangers and you should minimize your risks, both physical and financial.


Footing the Bills

Consider this advice on where to obtain money in order to pay for your remodeling project.

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If you have the cash on hand to pay for your remodeling project, you needn’t read this section. Most people, however, need to borrow money to underwrite their job.

The best option is usually a mortgage loan. That’s because the interest on a home mortgage is tax deductible. There are several varieties of mortgages that can provide the funds for a home renovation project, but each depends upon how much equity you have. Equity is the net value of your property after all indebtedness held against it has been deducted from its gross value. Allow me to translate.

Suppose you want to borrow $25,000 to improve your $100,000 home. If your original down payment was, say, 25 per­cent of the purchase price, and your pay-down on the principal since then equals another 25 percent, you own the remaining 50 percent, or half your house. That would mean you are an excellent candidate for that loan, since most banks will loan up to 75 percent of the value of an existing house.

There are a number of ways you can draw upon that equity. The two princi­pal ones are first mortgages and second mortgages.

FIRST MORTGAGES
For the home renovator, negotiating a new first mortgage is one way of underwriting the remodeling job. In practical terms, this means you will apply to the bank for an all-new mortgage. If the bank approves the loan, some of the proceeds will be used to pay off the existing mortgage. After deducting closing expenses and fees, whatever is left over will be paid to you. Typically, a new mortgage makes especially good sense when the interest rate you are paying is at least one percentage point higher than the rate you would be paying on a new mortgage.

SECOND MORTGAGES
A second mortgage is exactly what its name suggests: it’s an additional mortgage to the first mortgage you are carrying. Typically the holder of the second mortgage will have a claim on the property in the event you fail to make your payments. At the time a house was initially purchased, the seller may have agreed to hold a second mortgage, but for the homeowner planning a renovation, the most likely source of a second mortgage is a lending institution.

CLOSING COSTS
Costs vary from one state to another and from bank to bank, but the costs may include lawyer’s fees (possibly yours and the bank’s); recording fees; mortgage, transfer, or other taxes; points on the loan (fees calculated as percentage points of the sum being borrowed, meaning two points on a $100,000 loan would rep­resent a fee of $2,000); title insurance; filing fees; application fees; appraisal expenses; the cost of a credit report; and so on.

With a traditional mortgage, all of these expenses are usually borne by the borrower; with an equity loan, the bank pays for many of them. When you apply for a loan, most banks routinely provide an estimate of the total closing costs. Ask for a breakdown if one isn’t offered.

OTHER OPTIONS
In addition to mortgages, there are other loan options that might suit your particular financial circumstances.

Credit card advances
If your renovation will be modest in cost, you may want to avoid the paperwork and expense of loan applications and simply draw a cash advance from one or more of your credit cards. Keep in mind, however, that the inter­est rates are generally rather high (often more than twice that of mortgages).

Personal loan
A personal loan is a relatively simple transaction. You file an application with a lender, he checks your credit and indebtedness, and he approves or disapproves the application. The loan is not secured by your home, and the decision to approve (or disapprove) the loan is made on the basis of your credit rating, income, and an overall assessment of your financial health. The rate will typically be a good deal higher than for a mortgage; the term shorter; and the interest is not tax deductible. Given these disadvantages, a personal loan should be well down your list of options.

Balloon mortgage
A balloon mortgage is one in which a large or “balloon” payment of the remaining principal is due at a specific date. Payments are made along the way, often of Interest alone though In some cases token principal payments are made as well. Balloon mortgages are more common in real estate transactions for commercial or multifamily dwellings. 

However, if your home renovation involves more than simply enlarging or remodeling your home for your family—if, say, your improvement includes the addition of an apartment or a commercial office space you expect will produce income and you’re planning to sell the whole complex within a few years—a balloon mortgage may make sense.

Construction loan
In order to construct an all-new house, few banks will issue a standard mortgage. Instead, the bank will grant a construction loan that, after the house is completed and the certificate of occupancy granted, will be converted to a more traditional first mortgage.
A construction loan works like this. When a bank approves a loan, there will be a specific disbursement schedule that specifies that a certain percentage of the loan proceeds are due upon completion of the new foundation, more upon the roof being finished, more at the time the windows are put in place, and so on. You construct your addition, and the bank pays you according to the schedule when they see that its strictures have been met.

In most cases, a construction loan isn’t the best route for a home renovator. However, if you are radically remodeling the house and the cost of the construction is substantially greater than the equity you have in the house, a combination construction loan and mortgage may be your best strategy.

Credit unions
If you’re a member of, or are eligible for membership in, a credit union, it may be another source of funds. Most credit unions are not-for-profit institutions that exist to serve their members, both helping to save and to borrow money. Inquire of the loan officer or manager at the credit union about the rates, terms, and other details. Often credit unions loan money to members at very favorable terms and with less paperwork than the same transaction would require at a traditional bank. The interest, however, will not be tax deductible.

WHICH LOAN IS THE RIGHT LOAN?
The right loan is the one that best suits your particular financial circumstances. In most cases, the key determinations are these: Does this provide enough money to do the job? and Can we afford the monthly payment?

If you have little experience in these financial matters, seek the counsel of such professionals as your attorney, accountant, or the real estate broker who handled the purchase of your house. Your banker can also help.

When the time comes to apply for a loan, do it in person. If possible, talk to the person who approves the loans or who screens them, and try to get a sense of how helpful he or she is inclined to be. Make sure you get all the attachments and instructions and a clear understanding of the processes of approval and payment.

Another suggestion? After you’ve talked with your banker and identified what you think is the best strategy, sleep on it. Have a couple of additional conversations, perhaps with your lawyer or a close friend whose business acumen you trust. To borrow money is to assume large and often long-term responsibilities and shouldn’t be done casually


Contracting the Contractors

Follow this advice to learn what's integral when producing a conclusive contract.

Contracting Contracts

Photo: contractorandinspectorservices.com

Do you need contracts? Yes is the short answer
Contracts are a crucial part of the paper trail that will help assure that you get what you want. This pathway begins with your preliminary drawings and moves on to the designer’s sketches and then to the working drawings. The estimates lead to the contracts and, eventually, the road will be papered with your canceled checks and the Certificate of Occu­pancy. It’s a story with a beginning, middle, and conclusion—and if parts of it are omitted, the ending might not be a happy one.

Contracts are legal documents that specify the responsibilities of the parties. A contract will define the work to be done by each contractor, the sums to be paid by you, and other terms. The documents will probably be drawn on standard forms that you, the contractor, and perhaps your attorney will negotiate and execute.

Contracts should always be in writing
In most states, a contract is not bind­ing if it’s not in writing. It’s only logical: If the understanding isn’t written down to start with, when an argument arises later, how do you know whose recollection is right? Get it on paper.

You may never look at the contract again after you’ve signed it. However, since the contract in a legal sense defines the relationship you have with your con­tractor, you probably will refer to it occasionally as the job progresses and you make payments. When there are disagreements, you will also refer to it since it provides a framework defining expectations, payments, and schedules.

Obviously the word contractor comes from the word contract. Let’s say you’ve met with the contractor, described the job, he’s prepared an estimate, and you’ve agreed upon the other terms of the agreement. The contract that results obligates the contractee (that’s you) to pay the contractor for the agreed-upon work.

Both parties should sign the contract, and both should be bound by the terms and conditions spelled out in the agreement. In general that means the contractor will be obliged to provide specified materials and to perform certain services for you. In turn, you will be required to pay for those goods and that labor.

A contract should, however, specify in as much detail as possible the work to be done. If the estimate was prepared on the basis of the plans and specifications, they should become a part of the contract, too. If the estimate was prepared without a formal set of specifications, now is the time to get specific. The materials to be used should be listed, not only the quantity but also brand names and model numbers and dimensions and weight and quality and color and other details. A schedule for the work should be specified, as well as the prices and the terms of payment.

Most often renovation contracts begin life as estimates. If you are adding a deck off your kitchen, the contractor may arrive at your home one evening, discusswith you the job to be done, inspect the site, and then retire to his calculator and clip­board. He’ll probably use a standard estimate contract form, and may well before your very eyes write down your name, address, a description of the work to be done and the materials to be used, and then sign the sheet and hand it to you for your con­sideration. He may ask you to sign right then and there and also advance a portion of the price. He may promise to begin work in the morning. It can be that simple.

Do you want to sign on the dotted line?
Use your own judgment: It may make sense to hire him, you may want it done right away, you may have done business with this fellow before and know him to be trustworthy. In general, however, I’d sug­gest that you might be better off if you take your time and give the decision proper consideration.

Whether the job is large or small, the price modest or mind-boggling, there are basic questions to ask of the contractor and about the contractor.

Does this contractor do quality work? The only way to know is to check out some of his previous jobs/references.

Is the price fair? Unless you have two or more comparable estimates, you proba­bly can’t make that judgment. Getting at least three is a good practice.

Is this piece of paper fair to you? Particularly if the document is long and packed with tiny print, get your lawyer to have a look. (If the cost of the work being con­tracted for is small, you may not want to spend the time and money in getting your lawyer to review it. It may not make sense if the attorney’s fees will be greater than the contractor’s price. One common rule of thumb is have an attorney review any contract that will cost you more than what you make in a week.)

Do you understand every word? In many states, the law requires that contracts be written in plain language, but whatever the case in your area, take care to under­stand what you are signing. Don’t be fooled by complicated locutions like “hereto­fore” and “notwithstanding” into agreeing to something you don’t mean.

Does the contract incorporate every piece of paper that has gone between the two signers of the contract? That includes the plans and the specifications you gave the contractor and the estimate and any changes he gave you in return. Remember, only written representations will stand the test of most courts.

PAYMENT TERMS
You should never pay more than a fraction of the entire cost of the job before work begins. Advancing 10 or perhaps 15 percent of the estimated cost is reasonable. In general, the principle to follow is that monies should change hands on the basis of progress, not talk or paperwork.

If the contractor demands a disproportionately large payment up front, find another contractor. Good sense also suggests that at least 15 to 20 percent of the total should be withheld until the job is done, and all payments in between should be made only on completion of specific portions of the job, although as major material purchases are made, more money should flow. The payment of bills is your best sin­gle method of controlling quality. You pay when the work is done properly and not before.

KINDS OF CONTRACTS
Contracts vary greatly. Those you agree to with banks for loans will have a lot of language describing the financial ifs, ands, or buts. With bank contracts there isn’t much to negotiate as it’s likely to be a standard contract. With builder’s contracts, every deal is different and there will be many details to discuss. There are also numerous kinds of contractor contracts. Some set a total price in advance so you know exactly what the final price will be; others are more flexible. There’s no one right approach for all jobs, so here are your options.

The Lump-Sum Contract
For a straightforward job without a lot of frills (the use of made-to-order materials, for example, to execute a straightforward design), the lump-sum contract is often best, both for you and the contractor. Your contractor will look at your plans, the specs, and probably the existing building, too. Then he’ll give you a price. If no changes are made after his estimate is submitted, he will be oblig­ated to hold to that price.

The lump-sum contract is simple and establishes before construction begins what the cost will be. However, if you elect to go with this method, make sure you get three or more estimates. When you get a lump-sum estimate, you won’t see a breakdown of materials and labor costs, so it is impossible to tell from the estimate whether the contractoi’s markup for profit and overhead is ten percent or fifty per­cent. If you have several estimates, you have a basis for comparison.

While this may seem an ideal arrangement, many contractors doing renova­tion work won’t agree to a lump-sum contract. There are too many unknowns: What if they discover structural problems? Or have difficulty finding new materials to match the old ones? Insect damage often isn’t identified until the walls are opened up. Contractors don’t want to find their profits entirely eroded by an unpleasant dis­covery they couldn’t have made before starting work.

Cost-plus or time-and-materials contracts. This method of payment means that you and your contractor will agree on a percentage—say, 10 or 20 percent—for his fee. He will then charge his actual costs for time and materials plus the percentage. A job with materials costing, say, $50,000, with an agreed-upon fee of 20 percent for the contractor, would then cost you $60,000.

The most obvious disadvantage of such cost-plus contracts is that the more the contractor spends, the more he makes. There is no incentive for him to keep costs low, as there is when a price is established up front that he knows he has to live with. On the other hand, when it comes to jobs involving retrofitting an older house or where there are necessarily some unknowns (perhaps your final decisions on mate­rials haven’t been made yet), few contractors will give you a lump-sum price. They can’t estimate on what they don’t know.

Make sure you check your contractor’s references doubly carefully if you decide upon a time-and-materials arrangement.

Upset price
One way of establishing an upper limit while retaining the flexibility of a cost-plus arrangement is to get the contractor to agree to do the work on what is known as an “upset price” basis. This means that you both agree to a maximum price before he begins the job. Then he proceeds on a cost-plus basis. Upon completing the job, if the price is less than the upset price in the contract, you pay less; if it is more, it’s his problem, and you pay no more than the upset price.

Hourly rate
Some smaller contractors may ask to work for hourly wages rather than for a fixed fee. They may say that in the end it will probably be cheaper for you.

Well, that’s possible if rather unlikely. It is recommended that you insist upon establishing a price up front. That way you won’t have any surprises down the road. In addition, you avoid having employees and the extra paperwork required.

Draw
Some contractors, especially smaller subs with limited working capital, will ask for a draw arrangement. Though every draw is a little different, the basic idea is to negotiate a fair balance of payment for work done. The two of you might come up with an estimate for the entire cost and a schedule for the work, then divide the total price by the number of weeks required for completion. The contractor would then be paid that fraction of the price at the end of each week. This approach requires care­ful monitoring in case there are delays. It’s only fair as long as the work progresses at the agreed-upon pace.

Such arrangements are fair to both parties, so long as work progresses as scheduled. Make sure, however, in the case of jobs that require inspections by the building department that the bulk of money due on completion of various stages is paid only after the inspections have been made. It should be the contractor’s respon­sibility to handle the inspections. In a typical case, a plumber might ask to be paid 50 or 60 percent of the total price when the “rough-in” is completed. That’s fair enough, as long as the work has passed inspection. You will have to use your instincts and good sense about what portion of a given job is done (if you have an architect or construction manager guiding you, he should make these decisions), but if it’s a quarter complete, don’t pay a third. A quarter is a quarter is a quarter.

An excellent clause to negotiate into a contract is one that states that, should the completion of your job be delayed for an unreasonable time, you may then use the unpaid balance of the contract to hire someone else to finish the job. The clause must specify what is the expected schedule (thereby defining what is “reasonable”), and may also require notification (i.e., that you must advise the contractor he has a few days or a week to get his act together or else). But it does provide you with an option in the event you find yourself wedded to an untrustworthy contractor.

Liquidated damage clauses
For practical purposes, liquidated damage clauses are penalty clauses (in fact, by law in some jurisdictions, these clauses are not enforce­able as they are held to be penalties). Liquidated damage clauses do make their way into construction contracts from time to time but, as a rule, they create as many problems as they solve. If a contractor is going to be late and there is a penalty clause in his contract, you can bet he is going to blame the delays on someone else. And who is to say he’s wrong?

More often than not, penalty clauses succeed only in creating arguments. Putting a specific schedule in the contract is important and probably as valuable as a penalty clause.

Change orders
Change orders are not part of the original contract, but are formal amendments to that agreement. They are issued when something about the job changes: materials are switched, the design amended, or some unanticipated com­plication appears.

Change orders don’t have to be complicated, but if the job changes, then the change orders must be done. They are a key part of the paper trail you are creating in order to control your project.


Affording a Renovation

When renovating, in addition to collecting soft data like personnel reputations, you should assemble the hard information, namely the estimates.

Managing the Money

Photo: shutterstock.com

A renovation project requires more than the skilled handling of different sorts of people. Good management is always a matter of good decisions, no more, no less. Some decisions have to do with personnel, but many have to do with money.

Any successful manager—whether the person is managing a bank, a factory, or a construction company—knows that making good decisions depends upon hav­ing the right information at hand. The trickle-down of this principle for you, the homeowner, is that you’ll be poised to make good decisions only after you’ve done your homework. This means that, in addition to collecting soft data like reputations and weighing your own feelings and considerations, you’ve assembled the hard information, namely the estimates.

Before you sign up any contractors, collect all your estimates, loan docu­ments, plans, specs, and any other associated paperwork into one place. Designate a drawer, briefcase, or better yet, an entire desk to the work of managing your renova­tion. Make it your HQ during the process.

You’re going into business, so you need to be businesslike. Before most business people embark on a new venture, they’ll put on paper a budget that spells out the capital at hand, the anticipated costs, and whether the budget balances. You should do the same.

You don’t have to be a CPA to do this. In fact, one sheet of paper should be enough to summarize the entire process. Put your costs in one column, your rev­enues (e.g., cash on hand and loan proceeds) in another. Leave columns three and four blank.

The estimate sheet doesn’t have to be fancy, but it should be complete and accurate. Check the totals at least twice. You might also have one of your profes­sional advisers review it and your paperwork with you, especially if you’ve never pre­pared a budget before.

Take a financial precaution, too. After you’ve totaled the costs, add a line at the bottom for miscellaneous unexpected expenses. Then take 15 percent of the whole cost and add it to the original total. It’s a rare construction project that comes in at the price budgeted, no matter how carefully the process is managed. That addi­tional 15 percent will give you a cushion for cost overruns.

Having totaled all the budgeted expenses plus a fudge factor, does your bot­tom line tell you that you can afford to proceed? If not, you may need to look for other sources of money. Or you may need to rethink what you are spending.

Even if the budget does balance, don’t abandon your estimate sheet. As you sign contracts and pay bills, enter the real costs in the third column and keep a run­ning balance in the fourth. By monitoring progress in this way, you’ll be the first to know when your budget is in trouble, and you can take immediate steps to solve the problem.

If something comes in under budget, don’t get so excited you go out and spend the money on something else. Construction jobs always have ups and downs (building materials are commodities traded daily, so their prices change from day to day). Savor the good news, but expect some other expense to come along and swal­low the surplus.

Get at least three estimates for each job
Whether it’s the whole job or only one subcontractor’s portion of it, only when you have a basis for comparison will the outrageously expensive estimate stand out. And remember, the cheapest isn’t always the best. If one price is much less than the others, there’s probably a reason why.

Get your job estimated during the off-season
This won’t help in Southern California where construction work isn’t seasonal, but in the snow belt you may well get a better number from a contractor during the idle months when he wants to line up work for the first day of spring. Even if a contractor’s prices don’t vary much from season to season, he’ll almost surely have more time to devote to working out the estimate carefully and maybe even to helping you brainstorm about costs and technical concerns.

Receipts and records
Keep all your records together in a safe place. That means estimates, contracts, invoices, and especially canceled checks and receipts. Organize them into files if you wish, but at the very least keep an oversize envelope into which you toss all paperwork related to your renovation.

These records may be helpful in resolving any disputes and disagreements in the short term. When it comes to filing taxes for the year in which the remodeling was done, consult with your accountant regarding which expenses may be tax deductible. Among them might be certain closing costs; sales tax paid on large purchases (kitchen appliances, for example); and perhaps improvements that are work- related.

Later, when and if you sell your home, your receipts and check stubs will enable you to calculate the cost basis of your house for purposes of calculating capital-gains tax that may be due.


Estimating Checklist

Remodeling Cost Estimating Checklist

Photo: shutterstock.com

Cost overruns are certainly common in renovation work, but there are steps you can take to try to anticipate some of them.

Below is a long—yet hardly exhaustive—list of costs common to renovation projects. You probably won’t have to add a line item for each of these for your job, but if you see one you think you’ll encounter and it doesn’t appear on your budget, find out why. Is it part of the contractor’s overall price? Or a sub’s? Don’t assume: Ask the question, then put the representation in writing. Here goes …

SITE PREPARATION
Do you need to arrange for tree removal or clearing of other vegetation? How about demolition of existing hardscape (patios, walls, etc.). Will pre­cautions be necessary to prevent soil erosion during and after excavation? Are there landscape features (like mature trees) that need protection?

EXCAVATION
Your estimates should specify what is to be done, which may include digging the foundation hole, hauling off unwanted fill, back filling after the founda­tion is done, and final grading. If there will be drains in or around the foundation, your excavation contractor may install them, so references to crushed stone and drain tile should appear on the estimate.

FOUNDATION
Has the foundation contractor figured in pounng the footings, walls, pads, bulkhead access, and/or slab? Are there poured concrete walkways in the plans and in the estimate? What about insulating the foundation? If your designer has specified it, the cost should be included in the price. What about sealing the foundation with an asphalt-based or other sealer? Is that included in the price? Is other drainage or waterproofing necessary?

FRAMING
If the builder has prepared his estimate on the basis of careful specifica­tions, the estimate should cover framing the walls, floors, and roof with a specified grade of lumber. Green lumber might cause headaches down the line, shrinking as it dries. Kiln-dried hem-fir is the norm, but you might want a higher grade of Douglas fir. In some urban areas, steel studs are required by the fire codes. The exterior walls should be covered with sheathing and the roof with a subroof of plywood, oriented strand board, or roofers. If the design calls for laminate or steel beams, steel columns, or roof trusses, check to be sure the builder has incorporated those into his estimate.

ROOFING
The builder, or a roofing subcontractor, should specify the materials to be used (asphalt shingle, cedar, tile or slate, per the specs), as well as flashing and roof­ing paper. Particularly in homes in colder regions with dense layers of insulation, ventilation is also important. Are there roof or soffit vents specified?

EXTERIOR FINISH
There’ll be a layer of material wrapping the exterior of the house, perhaps building paper or house wrap. The type of siding should be specified (clapboard, shingle, brick veneer, board and batten), and the material (perhaps pine or cedar) as well as the pattern. The door and window trim, the corner boards, the trim at the eaves (fascia, soffit, frieze, or rake boards) should be consis­tent with the specifications or clearly described in the estimate. In cases where you want your addition to blend with your original house, you and the contractor may be well served by a general description like, “Siding and other exterior trim will be done in materials and a manner consistent with existing exterior finish.”

MASONRY
If there is a chimney, fireplace, stone or brick facing on the foundation, a mason will need to provide an estimate to you, the GC, or the construction manager. It should specify the type of brick or stone. Ask to see a sample.

INSULATION
Again, the specs should be your guide but whether insulation is required in your climate to keep the heat in or out, insulation is a sensible invest­ment. The kind, thickness, and R-factor of insulation for the walls, floors, and ceilings should be specified, along with the vapor barrier for interior surfaces.

ELECTRICAL, PLUMBING, AND HVAC
The building code and the code enforce­ment officer are your allies here for safety and health concerns. Look for consistency with the specifications (query any variations). Make sure that you see, at least in a cat­alog but preferably in person, any fixtures or appliances specified. Verify model num­bers, colors, and sizes. If additional capacity for hot water, heating, or cooling will be required to service your added space, do your estimates include the prices for a hot water heater, furnace or boiler, air-conditioning components, or other equipment?

WINDOWS AND DOORS
Doors and windows should be highly functional yet they also contribute significantly to the appearance and character of the house. Make sure that your estimates describe doors you like, and that quality lock sets and weather- stripping are included. Are they of a kind and quality consistent with those in the existing house?

INTERIOR TRIM, STAIRS, AND CABINETRY
Window and door trim, baseboards, other moldings like chair and picture rails, and cornices should be specified. Review the sizes, grades, manufacturers, and model numbers of cabinets; if the millwork is custom, make sure the specs include grade and type of stock to be used. If you are adding a stairway, ask to see sample or catalog descriptions of the stair components, including the treads, balusters, and railing.

KITCHEN APPLIANCES, HARDWARE, AND OTHER MATERIALS
Check the specifications carefully to be sure you know exactly what you’re paying for. Affirm that what you expect is what you’re getting. Sometimes it’s best to exclude these from the contract altogether. Shop around on your own and get some deals but stick to the specs. Changes in appliance sizes, for example, can wreak havoc with cabinet orders.

OTHER COSTS
Does the estimate include rubbish removal and cleanup? How about painting, interior and exterior? Prime plus two coats of paint are a minimum; on new wooden floors, the finish should be at least two and preferably three or four coats of urethane.

Have you figured in such landscaping expenses as topsoil, seeding, planting, and relandscaping? Landscape costs are often overlooked. That can mean a hand­some renovation has little visual impact from the outside because its setting is a tan­gle of weeds or a bland expanse of lawn. Do your estimates allow for even modest plantings or walks and walls to accent the architectural attributes of your house?

You may not want to spend a penny more than the sums already in your esti­mates, but if pieces of the puzzle are missing, the finished work will end up looking incomplete, too. Have the hard conversations now rather than later. You have much more leverage before the work begins than after it’s finished and most or all of your money has been paid out.


Decision Making

As you confront tough choices, consider a couple of rules of thumb I've for­mulated over the years to help me to frame difficult decisions.

Photo: andycore.com

Over the years, many homeowners have told me the hardest part of managing a construction job is making all the decisions that are required. There are so many to make in any construction job, including design judgments, hiring options, material choices, and moneyatters.

“I just felt overwhelmed,” one man told me recently. “Our designer took me to a tile store and there were thousands of beautiful tiles to choose from!”

No one can decide for you whether to use the Italian or the Mexican tile, or which contractor is the right one. You will need to identify the fixtures and finishes you like from the choices you are given. Often, you need to make these decisions expeditiously, or you’ll hold up progress.

As you confront tough choices, consider a couple of rules of thumb I’ve for­mulated over the years to help me to frame difficult decisions.

Don’t let cost be your sole criterion. While budgetary considerations are often key fac­tors, don’t let dollars dominate. Especially if the difference in price is small, think about other issues such as quality, durability, and convenience. Spending a little more may mean a lot in the long run.

Don’t labor too long over any one decision. As any good manager will tell you, no deci­sion should require more time to make than it takes to collect the relevant informa­tion. So learn what you need to know, listen to your advisers, and make reasoned and prompt decisions.

Take a little time for the big calls. On the other hand, you shouldn’t allow yourself to be strong-armed, particularly with the big decisions. We’ve all heard stories about the piece of real estate that had to be bought right then or it was gone, and such sto­ries are sometimes true. But don’t believe it if someone tells you that the job they are going to do for you has a today-only price tag on it. It’s often just part of a hard sell.

Rather than getting talked into a deal that may not be right for you, tell the person trying to sell you their goods or services that you made your grandfather a death-bed promise you’d never make up your mind about a significant purchase until you had considered it overnight. Chances are you’ll get the extra day, and you’ll feel more comfortable with the decision.

Decisions don’t have to be forever. We all second-guess ourselves sometimes, and it’s no crime. Don’t be afraid to admit you made a mistake, but correct it immediately upon realizing it.

Consider this instance: When adding a downstairs half bath, a friend of mine bought some cranberry tile. The sample tile she saw in the shop was beautiful. But when the tile arrived, she realized an entire wall of the cranberry tile would be over­powering. My friend’s contractor immediately called the tile store and determined they could return the tile if they paid a 35 percent restocking charge. They decided to make a change. In retrospect, that extra hundred dollars was a small price to pay to get what she wanted.

Be wary of trend setting. Remember foil wallpapers in the seventies? They came and went like the common cold. Clients of mine spent a huge part of their budget paper­ing a vast large stair hall and vestibule. The effect of all that mirrored paper was dra­matic but it cost a fortune to do. Unfortunately, it also proved detrimental later when the house was put in the market. Not only were the sellers unable to recoup the cost of the expensive renovation, but some buyers were really put off by the foil paper. Keep in mind that one of the pitfalls of cutting-edge design is that it may affect resale.

Do what you want—but do it with both eyes open and one eye on the future.