Don't Let Shoddy Contractors Demolish Your Budget

April 15, 2006

When someone comes to your house and starts smashing down walls, tearing out appliances and punching holes in ceilings, it's best to know exactly who you are dealing with.

As a smart homeowner, you've already used Bankrate to lock in a low interest rate on a home equity loan and to find out which remodeling projects pay you back the most.

Now is no time to get nailed by a shoddy contractor.

According to the remodeling activity indicator released Jan. 13 by Harvard's Joint Center for Housing Studies, Americans spent $149.5 billion on home improvements last year, up 4.3 percent from 2004's total.

Lots of work means lots of contractors -- and lots of ways to get scammed.

Slam the scam

In 2005, the Better Business Bureau received 5,728 consumer complaints regarding construction and remodeling services, ranking relatively high at 22 out of 2,840 complaint classifications.

Sheila Adkins, director of public affairs for the Council of Better Business Bureaus, says there are three main reasons for the flood of complaints:

Homeowners don't get all the details written into the contract before signing it.
Homeowners select contractors based on price alone without investigating their backgrounds.
Homeowners get duped by outright scams.

These fly-by-night artists fall into three broad categories.

There's the lowball artist, a shady operator who intentionally bids below his legitimate competitors, then makes costly changes or skimps on workmanship to recoup a profit.

Then there's the slipshod businessman whose intentions may be honorable but whose incompetent estimates and overall poor judgment end up costing you money.

Last, there's the con man, an outright criminal who promises anything at any price, demands his money upfront and vanishes.

"These are the door-to-door home contractors who claim to be doing a job at your neighbor's house, they have leftover materials and would be happy to patch your leaky basement, repave your driveway or check your furnace," says Adkins.

Protecting yourself against the con artist should be easy, she says.

"Contact your local BBB and ask for a list of members in that industry. That's just being a wise consumer," Adkins says. "If you're spending several thousand dollars, I think you want to make sure you're giving it to a reputable company."

Contracting 101

OK, you've successfully avoided the outright scam artists. But you're not out of the woods yet. There are plenty of other ways your remodeling budget can head south, the first and perhaps most important being the failure to calculate an accurate budget.

To get a ballpark idea of what your project will cost, check out the median national averages as compiled by Remodeling magazine.

Remodeling costs: national averages

Source: Cost vs. Value Report, Remodeling Online)

Kitchen (major remodel): $43,862
Bathroom addition: $22,977
Bathroom remodel: $10,499
Home office remodel: $13,143
Basement remodel: $51,051
Two-story addition: $80,133

A number of other Internet sites can also help you arrive at a more accurate budget for your remodeling project. One of the best is ImproveNet, which helps calculate the cost of labor based on the size of your job, materials you might want to use and the quality you desire.

Next, you need to determine which types of home professionals you'll need to hire.

For minor work, an experienced general contractor likely will be the most cost-effective. A specialized contractor, however, may save money over a general contractor by knowing the timesaving tricks of the specialty.

If major work is involved, especially if there are design, aesthetic or structural issues, an architect may be needed to draw detailed plans and obtain permits. To save on costly architectural fees, consider instead a certified or licensed designer who generally specializes in particular types of projects (kitchens, interiors, baths, etc.). Or consider a design/build contractor who specializes in seeing major renovations through from start to finish.

A 'good sense' list

To save headaches later, consider drawing up a short list of qualified professionals in your area by logging on to the National Association of the Remodeling Industry, the National Association of Home Builders or the Better Business Bureau. To help your search go smoothly, you could check out how to hire a professional remodeler.

It's also good sense to make sure the contractor you choose has:

verifiable business licenses, certification and professional affiliations.
previous work experience, including a verifiable list of local customer references.
financial security (check banking and supplier references).
adequate insurance to protect you and your property against loss or suit.
good communication skills.

That last item should not be taken lightly. When you get down to writing the contract, clear communication on both sides is your single best insurance against a remodeling nightmare.

No-nonsense contract talk

Once you've solicited bids from several licensed professionals, studied them carefully and selected your contractor, it's time to commit the project to paper. In general, remodeling contracts come in three flavors:

Cost plus. You and your contractor arrive at an estimated cost and you agree to pay all actual costs plus the contractor's fee. It's a common type of bid, but you assume the risk of cost overruns and corrections.
Turnkey. The contractor commits to a fixed price for cost overruns. Change requests are documented, signed by both parties and typically paid for prior to the change being made.
Combination. If you choose to do part of the work yourself, you may combine elements of the cost plus and turnkey approach. The key is making each party's responsibilities absolutely clear.

Your contract should include:

detailed descriptions covering all aspects of the work to be done.
remodeling plans signed by both parties.
payment plan (never pay more than 30 percent down).
start and finish dates.
change order process, to be approved by you before work is done.
final inspection and sign-off requirement prior to final payment.

In addition, include these provisions:

Cancellation rights. When you sign a remodeling contract, you have three business days to change your mind and cancel it. Contractors are required to tell you about this right and provide you with any cancellation forms.
Lien protection. On large projects involving subcontractors, protect yourself from liens against your home in the event your primary contractor fails to pay the subs. This can be done by a release-of-lien addendum or by placing your payments in escrow until the work is finished.
Permitting. It is the contractor's responsibility to obtain building permits, if required, and to perform the work in accordance with all building codes.
Warranty clause. Make sure all warranties on products and materials installed by your contractor are in writing and verified.

Control the quality

You've heard the old phrase "built to spec," right?

Well, specifications, or specs, are written instructions detailing how the work on your project is to be completed, including installation processes, materials and actual products to be used. Without specs, a contractor is free to complete the work to his or her satisfaction, not yours.

If your project is a major one and your budget allows, have your architect include specs with your blueprint and hire a knowledgeable professional as your independent inspector to make sure the work is performed "to spec."

Bottom line: The best-laid plans of home remodeling have a way of going awry without your watchful eye to oversee the process from start to finish. If you want it done right, hire a reliable professional, get everything in writing in the contract, and then watch over it like a hawk to make sure your contractor is performing quality work.

Then, of course, sit back and enjoy what you have caused to be done so well.

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