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Government Advice On Hiring a Contractor

by Michael Stone

A recent online article from Louisiana gives advice to homeowners on how to protect themselves from contractor scams. The article was triggered by complaints about contractors receiving payment but not completing the work. Most of the advice comes from the state attorney general and the Louisiana contractors licensing board.Government Advice for Contractors

We've seen similar articles from other states. In my opinion, these bureaucrats are dealing with the effects of a problem rather than the cause. It's easy for them to offer up advice to consumers and it makes them look good, but they aren't fixing the problem.

The problem is that flaky, uneducated and just plain dishonest contractors are allowed to be in business. I'm going to get some disagreement here, but I believe all states should be licensing contractors. Right now, most of the coastal states require contractor licensing at the state level. Through the middle of the United States it's a mixed bag. Some states license at the city or county level, other states license with larger counties only, many states don't require any licensing unless you're an electrical or plumbing contractor.

States should also be requiring bonds, and having the bond level match the size of jobs they perform. Apparently Louisiana doesn't require any bonding on jobs under $50,000. That's a mistake. The problem jobs, the ones where the contractor takes the money and doesn't perform, are almost always jobs below $50,000. If they have to get a bond, the flakes will take their scams and schemes to some other market.

I've testified before both the Washington and Oregon legislatures on this subject. When I told them that higher bonds would solve many of the problems where contractors aren't performing, do you know what they said? "We can't do that. It would take away the contractor's ability to earn a living."

What they don't realize is that bad advice, like some of what is coming out of Louisiana, also makes it harder for legitimate contractors to earn a living. And it won't stop the flakes because the consumers who are getting scammed either won't hear the advice or won't heed it.

Along with requiring all contractors to take out a state license and bond, states should be making sure contractors have basic business competence before issuing a license. The few states who test contractors and/or require education tend to focus their attention on production issues. It's important to be able to get the job built, but if a contractor doesn't know how to price their jobs and manage their money they might, with the best of intentions, become one of those who receives payment and isn't able to complete the work. I've seen some very decent, honest, hard-working contractors end up in that boat, and it's heart-breaking.

I'll address the advice from Louisiana in order:

Get at least three bids. Be certain each contractor bids on exactly the same work. If one contractor bids on more work than others, make a note of it. All bids should be itemized and detailed.

Getting three bids won't solve the problem of contractors taking payments and not doing the work. If the consumer selects three bad or even marginal contractors to get their bids from, they'll still end up with problems.

This advice might work on single-trade projects, but it's worthless on larger projects. Who will pay for the time it takes all three contractors to create those itemized, detailed bids? Additionally, you will never get three contractors to present matching bids, even from the same set of plans. This is a pipe dream.

Instead, why don't states encourage consumers to conduct interviews with each contractor, just as they would do if they were hiring an employee. They should interview until they find someone they like, trust and who has a proven track record. If the first guy fits, they're done. If it takes eight contractors to find a one good contractor, so be it.

If the bureaucrats really wanted to help, they would provide a list of things the consumer should look and ask for from the contractors they are interviewing.

Know the contractor. Always require the contractor show you proof of insurance such as workman's compensation and general liability insurance. Call that insurer to confirm coverage. Verify the contractor's address and ask for references of previous customers, inspecting work done for them when possible. Make sure the contractor is licensed through the Louisiana State Licensing Board for Contractors.

Checking licenses and insurance is a great idea. Asking for references, and calling those references, is also a good idea.

Inspecting the contractor's work is a bad idea. For starters, it will inconvenience previous customers who will be asked to open their homes. It also assumes that the consumer knows enough about construction to look at previous work and know if it is good or bad. If the previous customer is happy, that should be enough.

Do not agree to a large down payment. A reputable contractor will not normally require a down payment over 10% to 25% of the total price.

Down payments can range from 10% to as high as 40% of the sales price of the job. The determining factor in most cases is the out of pocket expense the contractor will have getting the job started. The size of the down payment isn't the problem. A bad or flaky contractor will walk away with their money regardless of the size of the down payment.

On the upside, at least here it's just advice. In California, it's a law that down payments can't exceed $1,000 or 10% of the sales price, whichever is the least.

If possible, accompany the contractor to the building supply store and pay for the materials yourself. And have the materials delivered directly to your home or jobsite rather than the contractor's shop.

This is just plain stupid. I don't know a single contractor that would agree to it. It's a classic case of no-trust from the consumer right from the start. If you're asked to do this, walk away now before you get into arguments about how and when you are going to be paid. As far as I am concerned, this advice comes from someone who doesn't know what it takes to put a contract together and get a job built.

The last two pieces of advice from the state of Louisiana are solid.

Get a guarantee and a contract in writing. Be sure the contractor guarantees his or her work in writing. Do not accept verbal agreements. Any changes in the contract should be in writing and initialed by both parties. Keep a signed, legible copy of the contract in a safe place.

Do not pay cash. Always pay by check or money order and keep a receipt. Write all checks to the company, not the individual worker.

It's a shame that those states that choose to license contractors don't also have a contractor protection division. Consumers trying to screw contractors out of rightfully due money are also a problem.

We like to see the good guys win; we like to see the bad guys lose. State agencies should be doing more to help honest contractors make a decent living so they can succeed. They can do that by learning more about the industry before they give out advice, and by making it harder for the flakes to go into business.

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