Homeowner Advice: Some Misguided, Some Correct

A few years ago we saw a news article reporting on a contractor who had been arrested and charged with home improvement fraud. He received payments but didn’t do the work.

It’s flaky contractors like this that make us all look bad. The article went on to give advice to homeowners on how to protect themselves from this type of fraud. I’d like to walk through the suggestions in the article because some of them are really good suggestions. Others aren’t.

Use a local, or reputable established contractor that is licensed, bonded and insured with a history of performing competent work.

That’s great advice.

Do your homework when it comes to hiring a contractor. When work is performed by non-licensed contractors, it is not a level playing field. Unlicensed contractors do not generally pay the licensing fees, taxes, and insurance that a licensed contractor does.

While it’s good advice, there’s a logic flaw. It implies that paying taxes and fees makes the contractor an honest business person. Government agencies collect money from contractors in the form of taxes, licenses, fees and required insurance, but none of them spend any time vetting those contractors.

Also, that’s one reason unlicensed contractors are cheaper; they aren’t paying any licensing fees, taxes, and insurance.

So yes, having a license is good but it isn’t any guarantee the contractor won’t flake out on you.

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 flaky contractors. If the consumer selects three bad or even marginal contractors to get their “bid” from, they still end up with the problems. Getting three bids is an attempt at getting the work done as cheaply as possible. That’s not how you find a competent, honest contractor who will still be in business down the road.

Additionally, this advice might work on many single-trade projects, but it’s worthless on larger projects. You will never get three contractors to present matching bids, even from the same set of plans. That’s a pipe dream. Contractors are going to change their presentations to give themselves an edge over the competition every time.

The solution is to encourage the consumer to do an interview with each contractor just as if they were hiring for a position where they work. Interview until you find someone you like, trust and can prove they have a good track record. If the first guy fits, you’re done. If it takes eight contractors to find a good one, so be it.

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.

That’s mostly good advice. However, looking at previous jobs assumes the consumer knows enough about construction to know if it is good, average or bad work. 95% plus of consumers could not tell a good job from an average job.

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.

In truth, most down payments will be 20% to 40% of the sales price of the work. The larger the job, the lower the down payment percentage. The thing that most owners and government bureaucrats don’t think about or understand is the upfront costs of getting the project laid out, scheduled, materials ordered, and specialty contractors a retainer to secure them to the contractor’s job schedule.

I take issue with agencies telling consumers that they should never give a down payment. Why do they assume that a contractor should finance a consumer’s project? You don’t purchase a house without a down payment (earnest money), you don’t buy a car without a down payment. You don’t get into seeing your doctor or dentist until you have made a down payment (or proof that payment will be made). Do state agencies dictate to those industries what the down payment should be?

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.

I don’t know a single contractor that would agree to that. I have had guys ask me about this and I tell them this is a classic case of no trust from the consumer right from the start. Just walk away now. This type of recommendation comes from someone who does not know or even understand the process of putting a contract together and getting the job ready to build. Construction has two sides to the transaction, not just the consumers side.

Can you imagine getting into a discussion on why you choose a more expensive lumber than what’s available in the discount pile?

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.

I completely agree with both of those suggestions.

Let me finish this up with something that might irritate some of you. In my opinion, every contractor should be required to post a bond equal to the amount of business they do annually, with a minimum bond of $75,000. Why? Because con artists can get into construction easily because it’s cheap. A couple hundred dollars with the state and they are in business to bilk the buying public. Shoot, in some states they don’t even need a license. Skip the licensing; put a bonding requirement in place to protect homeowners.

I made this suggestion to a group of elected bureaucrats (who were all attorneys by the way) in a hearing in Salem, Oregon several years ago. Do you know what I heard back? “Oh, no, we can’t do that. It would take away these guys’ ability to make a living.” And yet, bad advice to homeowners on how to protect themselves makes it harder for legitimate contractors to earn a living.