How do I protect myself when entering a contract?

[Ajping3830]

I'm about to have a garage/shop built, the whole project will be in the $35-40k range. I've never hired anyone to do anything so I have no experience in the matter and have heard some horror stories of people getting taken by contractors. The payment terms with the builders are 50% up front, 50% on completion.

How do I know they are not going to go on a joy ride with the up front cash and then tell me they need more along the build for "unexpected costs" or "underestimated this", ect ect, you get the idea.

What sort of measures are people taking to protect themselves from situations like this?


A friend suggested getting a cost sheet of all materials and get it notarized to prove that what I gave them up front is enough to cover the build. Does this sound like a valid idea or are there better measures to take?

 

[Stuart in MN]

Of course, the first thing is to carefully read the contract before signing anything. It surprises me how many times people don't do that and then they miss some obvious thing they should have seen.

 

[Ajping3830]

Of course, the first thing is to carefully read the contract before signing anything. It surprises me how many times people don't do that and then they miss some obvious thing they should have seen.

No doubt about that.

Should they have included their material costs in the estimate? Because they didn't... They wrote up everything they will be using and how they will be building, but no costs.

 

[RStewart]

Get insurance on your deposit.

 

[Ajping3830]

Get insurance on your deposit.

Could you please elaborate? How would I go about doing that?

 

[Thumper68]

I like to pay the lumber yard, concrete supplier ect on delivery and the contract is for labor only. The builder should have no problems with this if they do then find another contractor.

 

[brycez28]

As a landscape contractor, I will state in my contract exactly what is included in the price. I would include a condition like "Includes excavation and gravel base of 24". If soil conditions are not stable and extra base is needed, then customer will be charged at (and I'd put the material cost and labor rate)." i would also have a condition about extra costs derived from the unlikely scenario of the site previously being a garbage dump, tree stumps, etc. Beyond the foundation, the materials and construction should have known and expected variables that the contractor has already taken into consideration and included in his bid.

 

[vavet]

I just finished my garage build last week.
Be clear on what everything is, what it will look like, and WHERE it is. Be explicit in the corner locations before clearing, after clearing, and before pouring the footers. My shop was marked correctly before clearing. I came home after the footers were dug and poured (same day) and it was wrong - they've moved them but I had no proof as to our previous conversation. It didn't cost me money, but I had to go back to the POA to get a deviation approved.
The other gotcha is "completion." Define that. Is it the county approval? That's how my builder specified it, but that might not actually be complete. He didn't put up a big fight when I held back payment until the gutters were on. To me, there's a difference in a few punch list items (needs caulk, receptacle plate cracked, etc) vs gutter company has not yet been here to install the gutters. If completion is final county approval, then maybe ask for a 10% payment to be made when all punch list items are completed or 30 days after approval...something like that.
Frankly I think 50% up front is a bit steep. I wouldn't object to $5k up front and another payment when they're ready for the concrete floor pour...or maybe after the floor pour since that seems to trip up a lot of contractors.The $5k is enough for plans, permits, and clearing.

One thing that I did not ask for, but wish I would've, is a timeline. If the GC gets squashed by a bus after the framing is complete, you're still a long way from completion, but he's still done a lot of work. What happens then? If he tells you it'll take 3 weeks from clearing to completion, ask for an escape clause at the 10 week mark. It gives you an out and if he's legit, there's no way he can't complete it in 10 weeks.

 

[Stuart in MN]

No doubt about that.

Should they have included their material costs in the estimate? Because they didn't... They wrote up everything they will be using and how they will be building, but no costs.

That would not be very typical, it just creates a big headache for the contractor. If they did include them, what will often happen is either 1) the customer complains about the costs because they think they can buy the materials for less money themselves at the big box store (but they don't understand the numbers include the contractor's markup) or 2) the customer uses those numbers to shop them around to other contractors. So, it's just how construction bids work.

As mentioned above, you can negotiate to provide the materials yourself for the contractor to install, but that has to be agreed upon beforehand.

 

[brycez28]

No doubt about that.

Should they have included their material costs in the estimate? Because they didn't... They wrote up everything they will be using and how they will be building, but no costs.

I don't typically separate out material vs labor costs on my bids.

 

[GMCGarage]

Have it written so you set up with the suppliers and pay for materials that are DELIVERED TO YOUR SITE only. No reason for contractor to mark up on materials. If they wont do this, then find a contractor that will.
Check to see they are bonded, and licensed, or registered with the state.
Any subs you pay direct too, that way your money doesn't pay the last job sub and they lien you up.

 

[Fixnfly]

The ******* who built my garage conveniently forgot to add the cost of a garage door when he gave me a price so I ended up paying $1200 extra for the door.
Then he underestimated how much concrete was needed and wanted me to pay for the extra concrete. I refused.

 

[Stuart in MN]

No reason for contractor to mark up on materials.

That really depends on the situation and the customer - for many of the people here on this site buying their own materials would not be a big deal, but for many others they don't know how to go about doing it, or they simply don't want to deal with it. There can also be some benefit for warrantee purposes, say for example some of the materials used may or may not be covered if they aren't supplied and installed by the contractor.

Not trying to defend the contractors - I'm actually an engineer who works on construction projects from the owner's side of the table. Markup isn't necessarily pure profit either, among other things it covers the contractor's costs for ordering the material and getting it to the site in a timely fashion to meet the work schedule.

 

[My Old Tools]

Life is negotiable. Offer the builder an alternative contract, 20% at signing, 30% after foundation complete, 30% after materials are delivered, 20% after you are 100% happy.

 

[6768rogues]

I never pay up front. If your contractor is living on the edge financially, he will need your money up front to buy groceries and pay for materials for his last job.
It is reasonable to have a schedule of milestones and payments. For example, if they bring equipment and start, it would be reasonable to give them a small payment for mobilization and a little work. When foundations are done, another payment, etc. Do not let him front end load the payments.
You never want to pay for the entire value of the work done to date.
If the contractor does not want to get paid on completion, have him write up a schedule of milestones and what the value of reaching that milestone is. Then pay him about 90% of that value when that milestone is reached.
NEVER pay for anything that you have not received.
And get proof of insurance.
Here is an example:
Total job: $35,000
Mobilize and excavate value $5000, when done pay $4500.
Foundation value $5000, when done pay $4500 plus $500 held from excavation.
Framing value $10,000, when done pay $9000 plus $500 held from foundation.
Continue that pattern through completion. If you are not construction savvy, ask a friend or someone who is to look at the schedule of values and see if it is reasonable. The contractor might try to front load the values.
Sometimes the hold back is accumulated until the job is done. That is up to you and your contractor. NEVER PAY IN ADVANCE.
At the end comes a time called substantial completion. Substantial completion is where the job is mostly done and it is turned over to the owner for its intended purpose, but there are a few small things are still not done. These are things like paint touchups, trim painting tht had to wait for better weather, etc. Substantial completion is when a punch list is created with the incomplete items, a value is assigned to each, and you retain that much money with a 5 to 10 percent additional as an incentive for him to finish. All other contract money is paid.
Again, NEVER, EVER pay for something that is not permanently yours. Not even materials, as they can be removed from the site. If you never pay for anything that you do not have, you will not be ripped off.
If you give him the 50% up front that he wants and he leaves town, where will your $20K be? Or if he is behind on child support and he uses the money for that?
Try to avoid change orders. Base bid prices are not the lucrative part of the business, change orders are. They can get expensive. Make sure any changes in the original contract are in writing with the dollar amount added or subtracted from the original contract and signatures from both of you. Changes can the the source of problems, so make sure they are documented so there are no surprises later. T
Did I mention DO NOT pay for anything that is not permanently in your possession?

 

[Radix2]

The best way is to break into more payments. There are a zillion if and or buts and you should be as clear as possible in your contract to be sure.... but in the end nothing proves performance better than performance.

foundation work, framing, etc. etc. your risk is smaller based on payment size and your confidence in performance builds per stage.

as long as you are prompt per item it should be all the same to him.

 

[Ajping3830]

Have it written so you set up with the suppliers and pay for materials that are DELIVERED TO YOUR SITE only. No reason for contractor to mark up on materials. If they wont do this, then find a contractor that will.
Check to see they are bonded, and licensed, or registered with the state.
Any subs you pay direct too, that way your money doesn't pay the last job sub and they lien you up.

How do I do this?

 

[teamextreme]

You may want to also consider a lien waiver. I protects you from liens filed against your property if the contractor fails to pay his suppliers.

 

[Ajping3830]

Ok I completely agree on the payment advice, I will see if we can work out a different plan there so I'm not putting up such a big chunk in advance.

Also good to know that it is not typical to display costs in the estimate.

Keep it coming guys, much appreciated.

 

[GMCGarage]

How do I do this?

Most time the state you live in will require.
Ask him for bond info, and call them to check on it.
same with insurance.

 

[Ajping3830]

One detail I left out is that the builder and mason are separate entities and have provided independent estimates, and will be paid independently, so we are already breaking down payments in that respect.

 

[ticklechicken]

Do everything 6768rogues said. And in case he didn't stress it enough, NEVER PAY IN ADVANCE.

 

[JerryB]

Take a step back:

First, and IMO, most important, you need to have a completed set of detailed plans. While you can do these yourself for a garden shed, it is best practice to have an architect or other professional do them for a major structure.

Be certain you review and fully understand the plans and that they show a structure that will fully meet your expectations. This is a place to ask lots of questions. There is a huge difference between the statement ". . . grade as required . . ." and ". . . slope is **.X, backfilled with YYY aggregate, surfaced with . . . "

Next is to make certain you can get (or better,) have in hand a permit based on those completed plans. A signed off permit is preferred over some planning and building official, or contractor saying something like ". . . that should be okay."

Take the plans to some builders and ask for their input. Once again, seek out a builder who specializes in the type of structure you want. This should develop a short list.

Then ask your proposed builders for references, preferably folks who have had them do similar projects. This should weed out the guys who are either scam artists (none very likely) or the ones who will 'almost' comply with plans, but get into financial add-ons (and possible disputes) based on their not taking time to properly price the job in the first place.

My last suggestion is to be on the job-site enough that you are aware of anything that does no look like it will meet either plan requirements or your expectations.

And don't under any circumstance agree to anything some construction worker, local supervisor, or sub-contractor suggest when they encounter a problem that requires any kind of change. Look up a few posts, and you will find a guy who agreed to a modification of the slope of the concrete that will make his finished garage nearly unusable.

In a case like this, the worker, sub contractor or the prime contractor will all say, "You approved this."

I realize all this sounds onerous, but the bottom line is that new building construction is one of the highest expenditures in most of our lives. It is also one of the highest costs to either fix or fight when things go wrong.

On the positive side, it has the greatest rewards, both in our personal use and enjoyment of the finished structure(s), and potentially the largest assets for our heirs!

Hope this helps!

 

[The Tool Tyrant]

Talk with your local lumber yard to see if they have a 'FUND CONTROL' if not , they should know who does. The fund control deals with your 'progress payments and they have a good idea what the breakdown should be. When your contractor requests a 'progress draw', the fund control sends out an inspector to verify the progress is at the set point for the draw requested. That way there is no bickering and no way they GC can get over on you.

BTW, 50% upfront is ridiculous...no way Jose!

 

[Hilltopmasonry]

Have it written so you set up with the suppliers and pay for materials that are DELIVERED TO YOUR SITE only. No reason for contractor to mark up on materials. If they wont do this, then find a contractor that will.
Check to see they are bonded, and licensed, or registered with the state.
Any subs you pay direct too, that way your money doesn't pay the last job sub and they lien you up.

Sorry but most legitimate contractors won't go for this... if I do the job then I order the materials from my supplier and put it on my account... you won't save any money because I actually get a discount through my supplier since I am a contractor and I get a contractors discount


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[James-W]

I think the most important thing to do is to contact other people (at least 3 people) who have had structures built by this company. Find out what they think of the builder. If they are really happy with the job that was done for them, then the odds are pretty good that you will happy as well. If they are not happy with the job done by the builder, then I would look for a different builder.

 

[L5wolvesf]

If you have no experience in dealing with contractors or contracts and are concerned about the obvious consequences - lawyer up.

 

[James-W]

If you have no experience in dealing with contractors or contracts and are concerned about the obvious consequences - lawyer up.

That isn't a bad idea either. But you would need to find an attorney who is familiar with the building industry and their contracts and that may not be easy to do if you live in a smaller town.

 

[jdsac]

50% up front is a red flag. If he seems reluctant to re-do it, find someone else. Put him on the draw system- a certain % at each stage of completion. Sounds like he can't afford to pay his help. Contract should more or less build it on paper- concrete- how thick, size etc same with siding what type / grade etc same with roofing and other major components. If it isn't written down, you get what you get.
Agreed on paying the suppliers directly , that way you get no liens.

 

[Trey T]

Payment should only be made after service or material is rendered to you. The last roofing contractor I hired (best value bid and also highest cost bid), I paid him 10% upfront as booking fee but goes toward the total cost, then the rest after the job was done. It was a 44squares 2-stories w/ detached garage for $10K.

 

[theoldwizard1]

From a legal standpoint, what you want is an addendum, kind of a second contract that is added on to the first.

It doesn't have to be fancy, but it does have to be good English.

The opening paragraph should state that it is an addendum to the original contract and i the event that any statements conflict between the two documents this addendum should be considered the final version. After that, go wild ! Ask for the sun, the moon and the stars. It might take several sit down talks before both side agree.

• Change payment plan to something you feel more comfortable with. Perhaps you should buy the material and have it delivered to the job site. A written material list is yet another document.
• The more payments the better, but you need to be specific as to what work needs to be completed for each payment.
• It there are any "change requests" including additional material, that is yet another addendum/negotiation.
• Start dates need to be specified. Perhaps a penalty for not starting on time ($100/day ?).
• Completion dates for each payment need to be specified along with penalties.
• When specifying the above, you can add "... or as mutually agreed upon" so that it the guy has some kind of emergency you can give him some slack.
• Anything that was VERBALLY stated before, needs to be in WRITING in the addendum.

Keep is simple and easy to read. People understand bullet point like I just used. The addendum needs to be signed by both parties and both parties need to have a copy.


My son asked my to review the contract for his new roof. The addendum was about a page long. Most of it was written down statement of what the salesperson (owner) stated they would do (1/2" OSB instead of 7/16", panel clips every 2 feet when not backed by structure, etc. etc.).

Last and most important, IT IS UP TO YOU TO ENFORCE THIS ! If you can't be on site, you may have to hire an inspector. A friend did this on his home build (over $200k). The inspector had the blueprints and would do a walk through every day or so after the crews had left. He caught several major framing errors (windows in the wrong place, etc.) that never would have been corrected once the electrical/plumbing and drywall was installed.

At my son's job site the delivery truck showed up with 7/16" OSB. I told them NOT to unload it and then I called the company. They were not happy and had to do some quick work (and likely pay a premium price) to get 1/2" OSB delivered, but it happened.

The other thing I did is make some copies of the addendum signed by the salesperson and I handed them out to the job site foreman. Nothing was really out of the ordinary, but he reviewed it and reviewed with other key job individuals.

Walking around with a camera and actually climbing up the ladder to snap some pictures, proved I was serious ! The job went very well !

Again, you have to be prepared to stop the work and delay completion of the overall job it a step is not completed to YOUR SATISFACTION !

Back at my friends job site, he canceled the closing twice because the "punch list" was not completed. The mortgage company backed him 100%. The third time the builder actually did a walk through with him a day or two before and review the punch list on site.


IN THE END, NO ONE IS GOING TO COVER YOUR *** EXCEPT YOU !

 

[Git]

Things are a little different in California. The law indicates a maximum initial deposit of 10% or $1,000 - whichever is less. The idea is, don't let your payments get ahead of the work performed or material costs

I did some googling for the State of New York and found this:

Know where your payments are going.
Contractors are required by state law to either:

Put your payments into an escrow account and use it only for your job until it is substantially complete (contractors are legally required to disclose where money will be held in escrow).

Prove they have bond insurance to protect your money. Ask for proof of which option they use before hiring them.

Never do business with a contractor who is unwilling to abide by any of the conditions above.

If the contractor doesn’t meet the above criteria, look elsewhere. Even if the contractor seems reputable, it’s simply not worth the risk.

Some more info here:
https://ag.ny.gov/consumer-frauds/home-improvement-fact-sheet

any changes to your contract should be in writing via a 'change order'. Upon final payment - ask for a lien release

 

[redneckcharlie]

I'm a GC. Do your diligence on your chosen contractor first. If the person/company you chose has excellent references none of the nonsense posted here will matter. A draw schedule is perfectly acceptable and ok. Expecting any reputable company to jump through hoops or front your project simply won't happen like some have suggested. The good GC's are always busy and always will be. Treat them with the same respect you want and everything will be fine. A contract goes without saying with the complete scope of work and timeline as well. You don't want to pay directly for material, most including myself will not warranty anything I didn't purchase. Best of luck with your project. Try not to get into analysis paralysis and not enjoy what your having built.

 

[kbs2244]

Get a lawyer.
This what they do.
They can smell a "weasel out" clause from across the room.
With the money your are spending their fee is worth it.

 

[Lassen Forge]

You're in New York... you need a lawyer. Actually, some boroughs require it, and while you're upstate... well, I'd still lawyer up.

Anything else - you may not only be afoul of the law, you may be, what P.T. Barnum said was born every minute. If you feel you need protection on a deal, well, there you go.

 

[6768rogues]

I am also in rural western NY and there is no licensing or registering of contractors. Most municipalities require proof of contractor insurance before issuing a permit. It is ultimately your responsibility to protect yourself. I said it before and I will say it again, DO NOT PAY IN ADVANCE. If you do and it goes badly, remember that I said that.
When I was a contractor, for small jobs I got paid on completion. For larger jobs, I asked for 25% of the money at the half way point, and the remainder on completion. I always did what I promised to do and never got beat our of a dime. More often than not the home owner would give me more progress money than I asked for.

 

[Hilltopmasonry]

I'm a GC. Do your diligence on your chosen contractor first. If the person/company you chose has excellent references none of the nonsense posted here will matter. A draw schedule is perfectly acceptable and ok. Expecting any reputable company to jump through hoops or front your project simply won't happen like some have suggested. The good GC's are always busy and always will be. Treat them with the same respect you want and everything will be fine. A contract goes without saying with the complete scope of work and timeline as well. You don't want to pay directly for material, most including myself will not warranty anything I didn't purchase. Best of luck with your project. Try not to get into analysis paralysis and not enjoy what your having built.

+1 I agree

I will say as a contractor myself if a customer has all these requirements I will simply turn the job down... I am a reputable contractor that has a great name and a lot of wonderful references and I am booked with plenty of work. I do the right job for the right price and sorry but I will not deal with customers that have too many issues and insist on purchasing their own material and constantly worrying about price etc. etc.

I would say that it's OK to check on references and have a frank discussion with the builder about your concerns. Beyond that you have to have some level of confidence in who you select otherwise you will be a PITA customer and you will lose a lot of great reputable builders because they honestly don't want to deal with that


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[wssix99]

I'm a GC. Do your diligence on your chosen contractor first. If the person/company you chose has excellent references none of the nonsense posted here will matter. A draw schedule is perfectly acceptable and ok. Expecting any reputable company to jump through hoops or front your project simply won't happen like some have suggested. The good GC's are always busy and always will be. Treat them with the same respect you want and everything will be fine. A contract goes without saying with the complete scope of work and timeline as well. You don't want to pay directly for material, most including myself will not warranty anything I didn't purchase. Best of luck with your project. Try not to get into analysis paralysis and not enjoy what your having built.

^ Great post.


Some basic background for you:
- The contractor ALWAYS has protection against a deadbeat homeowner through the mechanic's lien process. (In a nutshell, if you don't pay the contractor, they can slap a "hold" on your property and you would not be able to sell it, refinance it, etc. until that claim is resolved, plus interest, legal fees, etc.)
- Protection against a deadbeat contractor can come in many ways. However; you will PAY for that risk aversion. The more risk you avoid, the greater the fees (in general) you will pay to third parties who facilitate the process. For example, if the money goes in escrow and you do draws off of it with waivers (where you sign off on the progress) then you will have to pay a bank and/or title company for their services, insurance, etc.
- All deadbeat contractors will ask for money up front. This does not mean that all contractors who ask for money upfront are deadbeats - but you should be cautious.
- Paying upfront allows an honest contractor to avoid having lines of credit to finance your materials/project. These lines of credit come with fees that get passed on to the homeowner/customer. This is a fee that you want to accept and pay. These fees will allow you to avoid the "pay up front" and will give you some of the most economical protection you can get. If your contractor can't get lines of credit to complete your job, then they probably don't have the financial stability/responsibility worthy of someone who should be building your structure.

 

[6768rogues]

In virtually all cases of a customer losing his money, money was paid in advance for something that was not received. There are a million reasons why it happened, but it all comes down to prepaying for something that was not delivered. Don't let that happen to you. How you don't let that happen to you is up to you.
If your contractor wants your money without having provided anything to you, walk away from the contractor. There is nothing wrong with progress payments not exceeding work done to date, but not a cent should be paid in advance. If your contractor cannot do business that way, he is not worthy of your job.
I also managed public construction projects in another life. It is against our state constitution to pay anyone for anything that has not been received. Payment in advance is considered a gift of public money. It is a good way to get a very unpleasant visit from the state comptroller. There were contractors lined up around the block to bid on our projects with no money in advance. Progress payments, yes. Money in advance, no.

 

[ard]

The 'trick' it to pay incrementally, and to monitor the work quality- so at any time you are not 'exposed' to the whole ~$35k

For example, let's say your contract has payments defined in $5k chunks, with each of these based on SPECIFIC deliverables. For the sake or argument we assume they are equal, AND that you can define '5k worth' or work in writing.

As each milestone is achieve, SATISFACTORILY, you pay $5k more.

It is INCREDIBLY important that you clearly define the work that will be done AND the standards for the work. A detailed set of plans is where the work quality and features should be defined. (Building specs don't belong in the contract, however "shall comply with plans and specs which are hereby incorporated by reference" (or similar) should be in the contract.). There is a recent thread here where someone didn't have any elevation views or specs in his plans. Turned into verbal nonsense, now a mess.

Sometimes you pay a deposit, this is 'at risk'. I'd make this small.

Perhaps: Deposit; SIte Prep; FOundation+Slab; Framing; weathertight; final inspection; punch list completed

Keep in mind that you can ask for changes to the contract. DO NOT act like you are uncertain. "Thanks for the contract, I have some edits to the payment terms but otherwise looks fine" or whatever. If BOTH parties in a contract understand that the other side simply need to protect their interests, it is usually a pretty straightforward process.

Also know that laws and rules in each state can have an impact on these agreements- what works for me in CA might not work in NY.