This Old House Magazine: Get It In Writing

Costello didn't know that in California it's illegal for a contractor to ask for a down payment of more than $1,000 or 10 percent of the job, whichever is greater. That wasn't the only red flag: Things began to go wrong from the scheduled first day of the job, when the contractor called to say that he couldn't get the lumber and would have to delay the project a few weeks. Then, during demolition, workers tore the vent off the gas water heater, which allowed carbon monoxide gas to escape into the house. Following that, the builders misread the plans and framed the addition 18 inches taller than city codes allowed. Before it could be fixed, and while the roof was still open to the elements, the winter rains arrived, soaking most of the Costellos' possessions that weren't in storage.

Now, three years and a second $30,000 payment later—and with the addition still unfinished—Costello is taking the contractor to court. "We messed up," she acknowledges. "We signed a bad contract that had too few specifics about what we expected from the project and how we would be protected if it didn't work out the way we wanted. Then we poured good money after bad."

Stories like Costello's make real estate and renovation professionals shake their heads in amazement—mainly because of how common they are. Although a home-remodeling project ranks among the biggest expenditures people make in their lives, in most cases the contract is little more than an afterthought, if it's considered at all. But a solid contract can be the closest thing to a guarantee that the job will turn out as the homeowner envisions. "People will pay $100,000 for an addition, but paying for an attorney and taking another week or so to make sure the contingencies are covered are often considered a waste of time," points out lawyer Ann Rackas, managing director for contract documents at the American Institute of Architects. "That isn't very prudent thinking."

A contract doesn't have to be complicated. For small jobs—say, under $1,000—a simple one-page agreement that outlines the project, schedule, and cost should be sufficient. But even for big jobs, a handful of basic provisions is all it takes to protect the homeowner if something goes wrong with the project or, worse still, if the contractor breaks the law. Many construction companies offer their own versions, and local bar associations or the American College of Construction Lawyers, in Washington, D.C., can help locate attorneys in your area who specialize in construction matters. But whether using an existing contract or drafting one with the help of a lawyer, the best protection for a homeowner is to read and understand the document thoroughly. Following is a checklist of 12 key points you should make sure your building contract includes.

• The contractor's name, license number, phone and fax numbers, and addresses (including e-mail).

• Project start and completion dates, with provisions for dealing with undue delays.

• Detailed blueprints, including floor plans and elevations that are technical enough to show precisely what the contractor will do. The homeowner should understand what the plans are describing. The contract should also contain a clause that says all work performed will comply with state and local building codes.

Cost Estimate and Payment Schedule

• The overall cost of the project, backed up by an itemized list that specifies for each phase of the job all the materials that will be used—including the manufacturer, model, size, brand name, and color.

• A payment schedule, with each installment contingent on completion of a clearly defined amount of work approved by the homeowner. Up-front payments should be no more than 10 percent of the cost of the project. Although this limit is part of the consumer laws in many states, contractors nonetheless frequently ask for a down payment of as much as one-third, saying that they have to cover the price of materials. Don't write that check, says This Old House general contractor Tom Silva."It shouldn't take one-third to bind the contract," he says. "If the contractor doesn't have credit, that's a red flag." Tom advises against making any payments until work has begun, but if the parties can't agree, experts suggest putting up to 75 percent of the project cost in an escrow account. Money from the account can be disbursed and the account replenished when certain steps are finished satisfactorily or materials purchases are made, backed by receipts. As for the final payment, "projects that go smoothly should end up with the homeowner owing about 5 to 10 percent, which should only be paid after he's examined the job thoroughly and is happy with it," says Mark Brick, who runs B&E General Contractors, in Glendale, Wisconsin, and is president-elect of the National Association of the Remodeling Industry.

Insurance Documents
• Proof that the contractor is carrying current personal liability, workers' compensation, and property-damage insurance. Ask the contractor to attach copies of coverage certificates to the contract. This section of the contract should also provide a waiver that frees the homeowner from responsibility for any litigation or judgments against the contractor arising from the project. Suits resulting from on-the-job injuries and so-called mechanic's liens, which may be awarded to subcontractors or suppliers who weren't paid for their work or materials, should be specifically cited as the contractor's obligation.

Other Essentials
• A hazardous-waste clause that establishes who is responsible for testing for materials such as asbestos and lead-based paint and who will take care of removing anything that is found. Generally, contractors don’t have expertise in this area, so it’s often up to the homeowner to hire an environmental specialist. This provision protects both the homeowner and the contractor from the unexpected discovery of toxic substances after the job begins, which could cause delays and disagreements about who foots the bill.

• A guarantees section, which in most cases covers defects in materials and workmanship for a year after completion of the project. This should list the name and address of each company guaranteeing any portion of the job—subcontractors as well as manufacturers or distributors whose products were used. "This helps ensure the quality of the job while giving the homeowner some leverage if problems arise soon after the work is completed," says Elizabeth Gutman, an attorney in the Princeton, New Jersey, office of Saul Ewing LLP.

• The procedure for handling change orders, which are alterations in the project requested by the homeowner or the contractor after work begins. Because changes affect so many critical aspects of the project—including fees, materials, estimated time, and design—change orders should be very specific with regard to the scope of work and the additional cost, and be signed by the homeowner and the contractor.

• Miscellaneous points such as the approximate time workers will arrive and when they'll leave; how often the general contractor will provide a face-to-face progress report; how debris will be removed, and who will get all the necessary building permits (usually this is the contractor's responsibility). Also frequently included in this section are more ticklish issues: whether the workmen can use bathrooms or phones in the house, if they're allowed to put their lunches in the refrigerator, or even if they can talk to the kids or pet the dog. However, be mindful of the impact these requests can have on the contractor–client relationship. "If someone asks me where my people are going to eat and what time they take their breaks and whether they are going to dust after every job, I'd probably pass up the opportunity to work for that customer," says Anthony J. LaPelusa Sr., president of LaPelusa Home Improvements, in Niles, Illinois. "We just about marry our clients for four months or more, and we don’t want to get married to somebody who's going to want a divorce in three."

• A provision for how contract disputes will be resolved. Many states offer home-improvement arbitration, in which an independent third party hands down a legally binding decision. The process is cheaper and faster than taking a contractor to court, but in agreeing to arbitration, the homeowner in most cases waives the right to a trial or judicial appeal.

• Written confirmation of the homeowner's right to cancel the contract within three business days after signing it. That window might be a good time to show the contract to a construction lawyer if one wasn’t involved in drafting it. "We trusted the contractor too much," says Costello, who now wishes she'd had a legal adviser review the document up front. "It's far better to spend a few hundred dollars now, rather than thousands of dollars later."

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Tom's Tips for Choosing a Contractor
While fixed-cost contracts are the most common, they are not the only option. Tom Silva, TOH general contractor, prefers to operate on a cost-plus—also called time-and-materials—basis, with a price cap agreed upon with the client. For each phase of the job, he provides a detailed cost estimate that includes his labor; as work progresses, he revises those figures if necessary. "That way, there are no surprises at the end," Tom says. "It gives the homeowner security and confidence in the work, and it gives me flexibility." The key to making this arrangement succeed, however, is finding an experienced professional and being absolutely certain of that person’s ability and integrity. Here are Tom's tips for getting the best contractor to work on your job.

• Ask friends, neighbors, and coworkers for referrals. "Word of mouth is the best advertisement," Tom says. A local lumberyard that sells top-grade woods and custom-milled architectural details is also a good place to inquire. "The proprietors of these shops know the contractors who do good work because they are the people who buy quality materials."

• Ask the contractor for references from customers who have projects similar to your own. "You don't want a new-house builder to work on a restoration job," Tom says. And don't be satisfied with a list of names; talk to the homeowners and see the finished product. Visit one of the contractor's current job sites, too, he says, "to see if the site is safe and if the workers are careful with the owner's property."

• Get written estimates from several contractors for the identical project. "These bids should be broken down into stages, such as demolition, rubbish removal, utilities, framing, insulation, and roofing."

• Agree on start and completion dates, and write them into the contract. Tom recommends also inserting a penalty clause that holds the contractor financially responsible for project delays.

• Don’t let price and timing rule your selection. "If you are looking to get it cheap and get it tomorrow, you aren't going to find a quality contractor," says Tom. "The best contractors may charge a little more, and they are busy, so you may have to wait." —Amy R. Hughes