13 Steps to Hiring a Contractor Who Won't Rip You Off

With the economy stabilized and home prices rising in much of the U.S. market, homeowners who spent the recession watching home remodeling on TV may now be ready to do some real-life work on their homes.

That can mean wading into a world both alien and expensive. The contractor you hire will make all the difference to the success and affordability of your project.

Rip-off artists and incompetents aren’t in the majority, but they are common enough that Spike TV has built a reality show, “Catch a Contractor,” around homeowners’ complaints of botched home construction and remodeling jobs.

So, how do you set up the best outcome for your job? Outside of TV, contractors come in all shapes, sizes and skill levels. Most are professionals who are trying their best to make a living doing work they can be proud of. A few, though, can’t be trusted to cross the street in a straight line. Follow these 13 steps to separate the pros from the bad eggs, avoid misunderstandings and expensive missteps from the outset and get the most for your money:

1. Get Recommendations

The absolute best way to find a reputable and competent contractor is to ask friends, colleagues and family for the names of contractors with whom they’ve had a great experience. Send your network an email: describe your project, perhaps including your price range, and outline what you hope for in a contractor. Or just phone friends or ask people for recommendations as you run into them.

Assemble a list of the most-promising names you’ve received. Chat a bit with those who made the recommendations to find out:

Why do you recommend this contractor?
How did you meet him or her?
What kind of work did you have done (to eliminate high-end specialists, for example, if you are working on a rock-hard budget)?
Did the contractor finish on time and on budget?
Tell me about any problems you ran into with this contractor.

2. Verify Licenses

When you have narrowed your list to two or three contractors, ask to see their business licenses. Make photocopies and verify they are current by contacting the board or agency that licenses contractors in your state.

Resources:

Find your state’s licensing agency on its website at USA.gov.
The National Association of State Contractors Licensing Agencies lists licensing agencies for most states.

3. Track Down Complaints & Disciplinary Actions

When calling your state’s licensing agency, ask how to find complaints and government disciplinary actions against contractors.

“What You Should Know Before You Hire a Contractor,” a consumer publication by the Virginia Board for Contractors, has plenty of information for homeowners everywhere. In some states, you can check a contractor’s status online. Washington state, for example, lets you verify that a contractor’s workers’ compensation insurance is paid up and find out if the contractor is registered, bonded and insured or has state licensing infractions.

4. Screen for Legal Problems

Look for lawsuits involving a contractor:

Check at your county’s district court for lawsuits naming the contractor or business you are considering using.
Search online for mentions of a contractor’s name and the business name.

5. Verify Insurance

Contractors need two types of insurance:

Liability coverage compensates the homeowner in case the work fails.
Workers’ compensation insurance (or industrial insurance) covers workers injured at your job site.

Regardless what a paper policy says, call the agent or state agency to confirm that the premiums are paid up and the policy is in force. If industrial insurance is not paid up, depending on your state’s laws, you could be liable for the unpaid premiums in case of an accident.

Ask each contractor you are considering for a copy of evidence of his or her liability insurance, including the phone number of the agent who sold the policy.

6. Conduct Interviews

Sit down for a half-hour or more with each contractor you consider. Talk over the job, the problems, their expectations, their credentials and experience. The Federal Trade Commission has a detailed list of questions to ask.

7. Turn Your Back on Temptation

It’s terribly tempting to hire unlicensed or uninsured contractors. Doing things by the book costs money, and contractors who skip the formalities can charge less.

You might get away unscathed if you hire an unlicensed business. Many homeowners do. But here are a few of the risks:

You’ll get no state help pursuing a bad contractor. In Virginia, for example, using unlicensed contractors makes you ineligible for monetary compensation from a state fund in case of improper or dishonest conduct.
You could be held responsible as the de facto general contractor and thus responsible for any defective work on your home for many years after you’ve sold it to someone else.
You could be on the hook financially for injuries on your job site. Your obligation to pay an injured worker’s medical bills could last for years.

8. Check References

Ask each contractor you’re considering for three references; take the time to check them, confirming that the contractor really did do the jobs he claims he did. Find out when the work was done, how long it took and if it was finished on time. You can learn plenty by also asking open-ended questions like, “What was it like to work with Linda and her crew?”

9. View Work They’ve Done

Building trades contractors often carry photos to show the quality of their workmanship. It’s fun to see them, but also ask the contractor’s references if you can see the work. An in-person look affords the chance to confirm quality in a way you cannot with photos.

10. Sign a Contract

Make sure that you and your contractor have the same understanding of the work to be done. Ideally, you or the contractor should write a detailed list of each task with steps to be completed and dates for milestones.HouseLogic explains how to draw up the contract and what to include.

11. Be Careful with Upfront Payments

Your contractor may ask for a portion of the payment upfront. That’s potentially reasonable. But agreeing on too large an upfront payment presents a risk for you. If you are asked to cover the cost of materials, see if you can pay the supplier directly. This keeps you in control of the money and lets you know if the contractor is sharing any discount with you or charging you a mark-up on materials.

Contact consumer protection authorities in your state to find out about any restrictions or rules contractors must abide by. Some states regulate what a contractor may charge upfront. In California, for instance, it’s no more than 10%, according to US News.

A payment schedule of 30 percent at the start, 30 percent in the middle and 30 percent upon completion is not unusual. However, it is safest for you to link payments to milestones of work completed.

HouseLogic offers these guidelines:

First payment should be no more than 10 percent of the total job.
Final payment should be enough money — up to one-third of the total cost of the project — to make sure the contractor returns to correct unfinished details.

Money Talks News founder Stacy Johnson suggests waiting a couple weeks before closing your books on a job. “Make sure you like it and then make the last payment,” he advises.

12. Beware of Low-Ball Bids

When asking several contractors to make competitive bids, be wary of any that come in far lower than the rest. A little lower is fine, but the “too-good-to-be-true” rule applies here: There’s probably something wrong with a radically lower bid. It often means there will be expensive surprises later in the project.

13. Protect Against Tail-Dragging

It’s not unreasonable for a contractor to juggle more than one project at a time. But this can get out of hand, leaving homeowners waiting and waiting for their job to be completed.

To ensure prompt completion of your job, build a penalty for late completion into your contract. In fact, you might add an incentive payment for an early wrap-up.

This post originally appeared on Money Talks News.

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