Business Week

July 7, 1997

THE NUTS AND BOLTS OF HIRING A CONTRACTOR

The contractor I hired to renovate my Manhattan apartment came highly recommended. Impressed by his credentials and eager to start the renovation, I paid him $ 20,000 up front. Two weeks later -- when the renovation was in full swing -- my ''dream builder'' skipped town for Singapore. He absconded with valuable art deco cabinets and a substantial chunk of my savings, leaving behind an apartment in shambles.

My case is hardly unique. Home remodeling contractors rank just behind car salespeople and auto mechanics in generating the most consumer complaints, according to the Council of Better Business Bureaus in Arlington, Va. The problem is that anyone with ''a wheelbarrow and a shovel'' can claim to be a contractor, says Paul K. Heilstedt, CEO of Building Officials & Code Administrators International, a municipal association in Country Club Hills, Ill. AIRTIGHT. With no federal oversight and limited state licensing and insurance requirements, the nearly $ 120 billion home remodeling industry is a hotbed of unqualified -- and often unscrupulous -- operators. Your best defenses against renovation ripoffs are a little skepticism, a lot of comparison shopping, and an airtight legal contract.

Whether you are remodeling the kitchen or considering a more elaborate project, the best person to lead you through the lengthy and often frustrating process is an experienced architect. While this will add 10% to 15% to your overall cost, consider it money well spent. An architect will design the project and oversee it from start to finish. And a good designer helps you avoid unforeseen problems, says Robert A. Rubin, a partner in the Manhattan law firm of Postner & Rubin. The American Institute of Architects (AIA) (800 242-9930) can provide a list of registered architects in your area who specialize in remodeling.

Once you've chosen an architect, you'll need to spell out the conditions and the expected budget of the project in a written contract. Whether you hire an attorney to draw up the papers or use a copy of a standard remodeling contract obtainable from the AIA, it should at minimum cover the following: the method and timetable for payment; a comprehensive listing and timetable of the architect's services, including a clause specifying the frequency of site visits; and evidence that the architect has liability insurance. If the remodeling project is more complex, a construction attorney -- fees usually run from $ 1,500 to $ 5,000 -- is recommended.

Although the architect will monitor the renovation, you'll still need to stay involved. Review all sketches and models early in the process; it's much easier to modify a design on paper than to knock down walls later. After you approve the design, the construction documents will be used to obtain building permits and generate bids from contractors.

Then, the architect can refer you to contractors who have successfully completed similar projects. But you'll still need to do a background check, says Manhattan investigator Michael G. Kessler, whose firm investigates a dozen cases of construction fraud each year. A typical scenario, he says, is the contractor who bills homeowners for fictitious supplies and employees. KICKBACKS. On rare occasions, an unscrupulous architect may be receiving kickbacks from the contractors for the referrals, so it is important to investigate their backgrounds and credentials independently.

That's why you'll need to do a little detective work of your own. First, request references. Check a few of the contractor's recent renovation projects and interview the homeowners.

But don't stop there. Talk to the subcontractors -- electricians, plumbers, and carpenters -- -who were involved in previous renovation projects and find out whether they have been paid on schedule. If the contractor does not pay them for work on your project, any or all of the subcontractors can place a lien on your property -- even though you have already paid the general contractor.

What's more, make sure that the contractor has both liability and workers' compensation insurance. Ask the builder for a copy of the insurance certificate, advises Bryan Patchan, executive director of the National Association of Home Builders Remodelors Council in Washington. Using the policy number on the certificate, call the carrier to check whether the policy is still current and if it covers a project such as yours. Also, call the Worker's Compensation Commission in your state to determine whether or not the contractor is actually covered.

Although insurance and registration requirements vary widely, the National Association of the Remodeling Industry (800 966-7601, ext. 3022) will tell you what licensing or registration, if any, is required in your state. It's also a good idea to call your local Consumer Affairs Bureau and Better Business Bureau to find out if the home remodeler has generated any complaints.

Only now is it time for a serious price comparison. The bids should itemize the time and costs for all labor and material. However, many consumers fall into the trap of simply hiring the lowest bidder. ''Don't put price first,'' says Patchan. ''A bid without you having checked out that company is not a bid worth looking at.'' Indeed, a very low bid may mean that the contractor urgently needs your money to finance other work, Rubin says.

Once you've narrowed the field to the one candidate who meets all these specifications, you're ready to draw up the contract. Again, the architect can supply you with a standard AIA contract that applies to your project. But your best protection is to hire a construction lawyer who can customize the contract and advise you on problems ranging from project delays to billing disputes.

At a minimum, the legal agreement between the contractor and the homeowner should include the following: a clause that permits cancellation within 72 hours after signing the contract; a list of all drawings and specifications outlining the scope of work; the names and addresses of all people working on the job; the total cost of the renovation and a breakdown of all labor and material charges; a one-year guarantee of the contractor's workmanship; approximate date of completion; a plan to settle potential disputes; and a release of lien clause, which will protect you in the event the subcontractors never get paid. CONTENTIOUS. But by far the most contentious item in the contract is the method and schedule for payment. Typically, contractors receive an advance payment of 15% to 20% of the stipulated sum after the contract is signed and before the renovation begins. Attorneys recommend stating in the contract that this advance will be applied against the first phase of work completed by the contractor. Then, payments will be made at various stages of the job's progress.

By contractually arranging to withhold 10% of each payment until completion, you can ensure that the contractor finishes the renovation right down to the last item, says Manhattan architect William G. Green. Before you sign the ''certificate of completion,'' get an itemized breakdown of final details to be completed. And even though you have agreed to a release of lien clause in your contract, make sure the builder provides you with the document before making the final payment.

It may seem as if finding a good contractor is more work than the renovation itself. But by making the extra effort at the outset, you'll save a huge amount of money, annoyance, and time.

Builder Checklist

REFERENCES Ask for a list of recent remodeling jobs and interview the homeowners.

CREDENTIALS Call the Consumer Affairs Dept. in your area to find out if the contractor is properly licensed and registered with the state. The local Better Business Bureau can warn of any complaints.

INSURANCE Get a copy of the contractor's liability insurance policy and call the carrier to confirm that it is current. Call the Worker's Compensation Commission in your state to make sure the contractor is covered.

CO-WORKERS Request the names and phone numbers of all recent subcontractors that the general contractor has hired and find out if they are getting paid on time.

CANCELLATION POLICY Federal law requires contractors to provide written notice explaining that the contract may be canceled up to three business days after signing it.

Author - Heike Wipperfurth