Tracy Stolz, a 60-year-old technology sales executive, hired a contractor to renovate her kitchen, laundry room and first-floor bathroom, in Potomac, Md. Before long, the contractor wasn’t showing up, and subcontractors either performed shoddy work or seemed directionless. She’d been expecting to scrape by without a kitchen or laundry room for three months. But that stretched into four months, then five. Eventually, Stolz hired an attorney to negotiate an end to the home renovation contract.
“I was warned that if the contract wasn't properly terminated, the contractor could put a mechanics’ lien on my property,” she says. Stolz ended up hiring a new remodeling company to finish the work — and paying about $20,000 more than she had planned. In the process, she learned that the first contractor hadn’t paid some subcontractors and had ordered some wrong items — on her dime.
Stolz says she could have avoided some of the problems by making sure the home renovation contract included a detailed timeline of steps in the project, clear consequences for delays, detailed specifications for the materials and appliances to be ordered, and a more favorable schedule of payments.
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If you’re planning a home update, addition, or another project, make sure you and the contractor agree on some key terms, and put them in writing in a contract. Don’t just sign the contract your remodeler gives you without carefully reading and understanding each provision. Ask a knowledgeable friend or hire a lawyer to review it if you’re confused.
“It’s a real struggle for consumers who are out there trying to do home renovation. This is a complicated transaction,” says Stacey Tutt, a senior staff attorney at the National Housing Law Project. “Regrettably, a lot of homeowners can be taken advantage of. It’s much easier to enforce a contract when there are very set provisions about what’s going to be done, what products are going to be installed and when.”
Even the most airtight contract can’t prevent an unscrupulous contractor from ripping you off. But understanding and negotiating a handful of key terms can go a long way toward preventing the most common problems. “A contract is about managing expectations,” says David Jaffe, vice president of construction liability for the National Association of Home Builders (NAHB). “There’s no substitute for ongoing and effective communication between the homeowner and the remodeler through the process.”
Scope of work
The heart of the contract is a description of what type of renovation work will be performed, with details specified, such as 2x4 or 2x6 framing and how many windows or appliances will be installed. The more complex your project, the more steps the job will comprise and the longer this section will be. Attach a drawing or architect’s plan that shows the location and size of each element of the renovation.
The more detail, the better chance the homeowner has of getting the desired final product, says Chris Egner, president of the National Association of the Remodeling Industry. “If there are items that are not going to be part of that project, it would be best for that to be spelled out clearly so there’s an understanding between the homeowner and the contractor.”
Time frame
Look for a start date and end date for the project. It’s fine for those to be tied to a milestone, such as a permit being granted. For instance, the contractor promises to start work within 30 days of acquiring a permit. You could ask for continuous work, weather permitting, to avoid a contractor starting work and then ghosting you. “We don’t want to enter into a contract and all of a sudden the contractor isn’t going to show up for two years because they’re busy,” says Egner.
That said, work may be delayed for reasons outside the contractor’s control, such as a supply chain delay. Therefore, your contract should spell out what constitutes an excusable delay and under what conditions it’s likely, says NAHB’s Jaffe.
Cost should be understood by everyone
Your contract should include an estimated total price for the work. Most home remodeling contracts are fixed cost, meaning the contractor bears the risk of performing all the work for that amount. The alternative is a materials-plus-labor, or time-plus-materials, contract, in which you bear the risk of having to pay more than you expected because you underestimated the price or difficulty of the project. “They have to be careful that they’re monitoring the costs,” cautions Jaffe.
Given the current unpredictability of the supply chain, some fixed-cost contracts might provide for increases in materials costs to pass through the homeowner. “In this environment, it’s not uncommon for a contract to include an escalation clause to ensure the remodeler receives compensation for inflated costs like lumber and building materials,” says Jaffe.
If that’s the case, make sure the contract spells out how the remodeler will provide evidence of the increased cost, such as using an industry publication like Random Lengths, which tracks the cost of lumber. You could attempt to negotiate a guaranteed maximum cost clause, to be sure you don’t end up in a hole financially because prices have climbed.
Egner says he has never seen as dramatic an escalation in the cost of materials as he's seen recently. “We’ve always had fluctuation in pricing, but nothing like the last year and a half. We’ve seen products go up 30% in one year,” he says.
Payment schedule
Take a hard look at the size and timing of the proposed draws in your contract. The checks you write to your contractor should be tied to milestones in the project, with the percentage of money you’ve paid roughly keeping pace with the amount of work the contractor has performed: what they’ve spent on materials and labor. For example, you might pay a certain amount as a deposit, another chunk when the existing structure is demolished, and a subsequent draw with framing, dry wall, paint, appliance installations and the like. “If you’re 50% done and you’re 80% complete with the payments, that’s probably not right,” says Jaffe.
Use common sense when looking at the size of the down payment or deposit called for in the contract. A one-day gutter repair shouldn’t call for an 80% deposit. But some jobs require up-front material orders that could justify a larger up-front payment. Check with your state agency that regulates home remodelers to see if they set a maximum down payment or enforce other consumer protections. “You don’t want to pay everything up front because you lose your leverage,” says Sally Greenberg, executive director of the National Consumers League.
The contract likely will specify that the final payment is delivered after the project is complete to both parties’ satisfaction. It can help to designate an industry standard for any complaints, such as NAHB’s residential construction performance guidelines. That specifies, for example, if there’s a crack in the foundation smaller than 1/4 inch, it’s not a defect in need of correction.
The final payment should be large enough to give you leverage in case something isn’t completed to your satisfaction. “Make sure you hang on to that final payment and don’t release it until you ensure all the work is done, including the cleanup and removal of the trash,” says Stacey Tutt of the Housing Law Project.
Materials and allowances
Another crucial provision in the contract: spelling out the specific materials to be used, the quantity, and the products to be ordered. Include as much detail as possible, such as brands, model numbers, and acceptable alternatives. “Put all the materials into a different list than the job list, so you know what you’re paying for,” Greenberg says.
Check the prices of items the contract provides allowances for, such as appliances, materials and doors, because if the costs exceed the allowances, you will be required to pay the difference. (Allowances means the maximum cost of the given product before you need to pay the difference.) So make sure that you start with realistic price estimates. Don't lowball prices in the contract with, say, $2,500 for 10 windows when the cheapest window at Home Depot costs $750. You’ll be paying the overages.
Change order process
Even the best contract can’t anticipate every possible development in a renovation project. You might discover unexpected problems inside your walls once they’re opened up. Or perhaps you have a late inspiration for a tweak on the design. You should specify how change orders will be handled, so the homeowner and contractor are on the same page. Keep lines of communication open.
“Issues are going to come up,” says Jaffe of NAHB. “Disputes between the homeowner and remodeler are often about differing expectations.”
Your obligations
The contract primarily addresses the remodeler’s obligations and how you will pay. But you should also be aware of your commitments and risks in signing the contract. Some contracts require certain access to the site, valuables to be put away or a specified level of homeowners insurance. Make sure it’s clear who bears the responsibility for any damage to the property and what consequences ensue.
Warning: look for a clause about a lien or mortgage being placed on your home if you fail to meet the payment schedule. That could be a serious financial burden in the event of a dispute – and a provision you could ask to have waived.
How disputes will be resolved
A contract may also require arbitration or mediation as an alternative to a lawsuit. Experts disagree which is better, but all say prevention is the best option. There’s no guarantee that you would be made whole in the event of a dispute, even if the contractor is clearly at fault, especially if the contractor has financial problems “You could be completely right, sue the contractor and still be left with nothing,” says Tutt, of the Housing Law Project.
Contacts, license, warranty, and bond information
Finally, your contract should include the remodeler’s contact person, address, license number and bond or insurance information. But it’s not enough to see a license number on the contract. Check with your state to be sure the contractor’s license is in good standing and covers the type of work to be completed. Ask for a copy of the insurance certificate to be sure it’s valid and check both the Better Business Bureau and several references from prior customers.
Remember that every provision in the contract can be negotiated. Strikethrough and initial any provisions that you and the contractor agree to eliminate. And be sure to receive a countersigned copy of the final contract before work begins.
"Lesson learned, if I were doing a renovation like that again, I would have a lot more protection in my contract and include what the ramifications are for not meeting the deadlines," Stolz says. "Also, you should always plan for 10% to 15% higher costs when it comes in, because you're going to have scope creep."
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