You Need to Keep Your Contractors on Budget! Here’s How
In late 2020, a Miami homebuilder was sued by former clients alleging that he had failed to perform and had stolen millions of dollars from them. He allegedly double-billed them for materials and services, overcharged them for subcontractors in order to receive a kickback, and even sent completely falsified invoices.
This is unfortunately an all-too-common occurrence when working with bad contractors. According to experts working on this particular case, the only reason he was caught was because he failed to deliver a finished product in the form of a completed home for his clients.
It’s concerning, but many contractors get away with this sort of fraudulent activity completely unnoticed. Why? At the end of the day, they still provide their customers with homes that they are pleased with and proud to call home.
Today, we will break down what you can do to prevent your contractors from completely blowing the budget and taking advantage of you like this homebuilder did to his clients in Miami. While the majority of contractors are upstanding businesspeople who are great to work with, it only takes one bad actor to financially ruin you.
Let’s dive into a few methods you can implement to prevent that from happening.
Get It in Writing
With an industry as laden with fraud as construction and contracting can be, reputable contractors want to protect their reputation and uphold their status within the industry. For this reason, reputable contractors will not protest when you request a written contract for work being done.
Need a great resource for pre-written contracts that you can use as a baseline for specific requests and terms? Check out our REI tools section for the scope of work template that many of our members have used.
Most established contractors have their attorneys write up their own contract. If they require use of this contract, be sure to have your attorney review the document prior to signing.
These are just a few items that should be in the contract:
- Start date
- Projected completion date
- Down payment cost
- Progress payment amounts and hurdles that must be met for them to be paid
- Final costs upon delivery of the finished home or property
Both parties are bound by this agreement upon execution. This will prevent the contractor from surprising you with any hidden fees or upcharging you for no apparent reason.
If there are going to be upcharges for anything, be sure the variables that determine how those are calculated are included in the contract. They should require your express written consent and authorization via signature to prevent you from receiving a drastically different bill upon completion.
Insist on Insurance
As a client of a general contractor, you need to be aware of potential liability risks that you face as the property owner should something happen on the jobsite. Whether it be to the property itself or to someone who is working on the property, you could be putting yourself at risk of liability for damages should something go wrong and your contractor is uninsured.
It is not rude to ask them for their policy number. It’s one of the first things I recommend doing after deciding you are interested in moving forward with a particular contractor.
Make sure they have general liability insurance to cover any accidental damage to your property that may occur during construction. The contractor should also have worker’s compensation insurance (more often referred to as “worker’s comp”) in case an employee of theirs is injured while working on your property. This absolves you of liability and ensures that you are protected in case something happens that is not your fault.
The industry standard for contractors is a two-million-dollar general liability insurance policy, but some may have a policy with an aggregate limit as low as one million dollars. If this is concerning to you, it is possible to request that they purchase an excess policy to cover any damages that may occur over their current policy’s max limit.
It is wise to request that they name you as an additional insured on their policy while working for you — if they claim this is not a possibility, you need to find another contractor. It is a quick call for them and takes very little time for insurance companies to name the contractor’s clients as an additional insured on their policy.
It’s nice to have some reassurance that the contractor you are working with has performed well in the past. A list of satisfied customers who are willing to recommend the contractor and stand behind their workmanship is a good sign.
During the early stages of conversation with your contractor, ask them to provide you with the contact information of several former clients who are willing to serve as references.
When talking directly with these past clients, you can ask questions about what it was like working with the contractor. How was the contractor’s communication? Did they try to upcharge you for anything that was a surprise? Were there any hidden fees, delays, or issues that arose or that you did not anticipate?
Always ask if they would work with the contractor again should they decide to build a new home tomorrow.
Have a Paper Trail
While this includes the first tip, it cannot be overstated whatsoever. This goes for change orders, delays being communicated, permit or schedule issues, and the whole lot. Everything needs to be well-documented while you are working with contractors — not only for your recordkeeping’s sake, but for the times when there are disagreements about what was said between parties and a clear answer is needed to move forward.
This can be helpful to all parties involved. Set up a folder in Google Drive with the property address as the name and create folders within it to describe different categories of records that you will be tracking. For example, create a folder for signed documents, a folder for quotes, a folder for documents under review, and so on.
One of the more common ways that property owners are conned by unprofessional contractors in Florida is by doing everything over the phone or in person with a handshake and cash. Without documentation of what is being done, costs, and signed acknowledgements of completion before final payment is delivered, it is easy for many contractors to collect cash down payments only to never be seen again.
Even worse, it is not uncommon for shady contractors to collect a cash down payment and deny ever discussing any project or receiving any funds from you. It is hard to prove anything in a court of law without a paper trail showing undeniably what took place.
Not only is it protection for you, but contractors should think of a paper trail as protection for themselves. By accepting payments digitally through online invoicing platforms such as PayPal, they are able to keep tidy and clean records of billing that has occurred. Good contractors typically have systems already in place to accept payment online.
Don’t be scared when they ask for a down payment in advance, as this is normal in order to secure your construction start date on their busy schedule. Do, however, be sure that it is not a grotesque or unreasonable amount.
In Florida, for example, contractors have to be careful not to accept more than a 10% down payment up front before certain statutory requirements and responsibilities are assumed. Once they have received 10% of the project’s cost in the form of a down payment, they are required to file for permits under local codes and begin work no more than 90 days after all necessary permits have been issued.
This is why many reputable contractors keep their initial deposit to less than 10% until they have begun working on the property.
If you have a contractor asking for one-third or half of the project’s cost upfront, that is a clear warning sign that they are inexperienced or potentially trying to take your money and run. Contractors who fail to meet the requirements set forth by the state after taking 10% or more in the form of a down payment are subject to state penalties that can include revocation of the contractor’s license.
Get Professional Representation
In Florida (and in most states), a real estate agent is paid out of the seller’s proceeds at closing. For this reason, you as a homebuyer working with a contractor are able to hire professional representation on your behalf with (in most cases) zero cost to you through the acquisition portion of the process on new builds.
Most contractors understand that they need to have a healthy relationship with real estate agents in the area to have a sustainable business. They’re typically open to working with agents on new construction deals.
On flip projects, get your agent involved as early in the process as possible. They’ll help you select the finishes that will get the property sold quickly and for a high dollar amount. When going based on what the contractor alone recommends and provides, the materials and finishes selected are often what provide them the highest margin. If given the option and a fixed budget, they will use the cheapest materials they can find without regard to whether they flow together, match, or look aesthetically pleasing.
Time and time again, investors give contractors a fixed budget and free reign over finishes and are disappointed to find that the color palette, materials chosen, and general aesthetic are not aligned with current market trends.
Since the builder represents their own best interests, it is crucial to have someone on your team batting for you. Hiring an experienced real estate agent who has worked with many builders in the area or even specializes in new construction real estate can mean the difference between a home completed in time and on budget versus a long overdue completion date with unnecessary upcharges.
Interview several local agents in your area to see who has the most experience working with contractors. Make sure to choose someone that you feel comfortable with representing you when you need to negotiate with your homebuilder.
Don’t Let Contractors Bamboozle You
At the end of the day, there are plenty of contractors in every city to do the job and do it well. If the first few that you speak with give off bad vibes or are unwilling to go about things in a professional manner, then run in the opposite direction and don’t look back.
It is better to wait a few weeks to find the right contractor than to start forking over cash to an unscrupulous actor only to never see it again and have incomplete (or not yet started) work.
Avoid this by having everything spelled out clearly in a written contract, making sure they are licensed, bonded, and insured in Florida, maintaining a paper trail throughout the whole process, and hiring an expert real estate agent to serve as your representation throughout the process.