How to Avoid Contractor Disputes

If you speak to any real estate investor who has worked with a contractor, chances are you will hear at least one horror story. As with any profession, there are always some bad apples—and a savvy real estate investor needs to build in protections for their contractor relationship that will prevent the relationship from souring. Based on an extensive review of online discussions relating to contractor disputes, we have developed the following list of recommendations for how best to prevent such disputes:

Contractor Selection

The first way to avoid a contractor dispute is to select a contractor who has an excellent track record and comes highly recommended. We previously wrote a blog post about how we selected our contractor for the renovation of our new office space. Based on our review of online discussions relating to disputes with contractors, there are a few additional pointers to consider:

Run a background check or case search to see if there are any active suits in which the contractor is the defendant that might indicate red flags regarding how he conducts his business. If you are located in our home state of Maryland, you can look your contractor up on the Maryland Judiciary Case Search website.
When vetting contractors, make sure to ask what days they will be at the house, how many subcontractors they will be working with, and what each of those subcontractors will be doing.
Interestingly, there was plenty of chatter in the public domain about not going with the contractor who bids the lowest. The reasons were various and included:

We also found an interesting suggestion in an online forum for how to identify good contractors: Visit the local specialty supply houses such as plumbing, electrical, etc. (not big box stores). Ask the people who work there if they would be willing to share the names of who buys from them on a regular basis and pays their bills in a timely manner. Contact those people and ask who the good contractors are that they work for.
Don’t select your contractor from a cold call or flier in your mailbox.

Contractor Agreement

We recently listened to a presentation by a real estate attorney who spoke about contracts with contractors. He made a few statements that really resonated with us. First, he stated that if something is not included in the contract, it was never discussed. Second, he stated that if someone were to pick up the contract a year from now, it should be clear to that person exactly what work was going to be done, by whom, and when—even if that person had not been party to the contract negotiations. Third, he stated that the homeowner must make certain that the contract is clear in terms of who is a party to the contract. Contractors will sometimes have partial names or DBAs as parties to the contract; the homeowner needs to be certain (and it needs to be memorialized) exactly who is a party to the contract.

Some additional pointers that we have gathered regarding best practices for the contract include:

If the work requires a full demolition first, one suggestion we saw was to contract the demo first, before preparing the scope of work for the contractor. Otherwise, the demo could reveal unknown issues and cause the scope of work to have to be revised (which will delay the project).
If the contractor presents his own version of an agreement (versus one that the homeowner prepared), make sure that an attorney reviews the agreement before signing.
Make sure the structure of payments to the contractor is driven by milestones, not by date. That is, the payment structure should not dictate that the contractor receives a payment every Friday. What if the contractor did not do any work that week?
The scope of work must be itemized and break out labor and materials. The list of materials should include each products’ color, model, size, and brand. If there are materials that will be selected at a later date, the contract should specify who is responsible for selecting the material and what the budget is for each.
All change orders should be memorialized with written documentation—using an official form that provides detail as to the nature of the change order. The change orders should be signed by both parties, and each should receive a copy of the fully executed change order.
Negotiate in advance the cost per hour for work performed under any change order.
If possible, the homeowner should arrange to buy the materials and have them delivered to the jobsite. This prevents issues that arise when the contract specifies that a certain material is to be purchased and then a different grade of material is purchased instead.

The agreement should provide for a “retainage,” meaning that the last 10% of the contract payment will be held back pending a final walkthrough with a licensed inspector and a final payment affidavit. Smaller contractors may balk at this, but it is worth asking for this in the contract negotiation.
The contract should require the contractor to provide a lien release for any subcontractor the general contractor is going to use.
Make sure it is agreed at the outset when noisy equipment can be used, who will take out the trash, who is responsible for site clean-up, whether smoking is allowed on the job site, etc.
The agreement should include information about warranties covering materials and workmanship.
The contract should specify what happens in the event of a dispute between the parties to the contract.
For larger projects, the contract should require that the contractor prepare a contractor’s affidavit at the time of final disbursement—a sworn statement that the full contract price has been paid and that all subcontractors and suppliers have also been paid.
The contract should have an indemnification clause so that the homeowner is protected in the event that the contractor or a subcontractor is injured while on the job. (The contractor should also have sufficient and appropriate insurance, as discussed further below.)

How to Avoid Contractor Disputes

Contractor Selection

Contractor Agreement

Services

Company

Resources