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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:

Insurance

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.
  • The Federal Trade Commission states that contractors should carry the following types of insurance:
  • Personal liability
  • Worker’s compensation
  • Property damage coverage
  • Make sure the homeowner is named as an additional insured on the general contractor’s insurance, and make sure that the policy does not lapse during the course of the work being completed.
  • One BiggerPockets contributor recommended for the homeowner to add a “theft and mischievous damage” ride to any vacant dwelling policy or builder’s risk policy to cover any issue that might arise with materials being stolen from a job site. Another recommended a “remodeler’s builders risk policy on special form” instead.

Security

Making sure that appropriate and sufficient security measures are in place is another key factor in reducing the likelihood of a dispute with a contractor.
  • No one should be allowed on the job site without the project owner making a copy of their state-issued ID and taking a photo of the license plate of their vehicle.
  • Materials must be locked up at night. Make sure that materials that will not be needed for a few weeks are not staged too early.
  • Tools either need to be packed up by the contractor and taken home at the end of each day or stored onsite at his own risk. The homeowner should post a sign at the job site disclaiming liability for any tools left unattended.
  • Make sure there is a way to keep the site secure when unattended. One suggestion we came across is to install an alarm system that can be turned on and off remotely, so that the burden is not on the contractor to remember to arm/disarm the house.

Contractor Payments

More often than not, disputes that arise relate to payment. In addition to the contractual terms relating to payment that we discussed above, the following steps should also be taken:
  • Always use a lien waiver with every payment.
  • Request the contact information for every subcontractor and materialman from the contractor. This will protect the homeowner in the event that the contractor walks off the job for some reason.
  • No disbursement should be made unless a licensed inspector walks the property and performs a visual inspection that is compared against the draw request. Independently verify with subcontractors that the work was completed.
  • Final payment should not be made to the contractor unless he signs an affidavit that all subcontractors and materialmen have been paid under the disbursement. Documentation of the work and materials that the payment covers should be attached to the payment. The affidavit should be notarized.

Miscellaneous

There are some additional factors to consider when contemplating how best to avoid disputes from arising:
  • If the property is within an HOA, the homeowner should make sure that the contractor is aware of all of the HOA regulations to ensure that no work is done that would not be permitted by the HOA. These regulations may be in the form of guidelines from an Architectural Review Committee.
  • Check to make sure that the contractor has properly closed out any permits. It is no fun to find out a later date that a permit was never properly closed out—and that the contractor is no longer in business. Both Baltimore City (ePermits) and Baltimore County (Inspection Connection) have online portals for inspections.

Conclusion

There is no foolproof way to avoid contractor disputes. No contract can possibly contemplate every scenario that might arise and proactively address that issue. Still, incorporating the recommendations discussed herein will serve to reduce the likelihood of conflict.
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