(A speech for the Lower Columbia Preservation Society on May 21, 2005)
(An expansion of an Article for The Oregonian published May 20, 1999)

At some point, almost everyone contemplates either constructing a new home or at least remodeling or repairing an existing one. The problem is that construction, even the most innocuous seeming project, can be exceedingly hazardous to your pocketbook in totally unexpected ways. The potential for difficulties with contractors is magnified the larger and more complicated the undertaking happens to be. That is especially true when historic structures are involved because of the often unique aspects of historic materials, designs and restrictions.

While there are a lot of terrific contractors out there who know what they are doing and complete their assigned tasks on time and within budget, there are others who are not so terrific. How then do you protect yourself from the less than terrific ones? The ones who are using the money from your job to pay off the bills on the last one? The ones who knock a hole in the wall and disappear for four weeks? The ones who do shoddy work and won't fix it? The ones who have "selective memory" as to what they were supposed to do for the price?

There are a variety of ways to help dramatically lower such risks. No one of them provides complete protection all by itself. Unfortunately, there are simply too many opportunities for things to go wrong. In fact, even if you faithfully follow all of them, it is still no guarantee, no magic wand. Nevertheless, you have a lot of money at stake. So, try to accomplish as many of them as you reasonably can. The more you use, the better yours odds of avoiding problems.

Do a Background Check

Start with an investigation of exactly who are the proposed suppliers, laborers and other subcontractors as well as the general contractor individually. Do so in advance of signing any construction agreement.

Ask if they have done this specific type of work before. Remodeling for example, is a very different expertise from new construction. Even if someone has remodeling experience, was any of it on historic buildings? Drywalling for instance is comparatively easy and inexpensive compared to plastering walls, let alone trying to replicate elaborate plaster molding. If the contractors have not personally done the specialty work needed, are they at least hiring subcontractors with such knowledge?

Ask how many other jobs they are working on simultaneously. Will they be too busy to devote the attention yours will need? Do they have enough workers and supervisors to timely do the job?

Ask for references. Then, actually call all their references. Did the references like the work? Would they hire that person again? Bankers and real estate agents often have opportunity to know of contractors. Ask your own lender and broker acquaintances whether they know anything about contractors you are considering.

Definitely contact the state Construction Contractor Board which governs Oregon construction contractors. It's free. You can reach them by phone or through the internet. Find out if there were any registered disputes involving these people you are considering hiring and if so, what were the controversies were and how they were resolved? In a similar vein, contact the Better Business Bureau, the Federal Trade Commission, the City and County building inspectors and, perhaps, the Chamber of Commerce too. Obviously, exercise caution if any reports are negative.

You might want to also go to the County Courthouses both where the property is located and where the contractors live. Often, there is a computer there where you can run a name check. Are there any lawsuits listed against them? If so, inquire further. Remember it's your money or money you owe a lender anyway.

At least confirm those you are contracting with are registered by the state as contractors and by the municipality to do business locally.

Do Competitive Bidding

Get several bids on construction projects, but don't necessarily take the lowest one. If something looks too good to be true, it probably is. For example, if four bidders came in respectively at $45,000, $50,000, $51,000 and $51,500 with a fifth coming in at $19,000, you have to start wondering why the low bid was so far out of line with the others.

Ask. Make sure the answer makes sense when you hear it.

Get it in Writing

Insist on the subcontractors giving written estimates or bids. As to those finally chosen, insist on there being written acceptances or, better yet, a formal contract with that sub. When invoices later start coming in, compare them to what was set forth in the contract.

Save all the paper work. It may prove important if there is a later dispute. The side with the best records is often the one that wins.

Pay Attention to the Form of Contract

Have a good contract with your general contractor (or your subs if you are acting as your own general on any portion of the work). The American Institute of Architects has decent forms.

Whatever you do, make sure the agreement spells out the parties, timing, costs, payments, standards, plans, specifications, amendment procedures, breaches, notices, penalties, attorney fees and dispute resolution. Define exactly who is doing what portions of the work and who has responsibility and control over the site, inspections and permits. Define the Project Scope in as much detail as possible down to specifying brand, dimensions, quantity, finishes, etc. and the standards to be used.

Detailing what is not going to be done is as important as detailing what is to be done. Drawings and specifications for materials should be made a part of the contract, preferably attached, but at least referred to in the contract with sufficient particularity that a neutral third party could readily identify the documents by the description given. Consider getting surveys of property boundaries and existing easement and utility line locations. You just bought yourself a lawsuit if you accidently built across the edge of your lot. You might be able to sue the contractor, but the neighbor gets to sue you.

Define how to make future amendments to the agreement. Define what safety procedures will be undertaken and by whom. Define who has the risk of loss in case of casualties or damage and when that is applicable. Define who is responsible for clean up, the standards for cleanliness and frequency it occurs.

Make sure whatever is the final defined agreement is signed and dated by both you and the contractor.

The same goes for change orders as the project proceeds. Do not count on enforcing your memory of what was agreed to by the parties. The contractor's memory might not be the same as yours. Spell out amendments on paper instead. Spell it out in sufficient, unambiguous detail so that any reasonable person walking in off the street could read it and figure out what were the actual agreement terms.

If you have a "cost plus" contract as opposed to a fixed price contract, you might want the right to "audit" the contractor as to claimed costs in the event of a dispute. If you agree to cost plus, you also might make sure you have a "cap" or ceiling on the price, in other words, a maximum price. Otherwise, you might discover you do not have enough money to pay for everything.

Even if you have a "fixed price" or maximum price contract, insure you have some cash reserves or contingency funds set aside just in case. If not, you might be in for an extremely unpleasant surprise if something goes wrong. By the way, merely because there are itemized estimates set forth, that does not automatically mean they are fixed prices. If that is what you want, say so in no uncertain terms.

It is possible to have some portions fixed price and some cost plus. That is perfectly okay. Just make sure that, if twelve people were plucked off the street later on to sit in a jury box to decipher the meaning of the words, the wording is unambiguous. That is the way to make sure that there will be no disputes or at least put yourself in the best possible position to win if disputes do occur.

If you need something finished by a certain date, say so. Possibly even set forth damages if it does not happen by that date.

Don't get carried away however in demanding a penalty. The damages you articulate must bear some reasonable relationship to your likely actual out-of-pocket costs if the building is not timely completed. For instance, it might be your per diem rental costs to live elsewhere while you wait for the home to be finished. It might be your travel costs from where your temporary residence is if you are forced to wait beyond the scheduled completion time.

When you are creating a liquidated damages clause as part of your contract, you should state damages would be difficult to prove with exact accuracy, but, in any event, save your documentation as to how you came up with the initial figure that was placed in the contract language. It may be important later.

A disinterested third party such as the architect can often be used to obtain quick decision making in disputes. Some contracts let the architect break the tie. Of course, make sure the architect is truly disinterested. If the architect is the father of the contractor, his objectivity might have a conflict of interest.

If you do not have a built in dispute resolver, perhaps quick mediation or arbitration should be considered. Either way, put it in writing as to how disputes are to be resolved.

Better yet, give yourself the final say so that you can fire the contractor on a moment's notice and hire someone else subject only to leaving to arbitration how much, if any, you still owe him or her.

Use Direct Accounts

Perhaps set up your own direct accounts with major material suppliers. If the general contractor needs a large order of lumber, you can have him submit a list to you which you send to the lumber yard expressly giving the supplier instructions that all the material is to be delivered directly to the site. Confirm it arrives. It would not hurt to see if it is all there as alleged on the invoice.

Caveat: Having your own account rather than using the licensed contractor might lose some potential "contractor discounts," but keep in mind these suggestions focus on maximizing protection against things going wrong, not necessarily minimizing costs. If you have a rich, debt free contractor who has a great track record, maybe you look more toward saving costs. If the contractor has a mortgaged house, a used truck, a small amount of beat up equipment and/or a spotty record, do not count on ever collecting anything from him if something goes wrong. In that set of circumstances, if you choose to continue with that sort of contractor, you might be better off finding ways to protect yourself rather than just squeezing expenses.

Use Bonds

Consider trying for a bond, insurance policy and/or guarantees on your project. It would be nice if there were a reliable third party with deep pockets who could pay you if something went wrong and the contractor (and/or subs as appropriate) died, disappeared, went bankrupt or otherwise became judgment proof. Bonds and policies cost money of course, but think of them as security for the contractor's promises.

If the contractor cannot get someone to back his work, ask yourself why can't he? Maybe it's time to find another contractor.

As to who you get that bond or policy from, check Best's Insurance Guide and see if the company has a rating of "A+" or higher. Make sure you get a copy of the bond or policy and make sure you are personally named as a co-insured of the bond or policy.

Does the contractor have workman's compensation coverage? If not, an injured laborer may try to find some way to come back against you. Ask the contractor to provide you with proof of coverage for the contractor's own workers. Do the same with the subs before each starts work.

At a minimum, make sure you have written (and signed) indemnity clauses whereby they agree to hold you harmless from claims of others.

Get a Right to Hold Back a Percentage

Negotiate up front for a "retainage." If you can, negotiate the construction contract to allow for paying only 90% of each draw request. That leaves a fund of money available at the end of the work in the event there are back charges for poor quality or incomplete work or similar problems.

Avoid Advances to the Contractor

Try to avoid paying "advances" or "deposits" whenever possible. Pay only for work truly completed. If you do not have a retainage or if it is inadequate, prepare "punch lists" as you do along and seek the right to withhold a reasonable amount sufficient to complete that item later yourself if the contractor doesn't do as promised.

Agree in advance you have that right though. It is not automatic.

Get Permits

Sometimes it is a temptation not to get a building permit on work you are doing. After all, permits cost money. Don't be tempted though. Make sure the contractor obtains a building permit, if appropriate, to do your particular project.

Aside from the fact that for may projects it would be illegal to proceed without a permit, the whole idea of a building permit is that, hopefully, someone in the building department might at least take a minimal look at the project to see if it is being constructed pursuant to the requirements of the building code. Just don't rely on that for complete protection of your interests. Among other things, building pursuant to code may not be enough depending on what you are doing. At the same time, it does add a component to your assurance that things are being done correctly.

Keep Track of Progress

Insist on both an assured start time and an unequivocal completion date. Insist on the contractor also providing you with a written "time line" to accompany the contract showing when critical items are expected to be finished. This is sometimes called a Critical Path Chart.

Having such a chart does not do much good though unless you regularly inspect the site and compare actual progress to the chart. "Eyeball" the project often. If, for example, the contractor wants you to pay for completing the roof, yet the walls themselves still are not up to support that roof, something is wrong. It should not take an expert to know that a roof goes on after the walls are up.

Also, is the project on time? Whenever a draw request is made, insure it is accompanied by an estimate of completion to date on the project for each item and compare it to the chart. If the Critical Path Chart says rough-in plumbing was to be done in July and it is now October, a potential problem is in the making. Remember, you are paying carrying charges on that property such as interest, taxes, insurance. Every delay costs you.

Perhaps you should ask for contract penalties if it is not timely completed as promised. At a minimum, lateness ought to be specified grounds in the contract for termination of the contractor.

Keep good records. Save all your receipts and invoices. Perhaps maintain a daily or weekly journal of the project as to progress and when the contractor was on the job site. It would not hurt to keep track of the weather as well.

Whatever you do, do not let any disputes that arise to drag on. That tends to compound problems.

Get Lien Waivers

What follows is some sample language you could adapt to describe your own particular property and get made into a rubber stamp which would be put on the back of every construction payment check.

"Endorsement of this check shall constitute payment in full and a release unto the owner of the following described property all right of the endorser to claim any amount or to claim a mechanic's or materialmen's lien for material furnished for use in or for labor performed upon the construction of the structure or improvement at [Insert here your own legal description such as: 123 Green St., more particularly described as Lot 1, Block 2, Green Acre Subdivision, City of Dreams, County of Money, State of Bliss, a/k/a Tax Account #123456] as of the ___ day of __________, 199__."

If you go that route, make sure you use the type of checking account in which the original canceled checks are returned to you for safekeeping. That way you hold the paid checks as future evidence that the individuals signed the checks which included the above language on the back.

As an alternative, there are packets of lien waiver forms you can buy at many business supply stores. Tell the contractor and the various subcontractors they will receive their checks in exchange for signed lien waivers. Sometimes, it is more helpful to put the lien waiver language on the checks themselves though because the endorsers then have a difficult time claiming they never received any lien waivers to sign. A waiver printed on the check itself cannot be separated from the check.

Use Double Payee Checks When Paying Invoices

Have all checks for the work made out as "double payee" ones. In other words, never just give money to the contractor. Always insist that he or she show you invoices, time cards, or other acceptable evidence of an actual bill from any subcontractor, supplier or laborer that is to be paid.

Look closely at those bills and determine they actually refer to your particular job and have a current date. Run the figures to make sure the tally is correct. Do not hesitate to call the sub to confirm if you have any questions.

Then, make the check payable to both the general contractor and the sub so that both must sign in order for it to be cashed. When that is combined with the lien waiver, it makes it difficult for anyone to assert they were not paid.

By the way, always make sure you personally are the one ultimately controlling disbursements on the work. Don't let your lender send out payments on its own regarding the project without your consent and approval as to each and every distribution.

Follow the Contract

If something is going wrong, re-read the contract documents immediately. Before you fire anyone, make sure you have done whatever is required. If, for instance, you must give written notice to the contractor before a termination, give it in the form and in the manner specified. If not, you could lose your rights to proceed against the contractor.

Conclusion

As has already been suggested, no single one of these ideas is an all encompassing. Collectively though, they should help somewhat, particularly where the contractor has little in the way of personal assets to pay for damages if there ever is need to bring a judgment against him or her.

In any event, when you are contemplating an upcoming construction project, plan to practice "preventive law." It is a management concept similar to defensive driving on the freeway. It makes good sense if you want to stay out of court or avoid losing money.

Good luck.

ABOUT THE SPEAKER

Mr. Hillestad has been specializing in real estate and business related law since 1973 after graduating from Michigan Law School and clerking for the Colorado Supreme Court. He has written extensively on a wide variety of subjects with a heavy emphasis on property law matters in particular.
Martindale-Hubbell, the only national company which not only lists, but actually compares and rates lawyers, gave him their highest possible legal skills and ethics rating. He is also listed in Who's Who for lawyers and a variety of similar lists.
Along the way, in addition to his full time legal practice, Mr. Hillestad developed three award winning businesses, they were B&B Inns, one of which was selected as "Company of the Year" by Colorado Business Magazine.
He has combined that with a life long interest in preservation, both environmental and historic. For instance, in addition to being a former director of Historic Denver, the second largest private preservation organization in the country, he was the author of Denver's Historic Downtown Walking Tour and four of the properties he has restored have already been placed on the National Historic Register.

FOR FURTHER INFORMATION:
P.O. Box 1065, 1347 South Hemlock, Cannon Beach, OR 97110.
Call 503-436-1314 or 800-436-1379 if outside South Clatsop County