Navigating Through the Construction Process

Everyone has heard the horror stories about the home renovation/construction business - the unscrupulous contractors, the shoddy craftsmanship, the delays, the mark-ups, the mess...etc.  Well, guess what?  Those stories you heard are probably true.  Still, the horror stories do not tell the whole story.  Home renovations that go smoothly are not newsworthy.  When is the last time your neighbor spent a half an hour detailing the process surrounding his family room addition that went off without a hitch?  In reality, you would ask him: "Hey Stu, how did it work out with the new family room addition?"  "Great, we love it" he would say, and then you would start talking about something else.  If he spent four times his budget, his electrician turned his downstairs bathroom into a combat zone on a regular basis and half of his wife's shoes were missing, you would be in for a twenty-five minute diatribe about the process and all the pains it inflicted on his family.  You would walk away from the conversation afraid to hire anyone to do anything in your house because you are afraid that you will end up broke and feeling violated.  The truth is that construction disasters are avoidable and often occur not because the contractor does not deliver, but because the consumer does not realize that he is just as responsible for the outcome of the project as the contractor and/ or sub-contractor(s).  The contractor is ultimately the scapegoat, but the onus is on the homeowner to ensure the success of the project. 

The trouble is that many homeowners believe their work is done once they hire the contractor and provide either a set of architect's plans or even just a "general idea" as to what they want.  They figure they will be back in two months to pick out cabinets, countertops and appliances, but it is up to the contractor to deliver the goods from here.  Wrong.  This is not like ordering a pizza.  Simply picking out the size and toppings is the easy part.  The hard part is deciding on the chef and then managing the chef from start to finish.  In the coming paragraphs, we will attempt to highlight some of the best practices to employ during your next renovation project.  By understanding the realities of both the industry and the process and by taking an active role in the project, homeowners can avoid pouring time and money into a project that leaves them unsatisfied, broke and bitter. 

Face the Facts

The fundamental truth that needs to be understood is that the primary interests of the contractor and the interests of the consumer are in perfect alignment.  This is due to one simple fact: to the contractor, this is a job and nothing more.  It is a business.  In business, the goal is to earn a living.  A contractor who does not try to maximize his earnings is not going to be in business very long.  But to the homeowner, it is much bigger than that.  A group of people are going to be firing up power tools in the living room.  It will be risky and expensive and the value of the homeowner's nest egg is at stake.  It is imperative to recognize that this fundamental truth spawns differences in the approach to certain aspects of the engagement and the homeowner needs to be aware of and manage these differences throughout the project.  Do not be fooled into believing that any or all of them do not apply to you.  Even if your brother is the painter, these differences hold up.  This is not a condemnation of the construction business or a generalization that all contractors are looking to squeeze their clients, but any homeowner that embarks on a renovation project without acknowledging or paying some degree of attention to these facts will undoubtedly walk away from the project feeling like Cornwallis at Yorktown.  See the table below for an illustration:

Taking the Job

For some reason, homeowners approach hiring a contractor much differently than most organizations approach hiring anyone.  If IBM needs another staff accountant, their process includes some combination of the following: they run a series of advertisements in various publications; they post an ad on their internal website; they post an ad on Monster.com or other employment sites; they engage a recruiter to find applicants; they provide their employees with incentive bonuses for referrals...etc.  On top of all that up front effort, they interview countless applicants until they find the right person.  Even then, the recruiter (if applicable) does not get paid unless the candidate holds the position for three or six months or even a year.  All this for someone who does not make, market or sell any of the company's products.  Why should your selection process prior to hiring a contractor be any different?  In fact, even more scrutiny should be placed on the vetting of this person because he or she is about to reconfigure your most valuable asset, your home.  Couple that with the fact that many homeowners come to the table with a preconceived notion that contractors are dishonest.  It is a gross generalization, but the stereotype exists, so why not be even more careful in your selection process? 

Much in the same way a company has a position's job description well defined in advance of attempting to fill it; the homeowners need to have at least a basic understanding as to what they want to do before parading in a string of contractors to fill their heads with all kinds of design ideas.  Establish the job description in advance with an understanding that it will transform and evolve over the course of the project.  By setting expectations and working from them you control the direction of the project.  Do not let the contractor steer you from the moment he enters the room.  There will be plenty of time for that down the road. 

Once the candidate arrives, subject him/her to the same standards of professionalism that you would when contemplating the hiring of a financial analyst or in the decision to use a particular pediatrician.  Trust your instincts.  If the candidate's attitude, mannerisms and comments give you any reason to be concerned about whether you will be able to comfortably work together, then pass.  The end product is a function not only of the contractor's skill, but your ability to communicate and work together.  If your contractor does not exude professionalism, then he has no business in your house.     

Some contractors have a way about them that appears as if they are doing you a favor by agreeing to even consider taking on your project.  They are always "swamped;" their other projects are always "huge" and the other homeowner is always a "pain."  It serves to put the homeowners on their heels and gives the contractor an aura of importance that can cloud the homeowners' judgment.  The reality is that you are the boss.  They need to demonstrate that they are the best candidate for the job just as you did when you were interviewing for your job.

It is essential that multiple candidates are interviewed.  Some contractors will make you feel like you need to decide on the spot or else they will go take some other job for the next six months, and that may be true. Still, the risk of losing a candidate to someone else's project that may or may not exist is more than offset by the risk of hiring someone without exploring all available options.  Also, referrals are extremely important, but just because your neighbor had a great experience with a contractor, it does not mean you will (and vice versa).  Referrals are often what get the contractor to your door, but it should be how he or she responds to your questions, and reacts to your job description that gets him/her the project.  Remember, neither your neighbor nor your friend at the gym is living in your house after the contractor they referred to you is done with the work.  Do not feel pressure to use someone just because someone close to you made the recommendation.  Obviously, there are cases where your uncle Fred is a painter and therein lays the potential for years of family guilt if he finds out that you had another painter work on your house.  Those instances arise, and each homeowner needs to weigh the pros and cons when facing the prospect of hiring friends and family for large scale projects.  Five years of snubs at Thanksgiving may ultimately be an acceptable price to pay for a great looking master suite.

Scope of Project & Project Design

As discussed above, it helps to have an idea as to what you want before you start the hiring process.  As with any endeavor, the more knowledge you bring to the project the better prepared you are to make the important decisions that arise along the way.  Have an understanding as to the administrative aspects of the project, such as the necessary building permits, whether you will need to apply for a variance to the zoning bylaws, what your budget will allow...etc.[2]

If you are able to present scenarios to your contractor or architect, you are more likely to get an end result you are comfortable with as opposed to taking the approach that it is on them to come up with designs that you will just approve or reject.  First of all, that is increasing their scope and their role in the project.  Second, it takes you out of the driver's seat and puts you at least in the passenger seat if not all the way in the backseat.  There are several ways for a homeowner to prepare a design.  All of them take effort on the part of the homeowner, but it is effort well expended.  The easiest way to bring your design ideas to the table is to pirate them from somewhere else.  If you have a friend, neighbor or family member that has recently undertaken a similar project and you like the way it came out, ask if you can take some pictures to show to your architect or contractor.  Or, spend some time looking through design magazines or websites that illustrate and discuss different options.  Some of these magazines and websites also talk about the construction process and indicate whether certain options are more labor intensive than others.  Some magazines to consider include: Better Homes & Gardens, Residential Architect and Your New House.  

Building Materials, Appliances and Fixtures

Materials are a slippery slope.  As discussed later, few homeowners are in position to determine the types and quantities of materials to be used, so the only real semblance of control a homeowner has on materials is procurement.  Contractors often cite discounts that are available to them from lumberyards and other vendors and encourage the practice of procuring the materials themselves so that you can save money.  While it is often true that contractors enjoy price discounts, what is also likely is that you, the consumer, do not share in that enjoyment.  If your agreement with the contractor is that he procures the materials and bills you, expect that he will mark up the price or at the very least, keep the contractor discount and bill you the retail price.  If it is not in your agreement for him to do otherwise, it is a best practice for the contractor to do so.  Remember, this is a business for him.  For large projects like building a 2,500 square foot house from scratch, this is likely an unavoidable necessity.  Your contractor cannot be expected to call you every time he needs to go to the lumberyard, but for smaller scale projects, it is not unreasonable for you to insist that the contractor provide you with a list of materials and you arrange for them to be at the jobsite.  If for no other reason, this gives you peace of mind that you are not paying 10% more for your materials than you need to and also that you are paying only for the materials actually used on site.  Another alternative is that you agree to allow the contractor to procure the materials if it is logistically more sensible that way, but that he submits itemized vendor receipts for any purchases and is reimbursed only for out of pocket expenses without a mark up.  The idea is that you are paying for the contractor's skill, experience, resources, equipment and management.  You do not need to compensate him for trips to Home Depot.  Speaking of Home Depot, it is worth mentioning that if you are under an arrangement whereby you are being billed for materials under the premise that you are sharing in your contractor's discounts, be advised that retailers like Home Depot and Lowe's do not offer such discounts to contractors so if there is a seemingly endless run of Home Depot trips by the crew and or deliveries pulling up on Lowe's flatbeds, you are not saving any money and are a prime candidate for a mark up. 

With regard to appliances and fixtures, this is where your contractor can save you money, especially in the case of your plumbing fixtures.  These days, you can find wholesale suppliers for appliances and fixtures if you look hard enough.  And if you cannot, your contractor likely already has.  Plus, with appliances, it is very difficult for your contractor to squeeze a mark up out of you because you can very easily verify the price of the items you purchased.  You know, for instance, that you bought one refrigerator and you can easily find out how much it cost.  On the other hand, you have no idea how many 2x4's you bought so your ability to gauge whether you were ripped off is greatly reduced. 

Still, appliances and fixtures are prominently displayed in a home, so it is highly recommended that the homeowners shop around and choose the makes and models based on sight, feel, features and price.  Picking appliances out of a catalogue is not advised.  The best approach is to hit the retailers and find the products you want, then bring in your contractor and see if he can save you some money.       

Timetable, Contract Terms & Payment Terms

The only interest you share with the contractor is with regard to the timetable (or so it seems).  But even then, if you drill down, the bare-boned interests are still different.  While it is true that the contractor and the homeowner both want the contractor on site for as little time as possible, the homeowner expects that time to be continuous, whereas the contractor will likely have other projects going on at the same time as yours, and he will undoubtedly spend time away from your site when you wish he was sleeping in his truck in your driveway so he can get a head start on his day at your house.  This is normal.  Think about your job.  How many times have you been working on something when another call comes in that requires you to drop what you are doing and attend to it?  The term "multi-tasking" gets thrown around very casually thanks to the likes of Dilbert, but the principle is sound.  If a contractor can manage multiple jobs at once without sacrificing performance to the extent his business suffers, he is maximizing his earnings potential.  If, however, you have agreed to a timetable, and you believe that the contractor is not living up to his agreement, you have the right to bring this to his attention.  There may be legitimate reasons for what appear to be unnecessary delays.  An inspector could be holding things up.  There could be a conflict with a sub-contractor's schedule...etc.  The onus should be on the contractor to communicate these issues to his client, but the homeowner should not jump to conclusions simply because a day goes by during the course of a three month project where no work gets done.       

When it comes to the real construction plans, procedures and execution, most homeowners are not going to have the wherewithal to comment intelligently on the contractor's choice of materials, methods or whether it took the crew an appropriate amount of time to get the job done.  The point is that it should not be a surprise one way or another.  The only way for the homeowner to be in a position to effectively monitor progress is if a well defined estimate is provided by the contractor, and it is developed into an even better defined contract.

Assuming this is not the contractor's first ever engagement, he should be able to accurately predict the costs and timetable based on the scope as it is currently defined.  Often, scope increases take place, and the homeowner is usually the cause, but barring unforeseen additions to the project, there is no excuse for a contractor not to prepare a detailed, itemized estimate.  If it is done without a calculator, it does not count.  Period.  End of story.  No one can eyeball the total costs of a new kitchen without doing any math.  It goes back to professionalism.  A server at a fancy restaurant that does not write down the orders is "classy," and it is expected that he or she will return in fifteen minutes with everything exactly as it was conveyed by the customer.  On the flipside, the teenager taking your order at the truck stop that does not write it down is lazy and you are likely to get a burger that hardly resembles what you requested.

The contract should include the full scope of the project, incorporate the contractor's estimate and provide a timeline.  Both sides should agree that the contract reflects each party's complete understanding of the undertaking.  If the contract speaks to the renovation of a kitchen, but does not include the related installation of the gas line for the new gas range, it is going to be considered extra, and your budget just increased without a single nail being hammered. 

The most widely used payment terms are known as "a third, a third, a third" meaning that you will remit payments in the form of 1/3 of the total contract value at certain milestones.  The rationale behind these payment terms is as follows:

First Installment: The initial 1/3 is due upon execution.  The understanding is that this third covers the contractor's costs associated with materials in advance so he is not "out of pocket" for these costs.  Obviously, if you are procuring the materials yourself, you have an argument that paying one third up front is a little steep considering the contractor will not be outlaying any cash on materials. 

Second Installment: The second 1/3 is generally due upon the passing of the rough inspection.  The rough inspections are performed by the plumbing, electrical and building inspectors (and other inspectors as necessary) once the framing has been completed and the lion's share of the plumbing and electrical work has been performed.  Simply stated, when the next step is to close any holes or put up wallboard, then you are likely ready for your rough inspection.  This installment is generally assumed to cover labor costs related to subcontractors and other material costs. 

Final Installment: Unfortunately, the final 1/3 ends up being closer to a half than a third after all the scope increases and overruns have been tallied up, and it generally represents the contractor's profit on the job.  It is due upon the final inspection at the EARLIEST.  If the inspectors give you a pass, but there are still a few odds and ends that need to be wrapped up before the project is complete, then you need to withhold at least a portion of the final payment until these tasks have been performed.  Getting a contractor or plumber or electrician to come back when he or she has already been paid is similar to getting a two year old to sit still and be quiet when she is hungry or, God forbid, tired.  It is very difficult on your best day and nearly impossible every other day.  What ends up happening is either the "punch list" is continually put off until you just accept that the bathroom vent is going to make that noise when you turn on the fan, or you try to finish the job yourself.  Either way, it is your fault because you gave away all your leverage the minute you wrote that last check.

In most cases, your money is your only leverage.  You may not have the time or understanding of the process necessary to manage the project effectively.  The only thing you can do to enforce your will is withhold payment.  You run the risk of having a mechanic's lien[3] attached to your property, but if you have a detailed contract and your contractor has not performed in accordance with its terms and conditions, you need not worry that he is going to go through the trouble of picking a legal battle that he cannot win. 

Put the Best Team on the Field

The bottom line is that, as in any industry, there exist contractors, sub-contractors, electricians, painters and other tradesmen that look to take advantage of their customers.  This is no different than a dentist that insists that you need your fillings redone every other year or a lawyer that exploits your injuries for personal gain.  Contractors have a reputation for not being trustworthy, but millions of people have made their livings as contractors since the dawn of man and it is not unreasonable to assume that the vast majority of them exemplified professionalism, integrity and a commitment to client satisfaction.  You just never hear about them.  Their stories are not interesting at cocktail parties. 

So it is not fair to approach your looming home renovation project with a predetermined understanding that the contractor you are going to hire is going to try to bleed you dry.  Instead, follow the guidelines above and take the contractor's integrity out of the equation.  Do not leave yourself open for the project to be affected by your contractor's potentially questionable ethics.  If you recognize that you are as much responsible for the outcome of the project as is the contractor and then implement the protections discussed herein, you are positioning the project for success.  It all begins with your plan, and it ends with your execution.  If you get lazy and hire the first candidate you meet because some guy at work recommended him, you have just reduced your chances for success.  If you agree to a contract that does not accurately reflect what you believe to be the scope of the project, it might work out, but it will likely result in you paying for things on day 60 that you considered to be included from day one.  Who is to blame for this?  The contractor?  You can rant and rave and bore the daylights out of your neighbors at the block party about how you were ripped off or you can identify the risks ahead of time and control the situation from the get go. 

Questions or comments about this article?  Contact the author - Ryan McDonnell

[1] The term "billed" is used loosely here as contractors are notorious for including nothing more than a number and the term "materials" on a line on their invoice.  The notion of itemizing receipts is sometimes a foreign concept.

[2] For an in-depth analysis of the critical elements to consider prior to undertaking a large scale renovation project, refer to our August newsletter's feature: Expand or Move???  A Homeowners' Dilemma

[3] A mechanics lien is defined as an enforceable claim, permitted by law in most states, securing payment to contractors, subcontractors and suppliers of materials for work performed in constructing or repairing a building. The lien, which attaches to real property, plus buildings and improvements situated on the land, remains in effect until the workmen have been paid in full, or in event of liquidation, gives the contractor Priority of Lien ahead of other creditors.