Question: We have decided to stay in our house, and spend our money fixing it up, rather than starting all over again with a purchase of a new property. We signed a contract with a home improvement contractor, and gave him several thousand dollars up front. That was several weeks ago. Although he did start working for several days, it appears that he has now stopped working and we have not seen him, nor can we reach him. What can we do?

Answer: Recently, the AARP urged its members to be careful when dealing with home improvement contractors. Although the great majority of such contractors are honest and hard-working, there are contractors who engage in fraudulent practices.

The home improvement industry is booming, since there are a lot of homeowners who are making this same decision: stay where you are, but expand or upgrade your home.

What kind of home improvement contract did you sign? Was it the typical one- or two-page contract prepared by the contractor, or did you use a more comprehensive form, which contains a number of consumer protections?

I have given up being surprised at the number of homeowners who sign a simple document with a contractor, and then complain that the contractor did not properly do his or her job. If you want the contractor to do something, it should be spelled out, in writing, in your legal documents. If you want a particular model bathroom cabinet, or a certain style built-in bookshelf, make sure that the specific model number is included in your contract specifications.

Is your contractor licensed as a home improvement contractor in the jurisdiction where your home is located? Ask the contractor for the license number, and confirm with the licensing department in the county or city where your house is located that the contractor is in fact licensed. There have been contractors who represented that they had a license, but in fact did not have one. Also, keep in mind that even though the contractor may be licensed in one jurisdiction, this will not help you if your house is located elsewhere.

If your contractor is licensed, advise him (in writing and by phone if you can reach him) that unless he resumes work immediately, you will file a complaint with the appropriate licensing department. While this may be an idle threat -- since many of the licensing departments in the surrounding jurisdictions are themselves overworked and understaffed -- it may help prod your contractor into coming back to work.

If you do not hear from him in a few days, consider his contract to have been breached and find another contractor to complete the work.

On the other hand, if your contractor is not licensed, you should consider canceling your contract, and obtaining a refund of your initial deposit. Many state laws require unlicensed home improvement contractors to return all of the money they receive from a homeowner -- even if they complete the job and the homeowner is satisfied with the work. This, of course, requires litigation, and depending on the amount of that deposit, you may decide that legal involvement is just not worth the effort.

If you're planning to hire a home improvement contractor, your contract should contain at least the following provisions:

• The contract should identify the beginning date and the approximate ending date of the job. I recommend that a contractor be given a bonus for early completion, but charged a penalty for late completion. Ask the contractor approximately how long the job will take; add two weeks to that time period, and then assess a penalty at the expiration of the second week. Many contractors do not like a penalty clause, and you will have to make a business decision as to whether or not it is to be included in your contract.

• A payment (draw) schedule that has been carefully worked out and agreed upon between you and the contractor. Regardless of whether you or your bank will be making the actual payments, it is recommended that at least 15 percent of the total contract price be withheld until the job is totally completed to your satisfaction. This is known as a "reserve."

• Each draw schedule -- including the final payment -- must be approved by your architect or a building inspector before the payment is made. You do not have to use an architect, but it is recommended that some independent third party who is knowledgeable about construction be required to sign off before any payments are made.

• What warranty will you get from the contractor? Review the terms and limitations, and make sure that the warranty provisions are contained in the contract documents.

• Inquire as to what kind of insurance you and the contractor will need in the event someone is injured on the job. You should contact your own homeowner's insurance company and they should be able to assist you. You can either increase your own insurance on a temporary basis, or insist that the contractor carry adequate insurance for your job, and give you proof of insurance before the job begins. (Incidentally, once your addition is completed, make sure that your homeowner's policy will cover the increased value of your house.)

• The contract should give you the absolute right to terminate the contract if you are dissatisfied with the work. Obviously, you do not have the right to terminate arbitrarily, and the contractor must be given reasonable notice of your intention to terminate so that he or she can attempt to cure any problems you may have. This termination right is boilerplate language in most construction contracts. It should also apply to the situation where the contractor has walked off the job, as it appears he has done in your situation.

• You should consider using the American Institute of Architects form contract, and you can contact the AIA at 1-800-365-2724 to purchase one of their standard forms. The AIA publishes numerous form contracts; AIA document A-107, titled "Abbreviated-Owner Contract Agreement Form for Small Construction Contracts," is probably the most useful contract for most homeowners.

  The AIA form requires that an arbitration process be used instead of legal proceedings in court to resolve any disputes that may arise. While I personally have reservations about arbitration, it is a cheaper and faster route to take than litigation. A lawsuit involves a lot of time, a lot of money, and a lot of stress.

When the contractor has completed the job and is asking for the final payment, insist that the contractor give you a release of all mechanic's liens.

The general contractor -- as well as all of the subcontractors -- should sign a release of liens form. There have been numerous situations where a contractor has been paid in full, but did not pay the subs, and those subs then file mechanic's liens against the homeowner. While the laws in jurisdictions differ, mechanic's liens can be a nuisance -- and potentially an expensive problem for you. You can avoid these problems by having all subcontractors sign the release form -- before the final payment is made.

For more articles by Benny Kass, please press here.

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Copyright 2001 Benny Kass. Posted by Realty Times with permission.

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Published: March 19, 2001

Use of this article without permission is a violation of federal copyright laws.