We were inspired to write this blog with a real case, where the Client became suspicious of the quality of the work performed and the length of the time frame, so they asked us for a second opinion. Eventually we stepped in on the project and realized that kitchen cabinets weren’t even ordered, even though they were paid for 4 months ago.
This is not the first time we have helped our Clients to deal with the consequences of a contractor that failed to comply with their agreement. Here is the inside story on why this is happening and how to prevent it from happening to you.
While unreliable contractors can cause a lot of loss and serious reputation damages for the industry, in most cases there is no intent to cause trouble to the Client.
I would group contractors at fault in 3 categories: Risk Management Failures, Technical Failures, and Financial Failures.
Risk Management Failures
This is the least dangerous out of our 3 categories. In the best interest of both Client and contractor, risks must be calculated and included in the estimate. This helps to make sure there is a fair budget set aside for taking care of unexpected problems like: materials being out of stock, so the contractor needs to find a more expensive way to get materials and keep the schedule; availability of people or subcontractors when the contractor pushed for more expensive labor than was planned; unexpected technical issues when the contractor has to spend more time or materials to keep the promised level of quality; etc.
The longer the project, the more trades involved, the less experience the contractor has for a specific type of job, the more risks. It is necessary to make sure that these risks are budgeted for to help make the project go smoothly, without delays or reduction in quality.
This happens when the contractor signs the job with lack of knowledge about it or doesn’t spend enough resources to supervise workers. As a result, the job is done with serious mistakes at rough stages which can affect the intent of the project to the point that it is not acceptable for the Client, and can even result in more serious issues, such as failure to pass city inspection. Correction is always more expensive than to do it right initially; that’s when the contractor faces the hard decision to lose money and redo the work. Most unreliable and unlicensed contractors will start to cut corners and use cheaper labor, even if they realize the loss is too big for them, which could result in them abandoning the job.
The contractor that falls into this category is most likely to attract you with the price. Some residential contractors are trying to get projects just to stay busy, planning for minimum or zero profit. The danger of this is that general contracting has high risk operations and people do make mistakes from time to time. Signing a few zero-profit projects in a row is financial mismanagement, as a company can’t function without profit. The contractor may start to cover lack of profit, damaging the cash flow, and finding themselves in the situation of “financial pyramid”- when the deposit from a new project is required to finish the current work. This is hard to identify because this can be a contractor with good reviews, a professional team, good history and job portfolio and several ongoing jobs, but if there will be no new job signed while your project is ongoing, you’ll face serious schedule problems in the end of the project and potential default of the contractor.
Now let’s talk about how to protect yourself and significantly reduce the chance of having problems during upgrading your home. The first general rule is to always hire a licensed contractor and have a written agreement with the scope of work, contract amount, and time frame for your project, as well terms for termination of the agreement.
Avoiding Risk Failures
Ask your potential contractor to show how much is allocated for unforeseen conditions in the estimate and try to talk about what risks the contractor can think of. That is how you will push your potential contractor to do a simple risk assessment, even if it’s not a standard practice for them to do so.
Avoiding Technical Failures
This is extremely hard to spot not being a construction professional, but you can ask about warranties and protect your project by asking to follow building permits and inspections practices and regulations. Getting a city permit can put some technical limitations on you project, but the city inspector will help prevent expensive mistakes made by the contractor and make sure the job is done right.
Avoiding Financial Failures
Make sure the contract has a fair performance payment schedule and follow it. If the contractor uses subcontractors or orders custom materials, for instance kitchen cabinets, don’t be afraid to ask them to show the receipt –from transferring the deposit to start manufacturing — or other confirmation that the contractor placed the order in a timely manner. It’s not common practice to ask for the whole amount of the agreements with subs, and you don’t need it. Confirmation of transferring the deposit timely is all you need to make sure your deposit and progress payments goes toward your project, not financing another.
Maintaining the quality of work and taking care of the items described in this blog requires resources. That’s why trying to save money by hiring a less expensive contractor could lead to much bigger losses, stress, and dissatisfaction with the renovation you paid for.
We hope that this information will help you avoid mistakes and that your project will go smoothly with the quality and budget you expect.