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Would a bank lend you hundreds of thousands of dollars with nothing to secure the loan without a credit check? Probably not. If you knew of a bank or mortgage company that did that, you’d be more than surprised, wouldn’t you? But did you know that literally thousands of homeowners every year give hundreds of thousands of dollars to people that they barely even know? And they do it without any real knowledge of the company, the people in it, or what those people actually plan to do with the money once they get it.
Did you know that over 90% of contractors in the home improvement and remodeling industry have no formal financial accounting system? They run their business right out of a checkbook, or, in some cases, their wallet. These contractors have no way of separating the money you give them for your project from the money they get from all their other clients. They just mix your dollars with everyone else’s.
This is a bad thing for you, and here’s why. If any other client fails to pay, or the contractor makes a mistake that runs up the cost, the money you paid for your project goes to pay the contractor for work on the other guy’s home, and when it comes time for your project to get that same money, it may just not be there. You paid, but now the contractor doesn’t have the money to do your job.
We conducted a survey in 2002 in which we called remodeling contractors from ads in the yellow pages. We were stunned to find that over 50% of those called were out of business. That’s 50% attrition, in less than 2 years. Industry reports show that the majority of new remodeling companies are out of business in the first 3 to 5 years. A more detailed analysis of these companies’ records shows that many of them were actually profitable, but their internal accounting systems were so inadequate that they couldn’t even tell they were making money.
When your contractor, with poor or no cost accounting systems in place, has cash flow problems, it happens in the middle of not just your job but all of his jobs. When this happens it can bring the whole construction operation to a halt. When it happens many homeowners are never able to recoup their losses.
Still other homeowners struggle to work with any builder just to get their house back to a semblance of finished construction. Most in this situation never achieve the vision they had for their home remodeling project. According to surveys, as many as 50% of all remodeling contracts are closed without the contracted work being completed, and the final payment is withheld by the homeowner for non-performance.
Save yourself the hassles and head- aches of having your contractor close up shop and disappear in the night. Insist on these four critical “Must-Haves.”
The contractor must have working “job cost” systems. These systems should integrate estimating, scheduling, job costs, and the financials of all projects until completed. Whatever system the contractor uses, he should know, hour by hour where your money is and how your job is doing with respect to meeting the estimate and projected job completion promises.
One of the major dangers in contracting is that cash flow is unpredictable. In manufacturing you can pretty much predict costs based on a recurring process with mostly controllable material and overhead costs. However, in the construction business, we are not making widgets. Especially in remodeling, although the process remains pretty much the same for each project, the job parameters, specifications, materials, jobsite, the actual contract details and schedules are unique every time. Project estimates compete with the reality of the job and can be hard to predict. And, yes, even “reputable, hard working, diligent builders” can make mistakes on occasion. A strong relationship with the banker, who understands the cash flow of our business and knows the effectiveness of the contractor’s internal accounting systems, is a must. Cash reserves and appropriate lines of available credit are essential to meet the challenges that cash flow fluctuations present. If your contractor can’t maintain these cushions against the unpredictable, you will need to worry about your investment. If this happens to your contractor, and he doesn’t have the necessary reserves and credit, you will be asked to make payments not due or deserved, just to keep your job from dying before it’s completed.
The Maryland Home Improvement Commission only requires $100,000 worth of liability and worker’s compensation. In addition, this minimum coverage is required only if your builder has more than two direct employees. This does not include the employees of any of the sub-contractors on your job. You’ll have to decide for yourself if that’s enough. Imagine this: Your project is well underway, and there are several tens of thousands of dollars worth of materials stored on-site. One night there is a big storm, and a tree is blown over. The addition, in which those materials are being stored, receives heavy damage, and the materials are damaged and no longer usable. What happens now? These items would not be covered by your homeowner’s insurance or by the contractor’s required insurance. Someone would have to pay for replacement out of pocket. What do you think the chances are of getting your low-cost contractor to pay? We recommend a minimum of $3,000,000 general liability, full workman’s comp even on our subs (or anyone who shows up on the job), plus builder’s risk insurance which covers materials on site but not yet installed. Without this level of insurance, your project might well be in jeopardy.
When things go wrong an in-place emergency response system is critical. Picture this in your mind’s eye: Your project, adding dormers and windows on the third floor of your house, is well under way. An unexpected storm hits, and the blue tarps that have been draped over the exposed rafters, where your new dormer is being constructed, fill with wind and balloon out filling with thousands of gallons of water. It’s past midnight, and it looks like the situation is getting worse by the minute. OK, now, what do you do? Does your contractor have an emergency paging system that notifies your Lead Carpenter and Project Expeditor with the push of a button? If they do, your message is received, and help is on the way in minutes. This very case was handled by Hopkins & Porter in the normal course of business. A portable pump was installed to drain the ballooned tarp, and the crew that responded re-secured the tarp. Everything was “battened down” again without one drop of water hitting the attic floor all before 2:00 am. Make sure you ask about systems that are in place to handle emergencies. Without an emergency response system in place, you’re relying more on luck and good will than on planning, training, and dedication. You can plan for the unexpected.
Remodeling is complicated. There are so many variables that it is inevitable that something will go wrong. Here’s what to look for to ensure that the company you’re working with is worth your trust and confidence.
RESPONSIVENESS: Does someone answer the phone, do you get to talk with a real person, or are you shuffled around by a computer answering system? If you do leave a message, is your call returned promptly? Does the contractor give you one point of contact as discussions begin, or do you end up having to explain the whole project to a different person every time you call? When you ask for information, is it promised within a reasonable time, and is it delivered when promised?
RELATIONSHIP: Is the contractor more interested in winning awards, or does he listen to what it is you want and need in your project? Does the contractor have long term relationships with past clients or do the past clients go back to “bidding” on their next project? How many of the contractor’s projects are second or third projects with repeat clients? How many of the new clients are referrals from satisfied homeowners? What kind of on-going training does the contractor provide for his crew and staff? How long does the staff and crew stay with the contractor? What kind of ‘mistake’ resolution procedure does the contractor have in place? Yes, even the most experienced contractors make mistakes, and because remodeling is a complicated process things sometimes go wrong. What does the contractor do to protect the rest of your property? How does he deal with dust, noise, trees, and disturbance to neighbors? How is trash collected and removed from the site? Ask to see written procedures and manuals that detail for the contractors crew and their sub-contractors as well just what is expected and demanded of them during the building process.
FIXED PRICE: The majority of contracts should have a fixed price. What that means simply is that your project cost is set and agreed to by you and the contractor. The only way the cost of your project should increase is if additional work is desired and approved by you.
Occasionally the scale or scope of a project warrants that it is wiser to proceed with what is known as a cost-plus contract. In this type of contract, you come to an agreement on how much of a mark-up you’ll pay on materials and what you’ll agree to pay for labor. The contractor keeps track of all these things throughout the project and presents an invoice for time and materials used to complete the project or the portion of the project completed to date. These types of contract should be rare and are useful where the scope of the project can not be determined before the project starts. Some historical renovations are like this, where you can’t tell what’s needed until you start to pull apart the old building and determine what, how much, and to what extent the existing structure can be saved and reused.
Can the contractor’s workload and schedule allow him to meet your desired start and completion dates? Experience teaches that every project follows the same steps, and to be successful the contractor must be able to define those steps and have a system that facilitates the completion of each step and each phase of the job (small or large) in order for the project to meet its goals. Many contractors, running both experienced and newly formed companies, will fall prey to overbooking their schedule at times when contractors are in demand. In many cases, without a system of on-going evaluation and production analysis, this will lead to both cash flow issues and an inability to meet promised completion dates.
TIMETABLE: Based on the existing workload, is your timetable feasible? The contractor should be able to clearly tell you what their current job schedule is and where your project would fit and when it would likely finish. Honesty about how much time is necessary for the design and selection phase is critical to developing a long term relationship. Is your timeline realistic? The design team must be communicating directly with the construction schedule as part of the feasibility study, so that you can begin to prepare for the project and the changes that it will have on your home life.
COMMUNICATION: Can you get your questions answered, how long does it take, and are the answers good answers? Is your contractor there when you need him? Even with today’s high tech communications systems, once you have signed a contract, will it become difficult to communicate? Will your concerns and problems be addressed and handled quickly, efficiently, and respectfully? Does the field project crew have direct communication with the home office support team? Can the field crew communicate design detail by hard copy documentation? Can work order and change order documentation be delivered to the site electronically so that no work delays are caused by a hold up in communication?
Many builders have been building for generations. If it wasn’t handed down from a family member, they learned it on the job and believe they know everything they need to know about construction. And that may be true for them, but the following are a list of systems we think you need to make your project a success. Yes, experience counts, but even after 27 years in business, we know that every job also needs a step-by-step checklist before acceptance by the production team and start up.
PRODUCTION SYSTEM: Our production team uses the latest computerized scheduling and job tracking systems. See our website under “Working with H & P” for a broader insight into important production steps.
LEAD CARPENTER: Are the carpenters certified? For years we have been using and refining the Lead Carpenter system of job management. One man is responsible for your entire job, and he is your main contact during construction, instead of the “crew” method where people come and go, and management tries to guess who will be working the best together next Wednesday when element X of the schedule has to be performed. In the Lead Carpenter system, the Lead Carpenter is there overseeing all phases of the job and is essentially a Superintendent with a tool belt on. This one line of communication is also one line of accountability. Lead Carpenters keep daily logs. They know your concerns and take pride in the finished product and will be there supervising or constructing every stage from beginning to the final punch list item. One of our long term employees was instrumental in developing the National Association Lead Carpenter Certification Program, which we now require all of our Lead Carpenters to go through and to pass successfully after a certain number of apprenticeship years. This is a comprehensive matrix type test that takes at least 6 months of study and a full day of testing.
Ah, the workers have left, and now you can relax and have the house to yourself to enjoy. But wait, not so fast...what happens if something goes wrong after your contractor has left?
WARRANTY: Only 50% of remodeling contracts are completed to the owner’s satisfaction and final payment released. Many contractors are satisfied that 90% of their responsibilities are complete and disappear on to the next source of revenue. Even though warranty is required under Maryland Home Improvement Commission law, that doesn’t mean much when you need to get something done. H&P takes a different approach. We follow an active warranty program where at 3 and 9 months we ask our clients to develop a list of any items they are concerned about, and we come out with a checklist of items we are looking for that might need attention. We develop a list of any items that either need attention or the owner wishes to have repaired, we schedule them through our Handyman division and have them taken care of straight away. At 9 months the same process takes place. By the 12th month, if there are any major problems, we know of them, but generally you will just receive a letter with helpful tips on how to take care of your project in the future.
HOMEOWNER’S MANUAL: At substantial completion, our clients receive a binder with all important warranty information, mechanic contact numbers (names and numbers of those subcontractors that worked on your job), finish selections, model numbers, colors, etc. This gives the homeowner one source for the future to find out anything pertaining to this job if it becomes necessary.
FINAL WALK THROUGH: When your job is substantially complete and after the Lead Carpenter has resolved all the items he has found on his list, a final walk-through is done, and any items that need attention will be placed on a final completion list. Final construction payment will not be made until all the items on this list are completed to your satisfaction.