Recently, I was reading some old business journals and came across this article detailing How to Choose a General Contractor or Developer. In addition to competitive pricing, the JBJ extols the virtues of vetting the licensing, qualifications, references and workforce of your contractor. Using this article, past experience and client interviews as inspiration, we have created a list of 10 things to consider when selecting a General Contractor.
1. Vet licensing
Local building departments or local building contractors’ associations will be able to tell you if a contractor is properly licensed to work on your project. The Florida Department of Business and Professional Regulation maintains a database of what contractors are licensed for what scope on the state level. You can check a contractor’s license here. The following categories require registration or certification: general; building; residential; sheet metal; roofing; air-conditioning; mechanical; swimming pool/spa; plumbing; underground utility and excavation; solar; and pollutant storage. Cabinets, countertops, flooring, paint, wallpaper and window treatments are examples of work that do not require state licensure.
A licensed and bonded contractor is a contractor that is working within the laws of the State of Florida to be a responsible and reputable business. Florida licensed contractors are required to be insured and bonded, which ensures that you are protected should an accident occur or the contractor fails to perform its contract. With a licensed contractor, you are getting the security of knowing Liability Insurance, Workers’ Compensation, and a means of accountability are included. Waiting until a structure collapses on a worker is the wrong time to check that your contractor has insurance and is licensed. By choosing a general contractor licensed by the State of Florida, you have adequate assurance that the contractor working on your building is legitimate, abides by the law, and adheres to the system in place to track any complaints against them. All too often, unlicensed contractors perform work that, at best, needs revisiting at some point down the road. At worst, the project completely fails and needs an overhaul. With licensed contractors, you drastically increase your chances that the work you have performed will be performed by a business that will take requisite steps to resolve any issues that arise within the scope of your construction contract. When you are vetting licensing, don’t stop with the general contractor; check whether the subcontractors they use hold the proper licenses as well.
2. Ask about their experience
When you are interviewing potential contractors, be sure to ask for questions that allow you to understand their experience. Ask for references, both from past clients and colleagues. Once you are furnished with at least five references, follow up with them. Ask those references about the performance history and abilities of the contractor. Ask if they are repeat customers. Ask if the contractor belongs to any professional associations, the Chamber of Commerce, Better Business Bureau or any statewide organizations related to the construction industry. Find out what that contractor does to stay abreast of construction industry continuing education and how their firm is devoted to refining their craft. The answers you get to these questions will signal just how committed this contractor is to quality.
Ask how long the contractor has been in business and what kind of experience they have with projects similar to yours in size and scope. For example, is their specific experience in commercial buildings, hospitals, schools, industrial, residential, etc…?
Ask how many contractor driven change orders per job they typically produce. Do they have a reputation for paying their subcontractors and suppliers fully and on time? Do they have a reputation for completing projects on time and within budget? Ask how many projects they have administered that have gone awry and resulted in liens or lawsuits. Ask what they have done to mitigate those problems and what assurances they intend on making to you about how administrative and legal issues will be dealt with.
Make sure to ask if the contractor has done business under another name or in another locale. These days many contractors are simply starting new firms to avoid liabilities associated with previous companies. Ask about the composition of their staff. According to Maurice Rudolph of Auld & White Constructors, this is the most important question to ask a potential contractor. “We encourage our customers to review our business profile and analyze the longevity of our staff with our company. We feel this is the biggest reason why we are a firm with a longstanding reputation for quality,” Rudolph said. “We earn business because of our top to bottom depth, led by our Site Superintendants and Assistant Superintendants.”
As you are performing your due diligence, you are looking for an answer to the question of whether you can trust this contractor. What better way to gage trust than by evaluating their references and ascertaining whether their project was completed on time, if the project was within budget and how professional the general contractor was.
3. Ensure the contractor is insured for accidents and bonded for non-payment and non-performance
The contractor you use should carry adequate builders’ risk, liability, vehicle and workers’ compensation insurance. If your contractor does not carry proper insurance, you could be left with the responsibility of paying for damaged property or someone’s injuries even if the loss was caused by the contractor’s negligence. The minimum amounts required for general liability insurance are: $300,000 for bodily injury and $50,000 for property damage for general and building contractors and $100,000 for bodily injury and $25,000 property damage for all other categories. Keep in mind that you can bargain for more than the minimums as part of your prime contract.
Requiring the contractor to establish and maintain a performance and/or payment bond will ensure that you do not get caught in a position where you have to pay for materials twice, hire a lawyer to discharge liens or get caught without private recourse if the contractor files for bankruptcy or winds down. Builder’s risk insurance and other insurances policies to not cover these problems. Florida payment and performance bonds will help protect you from general contractor’s mistakes or misdeeds and should be a required element of your construction contract. If a Florida general contractor has to obtain a bond from a surety company, the surety company will perform extensive due diligence on the solvency and professional viability of the general contractor. Sureties are not in the business of losing money on bad risks, so they typically require the general contractor to furnish personal financial information, financial information for the business, the contractor’s work history of performance and payment, and evidence of the contractor’s quality of workmanship. They do this so that they do not assume ultimate liability for a general contractor failing to pay a subcontractor or performing defective work. Thus, requiring bonding is a great way to gain assurance of the contractor’s financial solvency and ability to resolve construction related performance or payment issues.
A considerable downside of bonding is that the cost for the premium for the bond will be cost that will be assumed by the owner. Ergo, payment and performance bonds might not be appropriate for you if you have a smaller construction project and the bond premium is not worth the risk to proceed without bonding. Before the premium cost changes your mind, consider the costs if something goes wrong with the construction.
If a general contractor balks at a payment or performance bond, then you should consider other options. Experience has taught me that a general contractor that will not work with a surety bond in place is either unable to obtain a bond because of his or her past performance, unable to meet solvency requirements, or is unwilling to do the paperwork required to obtain the bond.
4. Establish the timeline and hold them to it
Establish your timeline in your soliciting bids (and then in your contract documents) and ensure your contractor is able to meet it. Changes to the timeline after commencement must be mutually agreed upon. Construction jobs not completed by the agreed completion date and without written approval for an extension should result in a monthly charge to the general contractor of not more than 1.5% of the construction contract per industry standards. There are many reasons for adhering to a strict timeline, with the primary reason being your bottom line dollars.
5. Review their list of subcontractors
Though it is probably an overkill to perform your due diligence on the subcontractors to the level you perform on your general contractor, it is very important to vet the subs. Do they have the same reputation for quality that your contractor candidates do? Typically, subcontractors are the “little guy,” so it is important to sure that they are apt and viable. Fundamentally, all subcontractor companies must be incorporated in the State of Florida and follow formal corporate formalities. They must also be able to produce Certificates of Insurance showing minimum CGL and Workers Compensation Insurance coverage. Additionally, you may consider requesting copies of their W-9’s providing their FEIN and proofs of a current occupational trade license and/or current state trade license.
Receive an assurance from your general contractor that they will be working under a written subcontract agreement outlining contract price, payment procedures, retainage (if applicable) to be withheld and detailed scope of work prior to start of work. Discern how the subcontractor will invoice and what their pay schedule will be. Ensure that payment protocols are in place to make invoicing subject to the site superintendent’s approval of work completed and quality of work. Ensure that the subcontractors are required to provide and/or sign an original partial or final release of lien as per Florida Statues prior to disbursement of payment. Ensure that the subcontractors also provide original releases for any associates material suppliers or other third tier subcontractors. Lastly, it is probably important to require that the subcontractors sign a statement indicating that subcontractor is in full compliance with INS and ICE procedures.
6. Safety-What are their programs and what is their Experience Modification Rate?
Ask to review each Contractor’s safety plan. Each contractor should have developed and implemented a safety and health program that addresses the hazard(s) to which its employees or subcontractors are or will be exposed on projects like yours. Charge your contractors with the responsibility of conducting its operations in a manner that will provide safe working conditions for everyone involved with the project. Does the contractor intend on performing job specific training for their employees regarding safety policies for the project? A good contractor will offer you the opportunity to review their past customer-specific safety videos, training sessions, comprehensive Contractor Safety Manual reviews and sign-offs, and emergency procedures.
All contractor candidates should have an Experience Modification Rate (EMR). Used in several industries, EMR compares the contractor’s workers’ compensation claims experience to other employers of similar size operating in the same type of business. Most contactors who have an annual premium in excess of $3,000 will receive an EMR. EMRs are calculated by the National Council on Compensation Insurance
(NCCI) or in some states an independent agency. While the formula may appear complex, it compares specific payrolls and losses to the industry average losses for like business of similar size. An EMR below 1.0 suggests that the contractor’s loss history is acceptable, while a number larger than 1.0 is a sign that there has been a significant loss claim in the recent past.
7. Accurate bid estimating
Effective project estimation is one of the most challenging and important activities in the construction industry. Proper project planning and control is not possible without a sound and reliable estimate. Underestimating a project leads to understaffing it, misevaluating the quality assurance effort and mischeduling. Good contractors strike a balance in providing a project with adequate resources, well managed scopes and experienced analysis of costs associated with project timelines. Project estimation is one of the aspects of business that requires a strong degree of consideration, because the succeeding phases of the project are dependent on the accuracy, efficiency and costs of the process.
The key to interpreting and comparing estimates is being able to compare apples to apples. The best estimates explain every detail about the job on a line-by-line basis, including specific costs and scope. The estimate should sort of resemble the contract as much as possible. Of course, the bigger the job, the more elaborate the estimate should be. The more details it contains, the better for all parties involved. Remember, most disputes genesize over scope, so both parties should go to great lengths to agree upon scope in the estimation phase.
In addition to product and materials cost information, cost items on the estimate should also include labor, work by subcontractors (have this detailed), and as well as a breakdown of general conditions (i.e. the cost of such items as building permits, debris removal, and cleanup when the job is completed). The estimate should also specify how the contractor expects to be paid and the timetable for completion.
Inquire whether the contractor provides fixed price estimates. Fixed-price estimates and contracts, as their name implies, require that contractors estimate up front what project activities will cost. For firm fixed-price contracts, once a contract is in place the contractor is responsible for any cost-overruns. Other forms of fixed-price contracts allow variances or change orders if conditions are significantly different from what the original statement of work described. Fixed-price contracts are effective when the scope of work is well-defined and estimated. Fixed-price contracts shift at least some of the uncertainty associated with a project to the contractor and encourage efficiency in contractor work since the level of profit realized depends on a contractor’s ability to control costs and administer the project efficiently.
In this economy, there are numerous contractors who will be willing to strike a prudent deal with you. Even when you found a contractor offering services for a reasonable amount, don’t be reluctant to disclose that you are entertaining other bidders. Competitive bidding encourages them to provide you with the best package they can offer. Take bids from at list three licensed contractors. Be sure that the estimate includes all work to be done by the contractor, the materials involved, the project schedule and the total cost. Try to avoid a General Contractor who is using high pressure sales tactics, requiring significant down payments or refusing to provide written quotes before the project begins. Warren Buffett said “Price is what you pay. Value is what you get.” Remember, they are frequently directly proportional.
9. Meet the contractor. Look them in the eye. Make sure you can work with them.
Inevitably, your construction project will be fraught with noise, inconveniences, scheduling delays, subcontractor performance issues, financing, unprojected costs and various other problems that must be dealt with along the way. These inconveniences are seemingly unavoidable. How your contractor deals with these inconveniences depends upon the relationship your contractor creates with you from the beginning. Good contractors will communicate well, manage your expectations, speak to you candidly, work to save you money (so long as you are working to ensure they are meeting their profit margin), be accommodating in scheduling and listen to your feedback and inputs. In turn, all you have to do is pay your bills and stay out of their way so that they can do their job. If you cannot find a contractor who will meet these requirements if you promise to meet yours, then you need to keep looking. Life is so much easier if you can work well with those who are working for you. A savvy general contractor also will size you up as a potential client. If you have been a pest in the past or caused payment problems, you can bet that you will have a hard time procuring the top-rated GC’s.
10. Engage an attorney to review contract
In any construction transaction, project owners, contractors and other construction professionals need to manage their risk, protect against future disputes and ensure that payment and performance are regulated. The proper drafting and negotiation of construction contracts are crucial and an experienced construction law attorney can assist owners and other parties through this process.
Under Florida law there are certain items (e.g. contractor license number, §713.015 lien notice language, §489.1425 construction recovery fund notice language, § 501.031 right to cancel language, 558.005 opportunity to repair language) that contractors are required to put in most every construction contract. Failure to comply with these requirements can result in substantial administrative fines for the contractor. Of course, all Florida contracts also have to comply with Federal law – the 3-day right to cancel (12 C.F.R. 226.15 ), Federal Truth in Lending (15 U.S.C. 1601) and insulation disclosures (16 C.F.R. 460).
I could write 50 pages of materials on essential terms and analysis of construction contracts, but fundamentally I encourage you to engage an attorney to read your contract very carefully, including key terms and warranty information on any products used to strengthen your home or building. All building contracts should include certain basic things, including: (1) price and parties; (2) payment terms; (3) scope of work; (4) terms of performance; (5) insurance and bonds; (6) indemnification; (7) warranties; (8) lien rights; (9) change orders; (10) project schedule; (11) regulatory compliance; and (12) termination.