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Of The Utmost Importance!
I feel this page is the most important because ignoring this aspect of building can lead to a disaster! There is a risk to everything, but we have to do what we can to minimize it. Many people, including contractors, have lost everything by not taking the precautions mentioned on this page. Some were not able to recover in their working lifetime. Don't let it happen to you!
Be sure all contractors and sub-contractors are properly licensed, bonded and insured!
Insurance
Types of insurance required;
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Homeowners policy. |
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Fire insurance. |
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Liability insurance. |
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Property insurance. |
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Theft insurance. |
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Builders risk insurance. |
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Workers compensation if you will have employees, and possibly unemployment insurance. |
Different insurers will have different titles or cover different items under a particular title. Some will provide duplicate coverage. Check with your agent for the coverage you may need.
Be sure you, your subcontractors and everyone else involved in your project is adequately insured! Ultimately you, the property owner, could be found liable for any injury or loss that may occur. It is imperative that you receive proof of insurance from all subcontractors. This includes liability and workers compensation insurance. This will vary from state to state, so check with your state agency, usually the Department of Labor. You should also have a blanket insurance policy to cover anything that slips through the cracks. Contact your insurance agent for available options. A consultation with your lawyer would be an hour or so well spent.
Consider these possible scenarios:
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The rough framing is almost finished when lightning strikes and burns your new home to the ground. The bank where you got your construction loan had not yet inspected the property and will not release the money due the contractors until it is rebuilt. Whose insurance, if any, covers the loss? |
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A load of lumber has just been delivered to the site and signed for. Over the weekend it disappears. Who pays for a new load of lumber? |
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An employee of the plumbing contractor you hired breaks his arm through his own negligence. The plumber does not have workers compensation insurance. Who pays the employees expenses and salary for time lost on the job? |
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A salesman claims whiplash from a fall he took on your construction site while trying to sell you siding. Are you covered? |
| Kids love to play on construction sites and sometimes get hurt. Are you protected from liability? |
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Somehow a pipe was damaged and water damage is extensive. No one takes responsibility. Will your insurance pay? |
Lien Waivers
A contractor, sub-contractor or material supplier has the right to place a lien on your property if they do not get paid for labor or material.
A lien waiver is a release signed by contractors and suppliers stating that they have been paid for all labor and material that they have supplied on your project. By signing, they relinquish all rights to place a mechanics lien on your property.
You must get waivers of lien from all contractors and suppliers before you pay them! Asking for a lien waiver after you have already paid the subcontractor defeats the purpose. He has no incentive to give it to you, and if he is dishonest, it is too late anyway because he has your money! Insist on a waiver before you write the check, including partial or progress payments.
Consider these possible scenarios:
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You have paid the carpenter for the rough framing of your home and got a lien waiver from him. Two weeks later you find out that the carpenter did not pay the window supplier for the windows he installed in your home. Now the window supplier wants his money or he will take his windows back. You can prove you paid the carpenter, but this is of no consequence. In most states the supplier still owns the windows and you will have to pay for them again and try to get your money back from the carpenter. |
This can sometimes pose a problem. If the carpenter contractor above says he cannot pay for the windows until you pay him, and says if you refuse he will have to stop the project, do not just pay him and hope he will pay for the windows! He may be honest but this is a big gamble on your part. Nor do you have to stop the project until you find another carpenter.
Simply arrange to meet with and pay both parties at the same time, getting waivers from both parties. This takes a little more effort on your part, but is well worth it. Also, there is no advantage to putting a financial strain on your contractor. That can be very counterproductive and possibly disastrous. After all, you hired him for his carpentry skills, not his business acumen.
Be sure you have satisfied the carpenter's contract by paying part of the money due him in the terms of the contract, to the window supplier!
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The concrete contractor has mechanical problems with his equipment. He hires an excavator to do some grading that is part of the concrete contract. You must get a waiver of lien from both the concrete contractor and the excavator before you pay the concrete contractor for his work, or risk paying extra for the excavator's service. |
Be cautious of design/build firms. They typically have no employees, but use sub-contractors to do their work. They would like you to believe that the trades people on your project are their employees, so that you will not ask for separate insurance certificates or lien waivers. They may then provide you with paperwork on their own company, which does not cover the subs, and demand progress payments as per their contract. The subs will still be entitled to their money and may collect from you if they do not get paid from the company you have already paid!
Do not fall for the story that lien waivers will be provided at the end of the project! You must get them before you make any payments. These firms may not like it, but should not be surprised by your demand. This is a standard practice in the construction industry.
Only a very small good faith deposit is acceptable up front, perhaps as much as 1 percent. If more is required, set up an escrow account at your bank instead of just writing the check and hoping for the best. It is a bit inconvenient, but will allow you to sleep nights.
Some clues as to who to get waivers from are:
| Any subcontractor you see on your project, (They will often have their own name on their vehicle), whether you, the contractor, the supplier or another subcontractor hired them. If they say they are employees of the contractor, verify that information by asking to see a pay stub. |
| Another is any delivery truck delivering material whether you or a subcontractor ordered it. Plumbers and electricians typically carry some of their supplies with them. Since the person that sold the supplies to these subs has no way of knowing where the supplies were installed, they would have a hard time finding you if something should go wrong. It's the delivery vehicles that know where their products were installed that you need to be concerned about. |
