Home Renovation: 3 Rules for Hiring Contractors

Last Updated May 26, 2010 11:20 AM EDT


A few turbulent years ago, a homeowner in need of a renovation was like a high school kid pining for a prom date. Yeah, you could get a kitchen renovation or a finished basement — if you could get a contractor to pick up the phone. Of course you'd be told what your job would cost (no negotiating) and when the crew might show up (not anytime soon).

Oh, how the tables have turned.

Today, like the end of a Disney movie, you and your spouse are homecoming queen and high school quarterback, and those nail bangers are just praying you’ll ask them to the dance. Wouldn’t payback be sweet?

Hold that thought. You still have to live with the work your contractor does, and humiliating him isn’t a great way to get the results you want. Instead, leverage your newfound economic power to get renovations done better, cheaper, and faster.

Tampa Bay negotiation trainer Robert Levine recently saved about 40 percent from the estimated cost of upgrading his lake house — adding a 600-square-foot deck, wood floors, and new windows.

After telling prospective contractors upfront that he’d discuss the competing bids with them, a price war broke out. Next, Levine divided the jobs into smaller segments, so he could work directly with some of the subcontractors. The result: a total bill of $77,000, versus the $125,000 to $133,000 initial bids. What’s more, Levine got better-quality windows than he expected. And because the contractors had plenty of room in their schedules, he got the work done at his convenience.

To score similar savings, you may need to hurry.

True, contractors’ labor costs are down about 10 percent from their 2007 peak, according to Angie Hicks, founder of the Angie’s List home services directory. But business is picking up. ServiceMagic.com, a site connecting homeowners with home service professionals, says remodeling project requests are up 49 percent from a year ago. And a recent American Express survey said 72 percent of affluent homeowners planned to make home improvements in 2010.

Don’t make the bubble-era mistake of thinking that a renovation is an investment that will provide a big payoff when you sell the house. There’s no guarantee it will. You should only redo your kitchen because you want a new kitchen, not because you think some future buyer will pay lots more for your Sub-Zeroed, Viking-ranged house.

That said, it’s worth keeping in mind which types of home renovations are most likely to pay off: new floors; cosmetic changes in kitchens; minor bathroom remodels; new closets and energy upgrades. Uncle Sam will lend a hand on that last one: You can claim federal energy tax credits of up to 30 percent of the cost of certain home improvements, up to $1,500, if they’re completed by December 31, 2010.

To save on a home improvement project, follow these rules for hiring a contractor:

1. Flash Your Cash

With credit tight these days, cash truly is king. So if you’ve got money in hand for your project, contractors will be willing to give on price. They know they won’t have to wait for your loan approval, so they’ll get paid faster.

You can likely trim 5 to 10 percent just by announcing you have the money and want the contractor to start immediately. (For small jobs, pay in installments as the job is completed. For major projects, deposit the money in an escrow account that the contractor can access as key milestones are achieved. )

For a high-end project, ask for higher quality materials or free extras. Your contractor might agree to a no-cost upgrade from oak cabinets to birch, for example. Or you could insist on not being charged extra if you’re having the entire interior painted and want faux finish in one room. If you’re having a dining room wallpapered, you might ask the contractor to do the foyer at no additional cost.

For a low-end, low-ego project calling for off-the-shelf fixtures and finishes, drive down the cost of labor and materials. For example, you should be able to negotiate 10 percent off a straightforward job such as transforming a basement into livable space.

Regardless of the scope of the project, if you’re paying in cash, press for a guaranteed finish date with financial penalties for overtime. Push to have especially disruptive phases of the job — such as the days when the water will be turned off — to occur on your timetable. This is an especially prime area for negotiation if you want a particular contractor but hesitate to press too hard on price for fear of losing him.

2. Make the Competition Fair but Stiff

Before putting the project out for bid, nail down your specific requests so the offers you get will be apples to apples. Get model numbers of your preferred appliances; brand names and shades of paint; and exact measurements of your rooms.

Consider requiring your job be broken into phases, with stand-alone bids for each. Specify that you reserve the final signoff on material prices before the contractor buys any building products. This will give you flexibility in negotiating each component and let you see how the materials and labor costs compare for each segment. Then you can leave the door open for a last-minute price adjustment.

You can renegotiate as you go along or even call back another contractor later if your original contractor disappoints. Since material costs have been dropping, if a later phase of your project calls for a big order, you might be able to renegotiate at a lower cost.

Get at least five bids, since contractors are more prone to bid than a few years back. Chances are you’ll have at least one outlier, most likely one who’s extremely low. Eliminate that one, since it’s likely based on faulty or deceptive assumptions.

Be realistic about what your job will really cost. The ServiceMagic.com survey found that, in the past year, most homeowners having renovations done underestimated the cost by 20 to 49 percent.

To weed out your finalists:

  • Speak to customers from projects they completed in the last year (i.e., post-bubble) whose budgets and projects were like yours.
  • Confirm that the contractor has at least several years of renovation experience. With new-home construction in the doldrums, many home builders are turning to renovation. But working on an existing home, with its welter of add-ons and changes, requires different skills than building from scratch.
  • Check local court records for liens and lawsuits against your prospective contractors and the subcontractors they’ll be using. A spate of filings means a company is probably having cash flow problems. You can check municipal, district, and circuit court records, including pending complaints and lawsuits, by searching for the courts for your county or state.
  • Be sure the contractors’ licenses, bonding and other paperwork are current and paid. You can find out by going to the Web sites of your state and municipal licensing boards.

3. Don’t Be Rude

Yes, you have the upper hand now with contractors. But use it for a high five, not a slapdown.

After all, you want a good working relationship — you’ll be living in the house long after the contractor is gone. Nasty, relentless dickering over price can result in cut corners and shaved quality, says Holly Schroth, who teaches executive negotiations at the Haas School of Business of University of California-Berkeley.

Schroth also speaks from personal experience. A year ago, she completed a major home renovation. She figured her project was the start of a long-term relationship, and negotiated accordingly, pushing for an earlier completion date rather than a rock-bottom price. Her strategy is paying off. When Schroth had to replace her microwave recently, her contractor dropped by and installed it for free. “Figure out what the best deal means to you,” says Schroth. “It doesn’t mean that you necessarily get the lowest price.”

During your friendly, but business-like, negotiation, offer a range of deal points instead of one hard line for the project’s overall cost. “You have to leave room for them to save face,” says Schroth.

Then, Schroth suggests, if the contractor you prefer wants to charge more than another worthy candidate, say: “Somebody else I like is offering a better price, but I’d rather have you.” Flattery just might get you your dream home.

More on MoneyWatch:

  • Joanne Cleaver

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