"Get it in Writing!" is a Registered Trademark of the Canadian Home Builders' Association.
When you hire a contractor to work on your home, you need to be protected from a number of risks. These fall into two general categories:
Risks related to poor work or dishonesty by the contractor and risks related to accidents that cause damage to property or injure someone.
The best protection from risk is to hire a contractor with a solid reputation for doing good work, and having a comprehensive written contract in place before the work begins.
Some consumers choose to deal with "underground" contractors who charge less, but only work for cash and do not provide a written contract. This type of business arrangement involves significant risks that you need to be aware of. This article provides information about these risks, and how to avoid them.
The first step is to examine some of the questions consumers should ask about underground "cash deals".
- WHY IS THE PRICE LOWER?
Everyone loves a bargain. But when it comes to hiring a contractor to work on your home, a "special cash price" can mean a lot of extra risks.
It's no secret that some contractors offer to do work for unrealistically low prices. Part of the "deal" involves paying them in cash without a written contract or a receipt for monies paid.
Homeowners who get involved in cash deals usually assume the contractor is cheating on taxes in order to offer the low price. They also assume that the contractor is the one who runs all the risks-after all, it is the contractor, not the customer, who ends up not declaring the income on their tax return. In reality, underground cash deals involve a lot more than evading taxes-and considerably more risk than homeowners imagine.
Whether it involves new home building, a cottage, a major renovation or something less substantial like roofing replacement or kitchen remodeling, residential construction is a fairly complex business.
Municipal building codes, permits and inspections make sure things are done the right way.
Provincial regulations govern the health and safety of workers as well as hazards related to equipment and chemical use.
Workers' Compensation programs protect workers injured on the job.
Contractor liability insurance protects customers in the event of an accident, damage to the home during construction, or damage or injury to third-parties such as the homeowner's family and neighbors.
A written contract sets out what the contractor will do, the work schedule, the price you will pay and the terms of payment.
Provincial lien regulations limit the homeowners' liability in the event that the contractor fails to pay suppliers and sub-contracts.
A written warranty provides customers with some assurance that they will get what they pay for.
Taken together, these measures serve to protect customers. They reduce the chance that serious mistakes will be made. And they provide protection for the customer in the event that something goes wrong. However, all of these measures require "paperwork" and records-something underground contractors must avoid for fear of being caught for cheating on taxes. And that is the real secret behind the underground contractor's low price. When you get involved in a cash deal, there is a lot more than taxes being evaded.
- WHAT IF SOMETHING GOES WRONG?
When underground contractors offer low-priced cash deals, they don't explain that they are passing some very serious risks on to you in order to make their low price possible. If they told you what was really involved, their low price wouldn't look like such a great deal. It would look like the potential consumer nightmare it really is.
The best way to understand these risks is to ask yourself a few "WHAT IF" questions:
- WHAT IF I GIVE THE CONTRACTOR AN ADVANCE PAYMENT, AND THEY NEVER DO THE WORK PROMISED?
Without a written contract or receipt for the payment, you could be out of luck. It will be difficult to prove you gave the contractor money-it's your word against theirs.
- WHAT IF THE CONTRACTOR DAMAGES MY HOME?
Contractors who operate their business properly have comprehensive business insurance to cover their liability in the event that they damage a customer's home. If the contractor is working underground, it's quite likely that they don't have such insurance and you would have to rely on their willingness and ability to pay damage costs.
And don't count on your own homeowners insurance policy. It may or may not cover such damage, depending on your coverage.
- WHAT IF A WORKER IS INJURED WHILE WORKING ON MY PROPERTY?
There is no simple answer to this question. Most contracting companies with more than one employee are required by law to have Workers' Compensation coverage to protect workers who get injured. In some provinces, self-employed individuals can "opt out", but they should then obtain private disability insurance coverage to protect against work-related injury.
In some provinces, if a homeowner hires someone who is not enrolled in Workers' Compensation, the homeowner can be held responsible for medical and rehabilitation costs if that person is injured. If you hire a contractor make sure that your contract includes proof of proper Workers' Compensation or equivalent private insurance coverage. Otherwise, you don't really know what will happen in the event of a workplace injury.
- WHAT IF THE CONTRACTOR DOESN'T PAY HIS SUPPLIERS AND SUBCONTRACTORS?
Every province has lien legislation designed to protect the financial interests of suppliers and subcontractors involved in construction work. When you hire a contractor, your contract should specify that a specific amount of money (usually 10 to 15%) must be held back from all payments made to the contractor for a specific length of time (usually 30 to 45 days after the work is completed). If you do this, your financial liability, if the contractor fails to pay suppliers or subcontractors, is limited to the amount of money held back. With a cash deal, where nothing is written down, it's unlikely that you have this protection.
- WHAT IF THE WORK IS BADLY DONE?
When homeowners hire a contractor, they want the work to be done properly, on time and on budget. If a mistake is made or a problem arises down the road, homeowners want to know that the contractor will stand behind their work and provide prompt and satisfactory warranty service.
When you have a written contract, the potential for misunderstandings between you and your contractor is reduced, and you are in a much better position to demand satisfactory service if the contractor lets you down. On the other hand, if you get involved in an underground "cash deal" without a written contract, problems are both more likely to occur and be much harder to resolve.
A proper, written contract sets out what you and your contractor have agreed to. For a new home building or renovation project, the contract should include details of the design, material and product specifications, the project schedule, costs and payment arrangements, etc. For simpler home repair jobs, less detail may be needed, but it should still cover all of these important points. And in all cases, the contract should provide a clear warranty on the work-what's covered and for how long.
- SO WHAT HAPPENS IF THE WORK IS DONE INCORRECTLY OR IS OF POOR QUALITY AND YOU DON'T HAVE A WRITTEN CONTRACT?
If you and the contractor cannot agree on matters, you may have considerable difficulty taking action to protect your interests.
If you choose to take the contractor to court (which may be your only option), not having a written contract can cause problems. It's likely that you and the contractor will have different opinions on what your "deal" was. So the judge will have to decide who to believe, or determine what seems fair, given the circumstances. Either way, the final result may not be to your liking.
Having a written contract cannot prevent all problems from occurring, but it can make them less likely and a lot easier-and far less expensive-to resolve.
- WHAT IF IT'S ONLY A SMALL JOB?
Sometimes homeowners who would insist on having a written contract for a major home renovation believe that getting a "cash deal" for small home repair projects is "OK" because there isn't much money involved. This can be a dangerous miscalculation.
Certainly a small job may involve a limited loss of payment if the contractor does poor work or fails to complete things. But in a number of ways, the risks you face in this situation are no less significant simply because a small amount of money is involved. In reality, the level of risk has little to do with the size of the job.
- WHAT IF YOUR HOME IS DAMAGED?
What if a $100 plumbing repair turns into a $5,000 water damage disaster when a pipe breaks? Or if the worker doing a $500 roof repair falls and is disabled? Or if a $200 electrical repair causes a fire that destroys your home? You want to know that the contractor has business liability insurance, Workers' Compensation coverage, or disability insurance where Workers Compensation is not required by law. And the only way you can be certain of this is by having a contract that spells it out.
Construction work involves risks. When someone works on your home, you need to be protected from these risks. Just because the job is simple or small doesn't mean something can't go wrong.
- WHAT IF LAWS ARE BROKEN?
Homeowners who hire underground contractors to get a "cash deal" often believe that they are not breaking any laws. After all, it's the contractor who is cheating on taxes, not the homeowner.
However, this belief doesn't reflect what's really involved in underground deals. Any contractor who is not reporting their income and paying their share of taxes is not anxious to have their name turn up on other government records. Like Workers' Compensation files. Or business license applications. Or building permits. In order to remain "invisible" to governments, they must avoid the paperwork required to operate their business properly. And in some cases, when they break the law, the homeowner can end up being responsible.
Building permits and inspection are one example. Most residential construction requires a municipal building permit. This ensures that the plans and construction work will comply with local building codes. Professional contractors know what the building code involves and will ensure that all required permits are in place. In many cases, underground contractors will skip this paperwork, especially with interior work not visible from outside the home.
However, it is the property owner, not the contractor, who is required to meet building code and permit requirements. If a permit is not obtained and the municipality finds out, the homeowner will be considered in violation. If the work does not meet code requirements, the municipality can (and often does) order it to be torn out, at the homeowner's cost. Underground contractors avoid direct involvement in the permit and inspection process in order to keep their work "off the books". So it's much more likely that permit and code requirements will be violated. When this happens it's the homeowner, not the contractor, who is breaking the law.
There are a number of other laws that can also affect homeowners should they hire an underground contractor. While these vary from province to province, laws concerning to Workers' Compensation coverage, consumer protection against overcharging, security of deposits and prepayments as well as construction liens can all involve risks to homeowners who hire someone who doesn't provide a written contract and proper documentation.
Some provinces also require special licensing and bonding of contractors. Particularly if they receive deposits or prepayments from customers. A contract based on the laws in place in your province is the best way to protect yourself and your family from financial risks. Professional contractors know this-that's why they don't offer "cash deals" done under the table.
These are just a few of the "WHAT IF'S" you need to consider. Don't fall for the underground contractor's cash deal. Make certain that you and your family are protected. Insist on a written contract covering all aspects of the work or project. And insist that it includes proof of contractor liability insurance, Workers' Compensation coverage (or equivalent private disability coverage for exempt workers), a lien hold back provision and clear responsibility for compliance with all other applicable laws and regulations. Also be sure to talk with your insurance company before the work begins-many homeowner policies don't automatically cover construction-related risks.