Investigating Contractors – What to look for in a contractor
When securing a first generation space or second generation space, you’ll also be looking at securing the services of a contractor. Since many property owners extend some form of tenant improvement allowance, they’ll insist that a general contractor carry out any work on a property, in case of inspection. While some property owners might point you toward a preferred contractor, not all will. That means you may need to select a contractor. The state of Texas doesn’t issue state licenses for general contractors. This could make your search more difficult. So, what should you investigate about a contractor before finalizing an agreement?
Insured
The first thing you should look for with your contractor is insurance. All reputable contractors will maintain a general liability policy. Policy sizes may vary, but most will carry at least a $1-$2 million policy. These policies help ensure that, should the contractor damage anything on the property, the owner is compensated.
Most general contractors also have employees and should carry worker’s compensation insurance. It’s not required if the contractor doesn’t work for public entities, such as the city or state. Despite that, some contractors still maintain worker’s comp insurance for their employees.
Bonded
A bond functions as a kind of agreement between, in this case, a contractor, the customer, and a public entity. The bond functions as a kind of promise on the part of the contractor to follow any applicable regulations within a given area. Different cities and states maintain different rules about when a contractor must get a bond. For example, some states require that all contractors get a bond when they get a license. In places like Texas, some cities require a general bond. In others bonds need to be attached to a specific document, like a building permit.
You should ask potential contractors about bonds as part of your selection process. Assuming you’re dealing with reputable contractors, you should get near identical answers from them. If you get an answer that doesn’t match up, it can be a red flag for that contractor.
Subcontractors
All general contractors work with a range of subcontractors. In most cases, these are specialists in a particular trade electricians, plumbers, and painters. By subcontracting, the contractor can ensure they deliver code-compliant work for your buildout. Unlike general contractors, many subcontracting specialists are subject to strict rules from Texas.
Licensed
Texas issues licenses for a handful of trades including plumbers, electricians, and HVAC. Many cities impose licensing regulations on jobs such as roofing or painting. A good general contractor will only work with licensed subcontractors and maintain records of their license numbers.
Insurance
Much like your general contractor, most subcontractors will also maintain general liability insurance. Plumbers, electricians, and HVAC companies maintain insurance coverage as part of their business. As with licenses, good contractors will ensure that a subcontractor has current insurance before letting them work. This should be the case in their own or on your buildout project.
Subcontractor Agreements
Smart general contractors use subcontractor agreements as a basic part of their business, as a protection for all parties. A subcontractor agreement is a contract between the contractor and the subcontractor. Some contractors work with detailed subcontractor agreements that spell out the exact work to be done and the associated timeline. The agreements detail when, how much, and under what conditions payments are to be issued.
Some contractors use less specific agreements. This might occur if the contractor is working on a second generation space. They know they’ll need the subcontractor, but the exact scope of work for the subcontractor isn’t clear. For example, the exact amount of wiring or rewiring needed might not be final until after the old walls come down and the new walls go up. At that point, the subcontractor agreement may be modified formally or informally.
In all cases, though, the existence of the agreement serves as a protection for everyone involved, since it usually includes details about the work to be done and payment terms.
Warranty Agreements
As a general rule, contractors will offer warranty agreements or guarantees of their work. These typically hold for a year after completion of the work. Of course, it’s not quite that simple. There are several types of warranty agreements that may or may not apply to your tenant improvement project.
Vendor Warranties
General contractors get their supplies from a variety of sources. In many cases, it’s a local construction supplier. In some cases, though, the contractor may order some kind of complete system from a vendor. For example, the tenant may get permission for a pergola or similar shade system. The contractor might design and build the pergola from scratch or order one from a company it has an installation agreement with. In that case, the vendor may provide a warranty for the pergola to the tenant or building owner.
Materials and Equipment Warranty
A materials and equipment warranty is a standard part of any contractor agreement. In general terms, it says that the contractor will use new materials and equipment that are defect free. The only time that might not apply is when the project includes vintage materials. Although that’s likely to prove rare in most commercial spaces, it’s not impossible.
This type of warranty uses standard exclusions. This could include cases such as misuse or modifications by the owner or tenant.
Construction Services Warranty
The construction services warranty promises that the contractor will use people with the correct training to perform work. So, for example, they’ll use electricians only for wiring. It also assures the property owner that the work done will follow the applicable national, state and local codes as required.
Callback Warranty
This is the standard one-year warranty that most think of when dealing with a contractor. This is the warranty that assures the property owner/tenant that the contractor will return and fix problems from defective workmanship or flawed materials that show up within a year of completion. For instance, a door falls off its hinges from nothing more than normal daily use after two months. The obvious culprit here is a flawed installation. Under the callback warranty, the contractor will come back and install the door at no extra cost.
You should quiz your potential contractors about what warranties they include in their contractor agreement. You should also inquire into whether they routinely work with materials or systems that come with a vendor warranty.
Lien Release Waivers
Many contractors also require the use of lien release waivers. Lien release waivers occupy an odd little place in the world of contractors and subcontractors.
Let’s say that a contractor hires a plumber to install the hardware for an office bathroom. In a perfect world, the contractor pays the plumber and everyone is happy. If the contractor doesn’t pay and keeps not paying, the plumber can issue a mechanic’s lien on the property. The idea is that, if the plumber doesn’t get paid and wins a lawsuit, the court can seize the property and sell it off to settle the debt. Sadly, this puts the property owner in the middle of a dispute between the contractor and subcontractor, but it’s how the lien works under the law. The property owner can then pressure the contractor to pay or pay the plumber directly and sue the contractor. What if the contractor did pay and the plumber issues the lien anyway?
This is the exact situation that lien release waivers prevent. There are four common types of lien release waivers, but the basic idea holds true for all of them. The plumber does the work and gets paid. In exchange, they sign a form that says they can’t issue a lien in the future for that work. So, the lien release waiver acts as a kind of proof of payment and as a legal defense for the property owner.
Not every contractor will insist on lien release waivers, but you only want to work with those that do. The contractor may eventually face legal action from the property owner if they don’t pay their subcontractors, but property owners must resolve the lien or face a court proceeding. That means it’s in the interest of property owners and, by proxy, their tenants to work with contractors that insist on lien waivers. This ensures everyone gets paid and no one ends up enduring a tedious or unnecessary court hearing. It also prevents a tenant or property owner from paying for the same work twice.
Recommendations
Even if you insist on all the above things from a contractor, you’re still likely to find more than one who fits the bill. After all, the things discussed above are sound business practices for a contractor. Ideally, every contractor should work this way. That leaves you dealing with those intangibles like your gut reaction. One way you can help validate your instincts is by asking around in your professional network. You can always ask for general recommendations from people you trust. The other option is to ask around about the top candidates in your pool of contractors. The odds are good that at least a few people will have worked with those contractors in the past.
Ask about the things you want to know about any professional service provider. Do they deliver quality work? Are the work crews careful about property on the site? Does the contractor stick with a schedule within reasonable limits? Is the contractor good about answering questions when you have them?
The feedback you get from other people can help you settle on one contractor over other options. While some people advocate looking on review sites, the value you can get from them has a limit. Most reviews will focus on home building or home renovations which are fundamentally different than a tenant improvement project or buildout in a commercial shell space.
Investigating Your Contractor Makes for a Better Outcomes
The more boxes your contractor can check off on the issues listed above, the better off you’re going to be during your project. Checking most or all these issues means the contractor wants to do a good job, follow code, pay everyone what they’re owed and leave the property owner/tenant happy. If you find yourself trying to choose between several contractors, search out referrals in your professional network. Your peers can often answer questions that will help you make a final decision about which contractor will work best for you and your project.