Negotiating a Fair Contract

A contract spells out all the terms of the work, helping you and the contractor minimize misunderstandings and wasted effort caused by poor instructions. It should include the contractor's name and address, license number, a timetable for starting and finishing the job, a payment schedule, names of subcontractors, and the scope of work to be done.
Other basic items include a specification of materials and equipment needed, demolition and clean-up provisions, approximate start and finish dates, terms of the agreement, and room for signatures and the date. Watch out for binding arbitration provisions that limit your right to sue in the event of a dispute.

An excellent addendum to a contract is the contractor's statement of what isn't included. This will include the assumptions the contractor has made about your job, such as that the existing wiring and plumbing lines are adequate, that the homeowner will pay for all trash removal, that the subflooring is sound, that the existing baseboards and window trim will be usable, and so on.
Do your homework and specify the materials and brand names of all the products, appliances, and fixtures to be used. The contract should also give the contractor the burden of obtaining all building permits. Most municipalities have a building code; the person who obtains the permit is usually liable if the work doesn't come up to code.

It's common to pay for a project in stages over the course of the work, especially as key materials and supplies are delivered. Try to limit the down payment to 10 percent or less. Contractors who ask for a substantial amount up front may use your money to hire help to finish their previous job, leaving you to fume at delays. In some states, it's illegal to require large deposits. Some projects, however, require deposits on components that have to be made to order—kitchen cabinets, for instance. In such a case, a higher down payment may be required and justified.

Your contractor should agree to resolve problems that arise during the course of work rather than afterward. They might readily fix sloppy plastering or a leaky roof as soon as it's pointed out but be less willing to fix it later on. That's a good reason to hold back part of the final payment until after a job is completed. You can negotiate such terms and include them in the contract. Withholding the last 5 to 10 percent of the money for 30 days isn't an unreasonable stipulation.

Never make the final payment until you have obtained signed mechanic's-lien waivers or releases from all subcontractors and suppliers. These are basically receipts acknowledging payment for goods and services; they free you from third-party claims on your property in the event that you pay the contractor but he or she doesn't pay subcontractors or suppliers.

Source: Consumer Reports