Owners and investors: You can protect yourself from renovation disasters

P. Andrew Fleming

P. Andrew Fleming

Guest post by P. Andrew Fleming
Partner, Novack and Macey LLP

As a building owner or real estate investor, you’d like to think that your next renovation project will go off without a hitch. And it might. But things do go wrong. Anything from poor workmanship to the financial failings of your contractor could turn the project into a nightmare.

If you think renovations were poorly done, there are a number of steps you can take to remediate the problem. Better yet, there are things you can do up front to protect yourself later should you be unhappy with the results.

Here’s a look at the causes and solutions of some renovation disputes, and how you can protect yourself.

Shoddy workmanship. You inspect the finished job and find that the floor is uneven, the roof is leaking or the cabinets aren’t aligned. It’s not a matter of a few paint splotches on the light switch, but major blunders that will cost another small fortune (in addition to the fortune you’ve already spent) in replacement work or legal fees to make things right.

To make sure you’re covered should this occur, include a clause in the contract that the contractor must get a performance bond on the job. This insurance policy guarantees proper workmanship. It’s your assurance that, if the work is unacceptable, the insurer will pay for it to be corrected.

Financial woes. Sometimes the mistake isn’t workmanship. Sometimes you’re left with the job unfinished and a long list of subcontractors demanding payment. In this nightmarish scenario, you’ve already paid your contractor, but he’s run into economic problems and declared bankruptcy or abandoned the job. He’s neglected to pay plumbers, electricians, roofers, carpenters or other subcontractors, and now you’re their target. You could end up paying twice for the still-unfinished work.

To address this situation should it occur, before work begins, require that the contractor first purchase a payment bond. This policy guarantees that the insurer will pay his employees, suppliers and subcontractors if the contractor defaults. It also builds confidence that the job will be finished even after economic cataclysm.

Both types of bonds must be negotiated between you and the contractor. In some cases, you might agree to split the cost with the contractor. In others, the contractor buys the bonds but increases the estimate for the project. It’s worth the cost to have this protection in place, even if it means you have to pay a few percentage points more for the job.

Arbitration. Lawsuits can be very costly, and that cost increases if you need expert testimony from architects, general contractors or others. The more complicated the case, the costlier it becomes. In addition, legal action can take years, so even if you ultimately win, you’re likely to be living with the problem for quite some time. You can avoid much of that hassle by stipulating in the contract that disputes are to be resolved through arbitration.

This alternative dispute resolution mechanism keeps your case out of the judicial system. Instead, you and your contractor agree to bring your differences before a third party who’s a member of the American Arbitration Association.

Arbitration has many advantages over the court system. First, it’s faster. You can specify an arbitration, in which the dispute is settled by only one arbitrator, streamlining the process. You can also request an expedited arbitration. Remember, the faster the case is resolved, the quicker you can improve the property’s appearance and settle finances. While resolution could take years in the judicial system, it might take as little as six months through arbitration.

With arbitration, you can request someone with experience in the field of dispute. An arbitrator with a construction or contracting background can offer far better insight into the case than a judge can.

In addition to being costly and time-consuming, renovation disputes are an emotional drain. Have an attorney review your contract before you sign it, and insert the clauses that will make you sleep better at night — in your beautifully remodeled property.

Andrew Fleming, a partner at Chicago’s Novack and Macey, represents companies and individuals in matters of complex litigation. He can be reached at 312-419-6900 or andrewf@novackmacey.com. 

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