Inman

Does your builder stack up?

In case you hadn’t noticed, we live in uncertain times.

For homeowners who are in the enviable position of being financially confident enough to build a custom home or undertake a major remodeling project — and they’re still out there — the economy has nonetheless manufactured an additional layer of anxiety: Setting aside concerns about construction competence, the question of the hour is whether the builder/contractor of choice is financially able to see a project through to completion.

It’s tough to gauge how many builders and major contractors have been struck down in the Great Recession. However, the National Association of Home Builders said in January that its membership had fallen 15-20 percent from its 2005 peak of more than 200,000. And the residential construction industry has lost more than 3 million jobs. 

Obviously, many builders are surviving the housing downturn and relatively few end up with clouds over their reputations for failing to pay their subcontractors.

But how is a consumer to know whether a builder will fold three months into a six-month project? Or that even after a job seems "completed," the homeowner may learn that suppliers and subcontractors have placed liens on the home because the builder didn’t pay them?

"Unfortunately, there is no ironclad check, in spite of all the research you do," said Jim Rabbitt, director of the Wisconsin Bureau of Consumer Protection. "But every check you do is worth doing, I will tell you that."

Construction-law attorneys and consumer advocates say consumers can set up some contractual safeguards and undertake some background-check measures that at least might flush out red flags.

Follow the legal trail

Rabbitt said that Wisconsin, among other states, publicly posts records of lawsuits and other legal actions online. In his state, for example, the Consolidated Court Automation Program links the public to the activities of its circuit-court system at www.wicourts.gov. …CONTINUED

There, court records reflect lawsuits, judgments, liens and criminal records.

Where states haven’t made records available for free, several online sources of court records, such as LexisNexis and Westlaw, will provide them for a fee.

A credit check

Legal advisers say it’s worthwhile to make sure that your builder or contractor is creditworthy. A credit background check might ascertain if the company has a history of being able to pay the sometime-myriad subcontractors who will ply their trades on your behalf, albeit indirectly.

"You can ask (the builder or contractor) for financial statements," said Salt Lake City lawyer Darrel Bostwick, who specializes in construction law. "You could get a Dun & Bradstreet report (a for-a-fee report on payment records, public filings, financial information, special events affecting the supplier’s condition, and a description of the supplier’s operation)." Dun & Bradstreet says it has such data on 6 million American companies.

Many builders might operate on a smaller level than is tracked by Dun & Bradstreet. Recognizing this, Experian, the credit-ratings company, two years ago rolled out Contractor Check, which is essentially a credit report for construction firms and subcontractors.

These reports contain data about where a company is licensed, how much insurance it carries, and a history of bankruptcies, liens and judgments. (The reports are $12.95 each.)

The grapevine

For better and for worse, the Internet has become one gigantic town forum about the reliability of businesses, and homebuilding and remodeling are not exempt.

Numerous Web sites invite the public to weigh in on builder and contractor reputations, some of them going beyond the usual metrics of construction competence and weighing in on financial performance. Bear in mind that most such sites aren’t vetted for journalistic neutrality — or perhaps are not vetted at all.

And most aren’t dedicated to singling out solid performers on the construction scene — only the disappointments. …CONTINUED

Look for consumer opinions and histories of woes at through services and sites such as Angie’s List and Homeowners Against Deficient Dwellings. The Better Business Bureau, both nationally and locally, contains information about company performance at www.BBB.org.

The money and insurance

Attorneys interviewed for this story and consumer advocates strongly recommend against making payments in a lump sum in advance or directly to builders, who in turn will be paying their subcontractors.

Instead, banks who are lending construction funds to homeowners may function as the payout conduits for builders. Builders, contractors and consumers also might set up escrow accounts that will hold money in an independent fund, to be paid out in a neutral, agreed-upon-rules arrangement. Construction-law specialists recommend such setups, though they say the zealousness of vetting the payments can vary widely.

"There are a lot of lenders who don’t do what they need to do to make sure the money gets to where it should go," such as making sure that claims for payment are backed up by invoices, Bostwick said. And they caution consumers to arrange for bonding arrangements.

"If you’re the homeowner who has hired the builder for a custom home, you would typically require a lot of protections," said attorney Thomas Miller, whose San Francisco practice, The Miller Law Firm, specializes in construction litigation.

"They need to make sure their contracts are solid, not just escrowing funds, but also to make sure they have adequate protections, such as insurance indemnity," he said. "You can make the developer provide a performance bond and a completion bond.

"But it’s amazing how any times (such protections) are sidestepped," he said.

Mary Umberger is a Chicago-based writer.

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