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Tree Butchery

Did you know that your local power company is the worst offender of homeowner’s trees?  In the sense that these tree men hired by the electric and phone companies will cut the tree so severely around telephone and powers lines than the tree becomes uneven.  It other words, it is half a tree, branches on one side and no branches on the street side.  More about this horror later, but before I go we need to stop this practice immediately.

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Lesson #1: Never, never, never place any trust in contractors, designers, landscapers, or anyone else in the home repair/renovation/building profession.  In addition, do not trust web sites that promote their so called “screened” network of professionals.  In my experience these anti-consumer web sites make their money charging monthly fees to contractors and subcontractors.

Lesson #2:  Let them know you don’t trust them and treat them as though you are their bank, finance company and employer.  The more money they want from you, the more information you need from them.

You need in your hand, not in their hands this kind of paperwork:
Licenses, Insurance, Bonds, Homeowner lien waivers, Worker compensation insurance, warranties, permits, etc.

The more money they want the more info you want from them. Make it a requirement to request  their Personal Information such as home address, business address, home and business phone numbers, social security number, driver’s license number or copy of driver license.

Most likely they have all types of personal information on the homeowner, so they can easily come back and file a law suit against your assets.  However without reliable and accurate information, it is almost impossible to file a law suit on the contractor and expect to recover their assets.

Lesson #3: Use a Private Investigator and/or background check search with criminal records search.  Why trust ten thousand dollars or more to someone who you don’t know from Adam’s house cat? Many homeowners discover after the fact, that Mr. Crappy has a record of lawsuits and complaints.  In the self made home renovation business, crime does pay.  Don’t trust your home to anyone without investigating their business and criminal history.

Lesson #4: Prepare  a project diary, with a camcorder, tape recorder, camera and/or  journal of the project from start to finish.  Purchase an inexpensive daily planner specially for the home project journal, and note every telephone call, missed appointment, face to face communication, etc in this planner.  Always assume something will go wrong, and this journal record  will be your best source of information if the project goes downs the toilet.  Please kept receipts of every nail, brick, plank, etc that the contractor purchased.  Don’t trust contractors to place the best quality materials in your home, because most likely they won’t and they depend on your ignorance and gullibility.

Lesson #5: Teach yourself first.  Read and print the State building codes requirements.  Learn the difference between cheap and superior building materials.  Request proof of purchase receipts for everything.  Specify in the contract that type of supplies and materials used in the project.  Also specify that any changes or alterations must be homeowner approved first if not, then the contractor has defaulted on the agreement.

Lesson #6: Verbal agreements must become written and signed/dated agreements. If you decide to change the paint color, get that in writing.  If you decide to plant ferns instead of dogwoods, get that in writing.  Always remember what if I need to sue Mr. Crappy, without written proof it becomes my word against Mr. or Ms. Crappy’s words.

Lesson #7:  Make sure the contractor complies with State or County building permit regulations.  It is important to get these building permits filed with the city’s building office.  The contract must specify that the contractor comes out of their pocket pay to repair any work that failed to meet State or County building codes.

Lesson #8: Never, Never, NEVER pay more than 20% upfront.  Pay the balance only when the work is totally finished and approved, (if needed by the city building inspector).   On thousand dollar or more projects, the contractors who require 50% upfront or want payment in full immediately after finishing are usually crooks. Stay away, far away from these Crappies.

I highly and strongly suggest opening a line of credit rather than using the contractor’s finance company.  Financing the project always means the contractor gets everything upfront because the loan is linked to the work.  Now suppose this, midway through the project something goes wrong, or your don’t approve of the way your contractor does their work.  However you have already signed for the loan offered by the contractor’s finance company.  To make a long story short, you got hooked big time.  In contrast, with a line of credit you fully control when the money gets dispersed.  If something goes wrong before the projects completes, then the contractors has to make it right to get paid by you.  Also, if the contractor starts to bullying or decides to skip and miss appointments, then you have the power to fire Mr/Ms Crappy and keep your money.

Lesson #9: Reference letters and certifications don’t mean anything as far as a contractor reliability and integrity.  Don’t be fooled by length of service or years of experience either.  He or she may have 20 years experience cheating customers.  Reference letters are easily faked, written by relatives, friends, spouses, ex-cell mates, whomever.  Certifications represent participation in a series of professional/career courses.  So what?  I experienced some of the worst mistakes by certified Carrier HVAC technician and certified toxic mold re-mediators.  Will the company or contractor provide a lifetime warranty on their work?  Will they make right what they did wrong, at no cost to you?  Can the homeowner file a claim against the contractor’s insurance?  Never look over these seemingly minor details, because if something does go wrong, it will be you paying for the repairs.

Lesson #10: Don’t give into being bullied or charmed.  Someone is trying to steal from you and they have no feelings about harming your family, health, pets, home, land and assets.   Don’t sign anything based on their time-table.  Take what ever time you need to make a decision and don’t get pulled into those limited time special discount prices or promotional offers.

I can’t stress enough that honest contractors rarely exist and the dishonest ones that I present on these pages represent most of the crooks who front as contractors and skilled trade-workers.

It takes long time to get over the anger of getting cheated by  home contractors because everyday you live with the mess they left.  The Town Carpenter incident changed my health for the worst: my blood pressure increased so much that I had to undergo extensive and expensive cardiac examinations.  The stress of everyday trying to cook meals in the mess left by Andy Luke caused another rage every day.  In addition, his wife would call me, to say how sorry she felt and that she really needed some help finding a place to live.  This family represents crappy-ness in abundance.

Once I finished paying another kitchen contractor, who repaired Andy’s crappy work, I filed a civil law suit with the Dekalb County clerks office on both parties: The Town Carpenter and Mr. Andy Luke.  The Atlanta Better Business Bureau does not have any power to mediate complaints between customers and businesses.  If they did, then our State legislator would enact stronger laws with criminal penalties for contractor scams. The BBB receives a very short complaint, the Business has 30 days to write a response.  The BBB sends the business response to complainant and then for then on it become an email debate, between customer and business.  I would guess that the BBB receives at least 300,000 complaints against contractors each year.

Every time I write a BBB complaint, I also mail a complaint to the Secretary of State’s office.  Homeowners across America please use grass roots efforts to pressure our elected official to legislate criminal laws for contractor negligence and fraud.  Let’s put these Crappies in Jail where they belong!!!

I seriously believe contractor dishonesty and negligence must become a State and Federal crime with at least five years in jail plus thousands of dollars in damages.  I advocate for criminal prosecution because now, homeowners are defenseless against these crappy contractors.  Our homes are ruined as well as our health, we must bear the costs of getting bad work corrected which often doubles the original cost, we may even suffer the loss of our homes, belongings and pets.  In addition we pay a lot of money to attorney’s who basically seek big retainer fees plus one-third of the recovery costs.  Insurance companies will fight against the homeowners for years in order to pressure you to sign nickel and dime out of court settlements that favor their interests only.  Now tell me why should this type of homeowner hell not be considered a crime?

Magistrate Court of Dekalb County, Georgia, Civil Action #08M51368.
Defendants Gary P. Luke, dba The Town Carpenter and Andrew (Andy) W. Luke.

Statement of Claim: Breach of Contract, contractor fraud, misrepresentation and negligence.  Failure to comply with terms of contract of May 3, 2008.  Misrepresentation, intentional and negligent regarding ability to renovate, design, fabricate and install custom kitchen cabinets.  Contractor fraud-contractor refused to complete kitchen project and to repair the numerous mistakes and damages after being paid in full.

Claim amount’ $6,500.00 plus filing fee.

I expected to see Mr. and Mrs. Gary Luke in court, but it surprised me to see Andy show.  Dekalb County gives both parties the right to conduct their own private mediation meeting before seeing the  Judge.  It probably would have been better for Gary Luke to turn down the mediation and go before the Judge, because the Plaintiff, me bears the burden to prove to the Court the statement of the claim.  Andy (Mr. Crappy) wanted to take full responsibility for everything.  However he insisted that he did wonderful work for pennies on the dollar.  So we settled for $5,171.25 including Court cost with future interest of 8% waived unless defaults.  The settlement included a payment plan of $200 per month beginning in 30 days, payable to me on the 9th of each month.  The Town Carpenter is dismissed with prejudiced.

A year later, I returned again to Magistrate Court to file a Writ of Fieri Facias, a Lien on Mr. Crappy, who defaulted on his payments less than year later.  Mr. Crappy even conned his mother into making a few payments.   The Court places an 8% interest on the Principal amount, so Mr. Crappy gets to pay more money as time goes by.  Liens do not go away, unless I fail to renew them after seven years, but this Lien, for sure without any hesitation will get renewed forever.  Legally, the Lien changed my status from homeowner to pseudo bounty hunter and now I can pursue legal remedies to seize salaries, bank accounts and other assets belonging to Mr. Crappy as well as pursue Mr. Crappy himself.

The Town Carpenter’s Son


The Town Carpenter
5241-B New Peachtree Road
Chamblee, GA  30341
Office: 404-379-8317
E-mail: info@thetowncarpenter.com

http://www.thetowncarpenter.com/index.html

http://www.thetowncarpenter.com/gallery.html#

The title of this lesson in contractor swindles, is Never Trust Beautiful Business Web Sites.  I would love to believe that a small owner business do better work than large companies, but the reality is with contractors it is six in one hand and half a dozen in the other when it comes to professional integrity.

We looked for months, seeking kitchen remodeling contractors.  Contractors would draw up estimates and give us plans, but the conversational process would break down as soon as we requesting specific products.  The owner of Paragon Construction, lost the kitchen contract when his subcontractors broke our bedroom ceiling by placing bags of insulation on the attic floor.

We visited Home Depot Expo and Lowe’s many times, and even had a kitchen plans with estimates prepared.  Never hired Home Depot or Lowe’s but I heard that they use outside subcontractors and their cabinets are overpriced.  A professional kitchen designer needs a retainer to work from, and these retainers may be $5,000 or $10,000.

Our kitchen is small, apartment size kitchen in home, with no room for kitchen table.  So, it did not seem reasonable to spend $30,000 on cabinets alone.  I wanted a floating island cabinet next to the range or cabinets that sat on legs so that I could clean the floor of crumbs and food particles.

IKEA, had the type of cabinets that I wanted, except they did not fit our kitchen.  I tried unsuccessfully for four months to get the IKEA cabinets to fit the room.  A co-worker suggested that we try a custom cabinet-maker to build the cabinets to fit in the room instead of buying pre-cut cabinets.

Great idea with the wrong cabinet-maker. Sometime in November 2006, I saw the Town Carpenter’s web page, contact them via emails and set up an in home visit.

The Town Carpenter  owner is Mr. Gary Luke

Gary P. Luke – President/General Manager/Sales As founder of The Town Carpenter and its predecessor, Strictly Custom Interiors, Gary brings more than 15 years of business ownership and management experience to the firm. Earning his Journeyman Carpentry Certification in 1979, Gary also brings to the table over 25 years of carpentry and woodworking experience. Driving his company’s success on exceptional quality at a reasonable price, Gary Luke personally guarantees his customers’ satisfaction and stands behind each and every product. Gary lives in Atlanta with his wife and children.

Mr. Andy Luke, answered the phone and made an appointment to prepare a project estimate.  Mr. Andy Luke, the Town Carpenter’s Son, in my opinion is a swindler and thief of the lowest rank.  Andy represented himself as an authorized employee of the Town Carpenter with a lot of experience in cabinet design and fabrication.  Andy does not have his own shop and claimed that he worked with his dad, i.e., father and son enterprise.

Before going further, I did not jump head first into doing business with this company. I got estimates from three other kitchen design centers.  Also we needed a laundry pedestal for the new front loading laundry pair.  Each pedestal, if purchase from the manufacturer would cost $230 each.  We decided to get the pedestals made to save money.  We hired The Town Carpenter to make two laundry pedestals for our front loading washer and dryer.  Mr. Andy Luke made the pedestals, in the Town Carpenter’s shop  and delivered them on time, $250.00 the total price for both pedestals.

The estimate Andy gave me, come in higher than the kitchen cabinet budget.  So, I decided to use another company recommended by Paragon Construction, owner Mr. Bill James.  This local company had a good selection of pre-made cabinets, however they did not have a rolling island and it would have voided the warranty to modify the cabinets.

Because we did not experience any problems with the laundry pedestal job, we figured to go ahead with the Town Carpenter design and installation.  I called the Town Carpenter the third time in March or April 2007.  Andy and I discussed at length all the things I wanted, he listened and told me all the things he could do for me, in addition he would add other things at no cost, such as counter height table for the microwave.  He prepared a project sheet and explained that he needed half up front and half when the project was finished and that it would take him from start to finish 30 days and the installation would take him only 1 day.

This is the project sheet Andy wrote up:

Kitchen Contract and Project Sheet

Many contractors and skilled trades use these type of forms as contracts, project proposals and estimates, etc.  One of the best plumbers, who has done work for my family and myself for more than 20 years used a project sheet as a contract for all his jobs.  I accepted the proposal and agreed to the 50% deposit, which is a big, big mistake.  Never agree to give any contractors more than 15% down-payment on any project.  In addition, never agree to give any money without getting more information from the contractors, such as, his business license, complete home address and business address, liability insurance and a bond against defective work.  I believe anytime a project cost more than $800, a homeowner should get a criminal records check of the contractor.  Don’t rely on the absence of BBB complaints against the contractor, because swindlers change their business names and location, faster than they change their underwear.

Here is where everything falls through the rabbit hole, Mr. Gary Luke, owner of the Town Carpenter understood that his son worked on my kitchen cabinets.  In fact, according the Gary, he gave Andy permission to do the project.

In March 2009 Andy approached me about doing a small kitchen telling me it was for the mother of his supervisor at Yellow Freight.  Andy was planning to marry in early May and said he needed extra money for his wedding and honeymoon.  He asked to use my production facility after normal business hours for what he claimed was a few kitchen cabinets.  Though his request was against company policy, I said would consider it and later gave him permission to use the facility one time only.  I would learn in July 2007 that the project was in fact for _______  _________, who has no ties to Yellow Freight or anyone there and was for an entire kitchen renovation, written by Mr. Gary Luke to the BBB on 5/12/2008, Case #27049141.

We paid Andy $2,637.50 March 2007.  In May, he showed up with half the work finished.  I had the entire kitchen, walls and floors removed and replaced, so that he could get the kitchen completed in one day.  I pushed other subcontractors to get the room finished, so that Andy could install the cabinets on May 4, 2007.  By May 3rd, Andy brings part of cabinets explaining that he needed more time, cause he worked another job, and that if I gave him more time, then he would discount the cost of project by 10% and build and design the kitchen cabinets with a rolling island and the microwave cabinet.  Andy also wanted the rest of the money paid to him that day.  In fact, he begged me for the money, with the plea he really needed it for personal reasons.   Note of wisdom, be very careful when contractors asks for favors in the form of money and never pay for work before it is totally finished.

I decided to draw up another contract, that Andy signed and dated.  Note of wisdom, swindlers don’t care about contracts, they will sign anything to get your money in their pockets.

Homeowner's Contract for Kitchen

June 2007, we still did not have a completed kitchen.  Andy installed the cabinets and the trim but he left a 40% of the project incomplete.  He kept asking for more time with the project, but he make and broke appointments every week.   July 2007, we still not see any progress made on completing the kitchen or correcting problems with the installation, so I telephoned The Town Carpenter business line and spoke to the owner Mr. Gary Luke.

Mr. Gary Luke and I wrote several emails and he also visited my home along with his wife and another time with his production manager.  I later learned from the court records, while Mr. Luke and I discussed the kitchen cabinets, that she used the opportunity to spy about our home and taking notes about the appearance of our office/den.

We basically wanted to get our kitchen finished and all the problems Andy’s caused corrected.  We took the position that Mr. Gary Luke, gave permission to Mr. Andy Luke to work as an independent subcontractor from The Town Carpenter, that Mr. Gary Luke knew that Mr. Andy Luke answered the business line for the purpose of stealing clients and that Mr. Gary Luke knew about our kitchen project.  Nonetheless, Mr. Gary Luke failed to protect his customer and clients and therefore he holds total responsibility to correct all problems without any cost to us.

Mr. Gary Luke wanted us to pay him $867.06  to complete the project and correct problems.  From July 2007 to April 2008 we still did not have kitchen finished.  We had other kitchen cabinet makers look at Andy’s work and discovered that Gary had missed telling us about certain problems with the cabinets.  Andy had made the range hood cabinet the wrong size, which caused the range hood to sit too low about the range, as a result the burner flames had started to melt the hood lights.  We also spoke to several attorneys, who advised us to give Town Carpenters an opportunity to correct the problems at no cost to us and if they did not then file a lawsuit against the company owners and Mr. Andy Luke.

June 9, 2008, I filed a complaint with the Dekalb County, Magistrate Court, Case # 08M051368.  Statement of Claim

Breach of contract, contractor fraud, misrepresentation and negligence.  Failure to comply with terms of contract of May 3, 2007.  Misrepresentation, intentional and neglient regarding ability to renovate, design, fabricate and install custom kitchen cabinets.  Contractor fraud, contractor refused to complete kitchen project and to repair the numerous mistakes and damages, after being paid in full.

We hired another kitchen remodeling company to finish the work.

Cost More to Repair Bad Work

To be continued the story is not finished.

Protecting Self and Home

Renovating In A Recession: Why It Could Cost You More If You Don’t Protect Yourself With These 7 Key Clauses In Your Contract

With demand for residential construction still in a slump and contractors holding on for the tides to turn, folks are being told that this a great time to strike up a deal on that home renovation project. After all, materials costs are down and contractors are willing to pass on those savings and even perhaps cut back on their own profit to compete for your business. But at what cost to the consumer is that great deal really costing? And is it safe to assume that the contractor will actually cut back on his own earnings just for the work?

In a nutshell – no it’s not and here’s why. Times like these are prime breeding ground for less than ethical contractors to take advantage of unassuming homeowners looking for that great deal who will only look at the bottom line, give a quick once-over to what’s in the contract and “trust” that they are getting that great deal – what with the economy giving them this great opportunity to take advantage of – when in fact it’s THEM that’s getting taken advantage of!

Here’s what a less than ethical contractor hopes the homeowner DOESN’T know:

—> 1.) His bid doesn’t include everything your specifications sheet calls for, but rather makes vague references to specific items. The homeowner doesn’t know how critical it is to cover in detail every single item expected to be included and performed in the spec sheet and “trusts” that what he said he’d do, he’ll do.

Result: The homeowner gets hit with “extra work” invoices for items they thought were in the contract.

Lesson: Get educated on creating thorough spec sheets, reading bids carefully by line items and expect change orders but on your terms. Which brings us to:

—> 2.) Change Orders: Write into the contract that any “extra work” must be approved in the form of written Change Orders, which are agreed to and signed by both the homeowner and contractor before work is performed and added to the total contract price if the contractor expects to be paid for it.

—> 3.) Lien Release Waivers: You pay the contractor who in turn pays his subs and suppliers, but at the end of the project the homeowner discovers the contractor didn’t pay one or more subs or suppliers

Result: The homeowner gets slapped with Mechanics Liens where they will end up paying twice for work they thought had been paid for by the contractor. It’s either pay up or hire an attorney to try and reason with the contractor – or sue.

Lesson: Write into the contract that Lien Release Waivers are required upon each payment made to the contractor, and must include releases from the subs and suppliers as well.

—> 4.) The contractor agrees to pull the permits and takes payments that cover those costs. A couple of months later problems start to crop up, communication with the contractor becomes strained and in an attempt to get to the truth the homeowner contacts the city only to find out he never pulled the permits!

Result: The homeowner ends up paying fines to the city, has to pull and pay for the necessary permits, may have to tear out work for inspections that should have been performed and will never get the money back from the contractor for the initial permits paid for, but never pulled. The homeowner ASSUMED the contractor would pull the permits but never saw the permits or thought to ask for them.

Lesson: Have it written into the contract that the contractor is to obtain all necessary permits, provide you with the permit documents to post and provide you with the receipts paid to the city for your records.

—> 5.) The contractor’s work is substandard but you can’t get him to correct much less acknowledge that there are problems.

Result: You’re stuck with poor workmanship, and an unpleasant even contentious relationship with the contractor. At your wits end you fire him but then get sued for breach of contract.

Lesson: Have a Cancellation or Termination Clause written into the contract that allows the homeowner to fire for substandard work, deviation from the contract and scope of work or illegal activity.

—> 6.) The contractor asks for a large upfront payment with 2 more payments at specific milestones.
Unbeknownst to the homeowner, the contractor is getting more money than work is being performed, right from the start. Eventually over time, he and his crew stops coming regularly or not at all. You suspect – and rightly so –that your money is being used on someone else’s project.

Result: When the homeowner realizes he/she has paid for work that has not been performed and when finally tracking down the contractor, he/she makes excuses or asks for more money. Very often the contractor has moved on to another project with your money in hand. The homeowner gets put off by the contractor and is forced to hire an attorney.

Lesson: Put together a more frequent payment schedule that requires invoices that details work that has been performed, supplies and materials used with costs to date and showing those cost deducted from the total contract price. Research your State’s law regarding down payment limits or consult with a construction law attorney to verify a reasonable down payment.

—> 7.) During demolition, the contractor discovers an unforeseen problem, i.e., termite damage on existing wood members and immediately recommends a solution, which is costly, but needs to be done immediately in order to move forward. (Or, goes ahead and makes the fix then presents you with the reason and the bill after the fact.)

Result: The homeowner has no idea that there may be a more cost effective solution but this is an opportunity for a contractor to legitimately add extra costs that are more profitable for him.

Lesson:
Include an Unforeseeable Work Clause in the contract that states that the owner must be given prior notice before any “unforeseen” work is performed. Include the right to obtain other bids for the work to ensure you are not paying a higher than normal cost.

Consumers can learn more about protecting themselves by visiting the ContractorsFromHell.com and enrolling in the Home Remodeling Bootcamp For Homeowners. The Home Remodeling Boot Camp, an online membership site created by Jody Costello, founder of ContractorsFromhell.com, is designed to teach consumers to be their own best advocate and in control of their project. Engaging homeowners to do the necessary homework, giving them the tools and information to help them choose their contractor wisely, will help mitigate the most common problems encountered when hiring and working with contractors


What Are Bonds?


The Importance of Surety Bonds in Construction

Historical Perspective

Surety bonds have been a valuable tool for centuries. The first known record of contract suretyship was an etched clay tablet from the Mesopotamian region around 2750 BC. According to the contract, a farmer drafted into the service of the king was unable to tend his fields. The farmer contracted with another farmer to tend them under the condition they split the proceeds equally. A local merchant served as the surety and guaranteed the second farmer’s compliance.

Suretyship was addressed in the first known written legal code, the Code of Hammurabi, around 1792–1750 BC. A Babylonian contract of financial guarantee from 670 BC is the oldest surviving written surety contract. The Roman Empire developed laws of surety around 150 AD that exist in the principles of suretyship today.

While suretyship has a long history, it wasn’t until the 19th century that corporate surety bonds were used. Recognizing the need to protect taxpayers from contractor failure, Congress passed the Heard Act in 1894, which required surety bonds on all federally funded projects. The Miller Act of 1935 (40 U.S.C. Section 270a et. seq.) was the last major change in public sector surety, and is the current federal law mandating surety bonds on federal public works. It requires performance bonds for public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000. Almost all 50 states, the District of Columbia, Puerto Rico, and most local jurisdictions have enacted similar legislation requiring surety bonds on public works. These generally are referred to as “Little Miller Acts.”

Risky Business

How one evaluates and manages risk on construction projects and makes fiscally responsible decisions to ensure timely project completion is key to success. To gamble on a contractor whose level of commitment or qualification is uncertain or who could become bankrupt halfway through the job can be a costly decision. How can a public agency using the low-bid system in awarding public works contracts be sure the lowest bidder is dependable? How can private sector construction project owners manage the risk of contractor failure?

Surety bonds provide financial security and construction assurance by assuring project owners that contractors will perform the work and pay specified subcontractors, laborers, and material suppliers. A surety bond is a risk transfer mechanism where the surety company assures the project owner (obligee) that the contractor (principal) will perform a contract in accordance with the contract documents.

Types of Bonds

There are three basic types of contract surety bonds:

The bid bond assures that the bid has been submitted in good faith and that the contractor will enter into the contract at the price bid and provide the required performance and payment bonds.

The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

The payment bond assures that the contractor will pay specified subcontractors, laborers, and material suppliers on the project.

Financial Security & Construction Assurance

Although surety bonds are mandated by law on public works projects, the use of surety bonds on privately owned construction projects is at the owner’s discretion. Alternative forms of financial security, such as letters of credit and self-insurance, do not provide the 100% performance protection and 100% payment protection of surety bonds nor do they assure a competent contractor. With surety bonds, the risks of project completion are shifted from the owner to the surety company. For that reason, many private owners require surety bonds from their contractors to protect their company and shareholders from the enormous cost of contractor failure. To bond a project, the owner specifies the bonding requirements in the contract documents. Obtaining bonds and delivering them to the owner is the responsibility of the contractor, who will consult with a surety bond producer. Subcontractors may also be required to obtain surety bonds to help the prime contractor manage risk, particularly when the subcontractor is a significant part of the job or a specialized contractor that is difficult to replace.

Most surety companies are subsidiaries or divisions of insurance companies, and both surety bonds and traditional insurance policies are risk transfer mechanisms regulated by state insurance departments. However, traditional insurance is designed to compensate the insured against unforeseen adverse events. The policy premium is actuarially determined based on aggregate premiums earned versus expected losses. Surety companies operate on a different business model. Surety is designed to prevent loss. The surety prequalifies the contractor based on financial strength and construction expertise. The bond is underwritten with little expectation of loss.

Prequalification of the Contractor

Sureties are able to accept the risk of contractor failure based on the results of a thorough, rigorous, and professional process in which sureties prequalify the contractor. This prequalification process is an in-depth look at the contractor’s business operations. Before issuing a bond the surety company must be fully satisfied that the contractor has, among other criteria:

Good references and reputation;

The ability to meet current and future obligations;

The experience matching the contract requirements;

The necessary equipment to do the work or the ability to obtain it;

The financial strength to support the desired work program;

An excellent credit history; and

An established bank relationship and line of credit.

The surety company must be satisfied that the contractor runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. Surety bonds have played an important role in the construction industry’s success, allowing the industry to sustain its position as one of the largest contributors to the nation’s economic stability and growth.

Contractor Failure

Construction is a risk-filled enterprise, and even capable and well-established contractors can ultimately fail. According to BizMiner, of the 1,155,245 general contractors and operative builders, heavy construction contractors, and special trade contractors operating in 2006, only 919,848 were still in business in 2008—a 20.37% failure rate. Despite the surety’s rigorous prequalification process and best judgment about the qualifications of the contractor, sometimes contractor default is unavoidable. However, when a contractor fails on a bonded project, it is the surety company that remedies the default—not the project owner and not at taxpayers’ expense.

In the unfortunate event that a bonded contractor does default, the surety has legal obligations to the project owner and the contractor. First, the owner must formally declare the contractor in default. Then the surety company conducts an impartial investigation before settling any claim. This protects the contractor’s ability to pursue legal recourse in the event that the owner improperly declares the contractor in default. When there is a proper default, the surety’s options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond.

Bond Rates

Surety bond premiums vary from one surety to another, but can range from 0.5% to 2% of the contract amount, depending on the size, type, and duration of the project and the contractor. Typically, there is no direct charge for a bid bond. In many cases, a performance bond incorporates the payment bond and a maintenance period.

The contractor includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium may be adjusted for the change in contract price. Contract surety bonds are a wise investment— protecting public owners, private owners, lenders, and prime contractors from the potentially devastating expense of contractor and subcontractor failure.

Benefits of Bonds

After analyzing the risks involved with a construction project, consider how surety bonds protect against those risks. Owners, lenders, taxpayers, contractors, and subcontractors are protected because:

The contractor has undergone a rigorous prequalification process and is judged capable of fulfilling the obligations of the contract;

Contractors are more likely to complete bonded projects than non-bonded projects since the surety company may require personal or corporate indemnity from the contractor;

Subcontractors have no need to file mechanic’s liens on a private project when a payment bond is in place, and because mechanics’ liens cannot be placed against public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide;

Bonding capacity can increase a contractor’s or subcontractor’s project opportunities;

The surety bond producer and underwriter may be able to offer technical, financial, or management assistance to a contractor; and

The surety company fulfills the contract in the event of contractor default.

Any contractor—whether in business for one year or 100, large or small, experienced or novice—can experience serious problems. Through the years surety bonds have held fast as a comprehensive and reliable instrument for minimizing the risks in construction.

10 THINGS YOU SHOULD KNOW ABOUT SURETY BONDING

Making the right choice to mitigate and manage risk on construction projects and selecting the most fiscally responsible option to ensure timely project completion are imperative to a successful project – and a sound business. Gambling on a contractor or subcontractor whose level of commitment is uncertain or who could become bankrupt halfway through the job can be an economically devastating decision. Surety bonds offer the optimal solution: providing financial security and construction assurance by assuring project owners that contractors are capable, in the surety’s opinion, of performing a construction contract and paying specified subcontractors, laborers, and material suppliers.

A surety bond is a three-party agreement where the surety company assures the obligee (owner) that the principal (contractor) will perform a contract. Surety bonds used in construction are called contract surety bonds.

There are three primary types of contract surety bonds. The bid bond assures that the bid has been submitted in good faith, that the contractor intends to enter the contract at the price bid and provide the required performance and payment bonds. The performance bond protects the owner from financial loss in the event that the contractor fails to perform the contract in accordance with its terms and conditions. The payment bond assures that the contractor will pay certain workers, subcontractors, and materials suppliers.

Most surety companies are subsidiaries or divisions of insurance companies, and both surety bonds and insurance policies are risk transfer mechanisms regulated by state insurance departments. However, insurance is designed to compensate the insured against unforeseen adverse events. The policy premium is actuarially determined based on aggregate premiums earned versus expected losses. Surety companies operate on a different business model. Surety is designed to prevent loss. The surety prequalifies the contractor based on financial strength and construction expertise. The bond is underwritten with little expectation of loss.

In 1984 Congress passed the Heard Act to protect federal projects from contractor default and protect subcontractors from nonpayment by contractors. The Heard Act was supplanted by the Miller Act in 1935, which basically requires performance and payment bonds in excess of $100,000 and payment protection for contracts between $30,000 and $100,000. A corporate surety company issuing these bonds must be listed as a qualified surety on the Treasury List. Also, almost all 50 states, the District of Columbia, Puerto Rico, and most local jurisdictions have enacted similar legislation requiring surety bonds on public works. These generally are referred to as “Little Miller Acts.” Owners of private construction also manage risk by requiring surety bonds.

Construction is a risky business. Of 1,155,245 contractors in business in 2006 only 919,848 were still in business in 2008 – a 20.4% failure rate. Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. Specifying bonds not only reduces the likelihood of default, but with a surety bond, the owner has the peace of mind that a sound risk transfer mechanism is in place. The burden of construction risk is shifted from the owner to the surety company.

Surety bond premiums vary from one surety to another, but can range from 0.5% to 2% of the contract amount, depending on the size, type, and duration of the project and the contractor. Typically, there is no charge for a bid bond if performance and payment bonds are required on the project. In many cases, performance bonds incorporate payment bonds and maintenance bonds.

The surety company’s rigorous prequalification of the contractor protects the project owner and offers assurance to the lender, architect, and everyone else involved with the project that the contractor is able to translate the project’s plans into a finished project. Surety companies and surety bond producers have been evaluating contractor and subcontractor performance for more than a century. Their expertise, experience, and objectivity in prequalifying contractors is one of a bond’s most valuable attributes. Before issuing a bond, the surety company must be fully satisfied that the contractor has, among other criteria:

  • good references and reputation;
  • the ability to meet current and future obligations;
  • experience matching the contract requirements;
  • the necessary equipment to do the work or the ability to obtain it;
  • the financial strength to support the desired work program;
  • an excellent credit history; and
  • an established bank relationship and line of credit.

Contractor default is an unfortunate, and sometimes unavoidable, circumstance. In the event of contractor failure, the owner must formally declare the contractor in default. The surety conducts an impartial investigation prior to settling any claim. This protects the contractor’s legal recourse in the event that the owner improperly declares the contractor in default. When there is a proper default, the surety’s options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond. That owners have been shielded from risk is evidenced by the fact that surety companies have paid more than $10.5 billion due to contractor default since 1994, according to The Surety & Fidelity Association of America, Washington, DC. In 2008, the surety industry paid more than $13 million in losses on private construction and more than $1.5 billion since 1995.

When bonds are specified in the contract documents, it is the contractor’s responsibility to obtain them. The contractor generally includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium will be adjusted for the change in contract price. Contract surety bonds are a wise investment – providing qualified contractors and protecting public owners, private owners, and prime contractors from the potentially devastating expense of contractor and subcontractor default.

After analyzing the risks involved with a construction project, consider how surety bonds protect against those risks. Owners, lenders, taxpayers, contractors, and subcontractors are protected because:

  • The contractor has undergone a rigorous prequalification process and is judged capable of fulfilling the obligations of the contract;
  • Contractors are more likely to complete bonded projects than non-bonded projects since the surety company may require personal or corporate indemnity from the contractor;
  • Subcontractors have no need to file mechanics’ liens on private projects when a payment bond is in place;
  • Bonding capacity can help a contractor or subcontractor grow by increasing project opportunities and providing the benefits of assistance and advice of the surety bond producer and underwriter;
  • Surety companies may prevent default by offering technical, financial, or management assistance to a contractor; and
  • The surety company fulfills the contract in the event of contractor default.

For more information about surety bonding, please contact the: Surety Information Office www.sio.org | sio@sio.org

The Surety Information Office (SIO) is the information source on contract surety bonds in public and private construction. SIO offers brochures and CDs and can provide speakers, write articles, and answer questions on contract surety bonds. SIO is supported by The Surety & Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP). All materials may be accessed at http://www.sio.org.

Surety Bonds: It’s Not What You Think

When it comes to home remodeling or renovating some part of your home, the first time a homeowner usually becomes familiar with the term “surety bond” is when problems with the contractor have come up.

It’s also a time when the homeowner may find that the general contractor has no liability insurance and now has only the surety bond to look to for help in recovering damages such as shoddy workmanship or abandonment of the project. Unfortunately, the news is not good.

First and for most, a surety bond IS NOT an insurance policy but rather a guarantee whereby the surety guarantees that the contractor (called the principal) will perform the obligation stated in the bond.

There are a number of bond types available but for the purpose of home remodeling and improvements there are three that would apply:

• Contractor Licensing Bonds
• Performance Bonds
• Payment Bonds

Let’s address Payment and Performance bonds first, as they are usually the least utilized by homeowners in their home improvement projects and carry a little more protection for homeowners.

Generally, Performance Bonds guarantee the completion of the project according to the building plans and specifications. If the job is abandoned or the work is unacceptable, the bonding company has the option of hiring another contractor to complete the work or settling for damages.

Payment Bonds assures the owner that no liens for labor or materials will be filed against the property as payment is guaranteed. In both cases the homeowner pays a percentage of the contract price to obtain the surety bond and becomes the obligee of the surety.

There are many complexities to these bonds not covered here that you would want to know if considering either of these bonds. If you’d like more information be sure to follow the links at the end of this article and do your research.

The most common surety bond homeowners get involved with is the Contractor License Bond, typically as a result of the contractor violating some aspect of the Contractors License Laws.

In California, contractors are required to post some form of security deposit with the Contractors State License Board and surety bonds are typically used for this purpose although cash or certificate of deposits may also be posted.

In this scenario, a surety bond is a contract in which the surety company promises the State of California that the contractor will comply with the provisions of the Contractors State License Law (CSLL) – Chapter 9 of Division 3, starting with section 7000 of the Business and Professions Code. The contractor’s “obligation” in this case is to NOT commit any violations of the CSLB that are grounds for disciplinary action against the license. The law sets forth specific violations, which the bond will cover.

If the contractor does not comply with the conditions of the bond, a consumer and/or employee may file a claim against the bond. (B&P Code Section 7071.5) The amount of the surety bond for general contractors in California is $12,500. (Other states vary in the required amounts.)

That’s $12,500 for ALL the jobs the contractor has going, not per project. So imagine if there are several individuals who for various reasons file a claim against that one bond. Very often damages per project exceed the entire dollar amount of the bond, let alone becoming available to the multitudes.

It’s just not going to happen, which is why homeowners need to be sure their contractor of choice carries liability insurance. So once that bond is depleted the contractor must renew the bond as well as pay back the money lost to the surety in order to keep his or her license. If a complaint has also been filed with the Contractors’ State License Board (which typically is the case) an independent investigation will be conducted by the Board or regulatory agency in addition to the surety company to determine if any violations occurred.

The contractor may be cited or even loose his/her license depending on the violations. It’s not a speedy process by any means and can be frustrating to the harmed homeowners not familiar with the process but needing to get on with repairs.

The important point that homeowners need to understand is that even if the contractors license board determines violations have occurred and the contractor is cited or even revoked, that doesn’t necessarily mean that the Surety will follow suit. Their terms of determining whether a pay out is justified is not dependent on what the Board deems is a clear violation of the CSLL.In other words, the surety company will determine if it will pay the claim and the Contractors Board will decide if disciplinary action or other resolution of the complaint is appropriate.

“Now this is where it gets sticky and very often consumers get slapped in the face by the surety company with a “no pay out” based on their own investigation of the facts even though their contractor was found to be in violation of the Contractors License Laws by the board. And that’s because the surety has an obligation to their principal – the contractor – to ensure that his/her license (and money!) is protected and not suspended. Their risk is very real and can quickly be consumed if not fervently protected, which is why their jurisdiction of what is “reasonably clear” is often at odds with what the CSLB determines.”

The surety companies will tell you that they serve both the bond claimant and the contractor but that’s just garbage. They serve the contractor, period. You cannot “serve two masters”, as one will always get the short end of the stick and that’s the homeowners.

“Many consumers have shared their frustrations with being denied pay out from surety companies even though clearly the contractor violated the license laws, damages were documented and disciplinary action pursued. It’s a no win fight as the surety companies have their so-called jurisdiction legally worded to protect their own. It’s simply not equitable no matter how much they deny it but then again, aren’t we Americans used to getting (ahem) hosed by now?”

Given that warning and using the California Contractors State License Board explanation on surety bonds, who benefits from the bond and how a homeowner files a claim against a surety bond follows:

Persons who can make a claim against the bond are listed in the CSLL (B&P Code Section 7071.5), and include:

a. Any homeowner contracting for home improvement work on the homeowner’s personal family residence damaged as a result of a violation of the CSLL by the licensee.

b. Any person damaged as a result of a willful and deliberate violation of the CSLL by the licensee, or by the fraud of the licensee in the execution or performance of a construction contract.

c. Any employee of the licensee damaged by the licensee’s failure to pay wages.

d. Any express trust fund damaged as a result of the licensee’s failure to pay fringe benefits for eligible employees.

How would a consumer file a claim against a bond?

In California, a consumer consults the CSLB’s Web site for information about the bonding company that wrote the surety bond covering the dates of the contract and the dates of the construction. Otherwise, contact your states Licensing Board for obtaining surety bond information on the contractor.

The consumer contacts the surety company, providing it with a written narrative describing the problem in detail, and attaching a copy of the contract and all other pertinent documents and information.

If a consumer is not satisfied with the response of the surety company, the consumer may take the contractor and the surety company to Small Claims Court for amounts up to $5000 against the contractor. The court can order the surety to pay up to $4,000. (Code of Civil Procedure Section 116.220(c)). Claims above $5,000 must be filed in Superior Court. (See the CSLB publication, A Consumer Guide to Filing a Small Claims Court Construction Claim.)

Be sure to visit your States regulatory agency, consumer protection division or local building departments for more information on surety bonds. In California, you can go to the CSLB web site and read up on surety bonds as well as more information on contractors and licensing requirements.

Jody Costello is a Consumer Advocate and publisher of ContractorsFromHell.com. As a result of a home remodeling nightmare she created ContractorsFromHell.com to help others avoid the problems her family encountered. Over the last nine years she has helped homeowners deal with problems as well as providing tips and resources. Working with the Contractors State License Board over the years, Costello helped to create greater protection and a voice for consumers and has testified before the State Senate supporting legislation protecting consumers. Go to http://www.contractorsfromhell.com

Source/Links:www.sba.gov/financing/bonds/whatis.html

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