Start with referrals
Just like credit card or mortgage companies, conducting background checks on contractors gives you an idea of a business's reputation and work ethic. Do not be afraid of asking for names and numbers of past jobs. Contractors are not cheap; your research should not be either. Do not settle for letters - those can be fabricated or written by family and friends. A reputable contractor is willing to provide a list of past clients.
If you have a poor gut feeling about a contractor, chances are something is not right. A good contractor is easy to communicate with, accessible, returns calls, discusses options for problems which may arise, is knowledgeable, provides estimates on paper and works within your budget. If they falter on any of those items, you might want to move onto the next candidate.
You would not hire someone who is "read about" lighting to work on your electrical - that is literally playing with fire. Make sure the contractor and their sub-contractors have the appropriate licenses and skills by asking for their business license number and confirming with your local licensing office whether they are in good standing. You also need to validate whether they are insured for public liability and property damage as well as workers' compensation.
The larger the renovation, the more complicated it will be. Make sure you understand the progression in all of its stages; prior to, during and after completion. Do not leave yourself or your wallet open to unexpected surprises or assumptions or questions. Have your responsibilities and those of the contractor defined and set in writing that way all parties know what is expected of them and who is accountable for what.
Lawyers are rich because people opt for trust over treaty. Unless it is in writing, you can assume all verbal agreements are non-existent and will not stand up in court. Confirm the renovation details in writing along with quotes, amendments to pricing, and arrangements for delays or unexpected costs.
Sometimes the lowest price is not always the best option. It is always a good idea to accept several estimates in order to gage a median price and negotiate from there. The contractor willing to cut "dirty deals" may also cut corners; creating potential health and safety issues down the road. Conversely, the contractor submitting an inflated estimate is probably not worth your time or money if a fat invoice supersedes the project.
How a contractor conducts their financial transactions is a pretty good indication of their work ethic. Someone who asks for cash-only payments and is dodgy about providing receipts or a contract is probably unlicensed, uninsured and almost guaranteed to be untrustworthy and unreliable. Cash deals also leave homeowners with little legal recourse if something goes wrong or if the contractor decides to walk off the job. Do not risk getting burned by trying to save a few dollars; you may end up paying twice the amount down the road.
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