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Building or Remodeling Your Home?
Chris W. Strand, MST, CPA/PFS
Principal, Tax Services; Director, High Net Worth Services - with contributions from Jeanne Murphy
July 13, 2009
Sam and Jenna fulfilled a long-standing dream when they built their custom home last year. Unfortunately, it turned into a financial nightmare when their general contractor fled the state without paying various subcontractors and materials suppliers. The couple then learned that they were legally liable for the money owed to these subcontractors and suppliers, even though they'd already paid their general contractor for the services and supplies!
Nikko saved for a year to replace the roof on his home. When the roofing contractor he hired fell and fractured his lower spine, Nikko later discovered that the contractor was not covered by the state's workers' compensation insurance and had filed suit against Nikko over the accident.
Home construction and remodeling projects come with potential financial liabilities over and above the estimated labor and materials charges. It's important to know the risks and take reasonable precautions. While the law provides some protection from fraudulent or incompetent contractors," according to the Washington State Department of Labor & Industries, "it doesn't guarantee honest transactions or perfect performance. Protect your investment by being an informed, cautious consumer."
Before you embark on any significant project, it's always a good idea to consult with your attorney. Ask him or her to review the contracts and advise you regarding proactive actions you can take to prevent problems in the future.
To help you avoid a few of the major financial pitfalls that can accompany a construction or remodel project, the following briefly describes potential trouble spots and the precautions you can take―and includes references to tools and publications with more detailed information.
Licenses, Bonds and Insurance Coverage
Washington contractors are required to register with the state's Department of Labor & Industries, post a bond, have a business license, and maintain insurance coverage that includes workers' compensation insurance and general liability insurance for property damage and public liability.
To ensure that your contractor or other licensed professional―an electrician or plumber, for example―meets all the state's requirements, the Department of Labor & Industries provides a searchable online database at https://fortress.wa.gov/lni/bbip/.
Construction Liens
Washington State law provides that people who supply labor or materials for your construction or remodel project and are not paid have the right to force payment by filing a construction lien against your property. A construction lien can prevent you from selling your home or, as a worst-case scenario, even result in a foreclosure.
Construction liens can be filed by general contractors, subcontractors, and suppliers―you are ultimately responsible for ensuring that they are paid. As a result, even if you have paid your general contractor for the work, you could also be forced to pay a subcontractor or supplier that was not paid by your general contractor―and thus wind up paying twice for the same work or materials.
There are precautions you can take:
 Always ask your contractor to provide you with a Disclosure Statement that documents the fact that the contractor is registered with the state. Importantly, it also provides the amount of any bond or deposit the contractor has posted with the state to satisfy future claims.
Ask your contractor to provide you with legally required information regarding lien release documents.
Before you make final payments to your contractor, ask for lien release documents from all the contractor's subcontractors and materials suppliers to ensure that they have been paid and will not file a lien against your property.
Workers' Compensation Insurance
You could be sued by people who are injured while working on your project and are not covered by workers' compensation insurance. Ask your contractors and subcontractors if their employees are covered by workers' compensation, and make sure that the coverage includes any owners who may work on your project.
To verify that a contractor or subcontractor is covered, the Department of Labor & Industries provides an online tool at https://fortress.wa.gov/lni/crpsi/. There is also a link to verify workers' compensation accounts in neighboring states.
For More Information
If you'd like to learn more about your general responsibilities and potential liabilities, consult the following resources:
The Washington State Department of Labor & Industries provides an online tool, Basics for Homeowners: Guide to Hiring a Contractor, at http://www.lni.wa.gov/TradesLicensing/Contractors/HireCon/Checklist/before1.asp.
The publication entitled Hiring a Contractor or Remodeler? What You Should Know―prepared by the Washington State Department of Labor & Industries― is available online at http://www.lni.wa.gov/IPUB/625-084-000.pdf
The publication entitled Facts About Construction Liens―prepared by the Washington State Department of Labor & Industries―is available online at http://www.lni.wa.gov/IPUB/625-017-000.pdf
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