What California Real Estate Investors Should Know About Construction Contractors

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Author: Staff

Investing in California real estate often requires repairs or renovations. Some real estate investors have the expertise to perform the work themselves. But everybody else must rely on contractors to renovate existing improvements on real property, or build new improvements from the ground up. California real estate investors must carefully research prospective contractors, and the should maintain close communication throughout the project.

Requirements for California Contractors

California law defines the term “contractor” as any individual or business that is able to “construct, alter, repair, add to, subtract from, improve, move, wreck or demolish” any improvement to real property. A license is required for any project valued at $500 or more.

The Contractors State License Board (CLSB) licenses contractors in three main categories: general engineering, general building, and specialty. Real estate investors commonly use contractors licensed in the latter two categories. The CLSB licenses specialty contractors in dozens of subcategories, such as insulation, framing, drywall, HVAC, landscaping, plumbing, and welding. Investors can research the status of a contractor’s license on the CLSB’s website.

Bidding on a Contract

The bidding process often involves numerous compromises and adjustments to a contractor’s initial bid. Investors should insist on an itemized bid that shows the costs for as many individual elements of the project as possible. The bigger the job, the more important it is to be able to see how much each part of the project will cost. Having itemized costs also makes it easier for the investor to monitor the progress of the project.

Investors should be wary of allowances, where a contractor might not know how much part of the project will actually cost. Communication with the contractor can help produce more definite figures. The final approved bid should be as precise as possible about the work to be performed, and should contain all of the provisions needed to create an enforceable contract.

The Contract Itself

The written contract between the investor and the contractor must describe, in as much detail as possible, the work to be performed, the total cost of the project, the timetable for payment, and provisions for approval of the work by the investor. In any dispute between the parties, a judge, mediator, or arbitrator will look to the written contract to see what was expected of the parties.

While work on a project is ongoing, an investor may wish to change some part of the project, or circumstances may require changing something. These changes should be reflected in written “change orders” signed by both parties. The contract should establish a clear procedure for change orders, and should state that change orders that follow this procedure become part of the contract.

Communication with the Contractor

A contracting project can appear chaotic at first glance, and it may be difficult to determine who is “in charge.” This is particularly true when the general contractor employs multiple subcontractors on a work site. Maintaining clear lines of communication between the investor and the general contractor can help the parties resolve difficulties before they become disputes.

Disputes with the Contractor

Disputes may arise over the timeline of the project, the quality of the work, or payment. Contracts should identify the jurisdiction and venue for legal claims, and should identify any alternative dispute resolution methods the parties want to use.

If the dispute involves alleged lack of payment by the investor, California law allows almost anyone involved in a project, from the general contractor to a materials supplier, to file a mechanic’s lien on the investor’s property.

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