The White KnightCanadian Contractor Business Coverage Excess Financial Liability Loss Market Professional Property risk
By Brynna Leslie
By Brynna Leslie
Homeowner Rick Naughton was $100,000 in the hole and had already been through two contractors in eight months. All he had to show for it by mid-August was an inhabitable bungalow, a rocky foundation, and a marriage on the brink. It’s every homeowner’s worst nightmare. But what does it mean for the contractor who comes into finish the job?
“When I first got the call, I agreed to go and have a look at the site,” says Jerry Stockla, owner of Newteck, a renovations company in Ajax, Ont. “I didn’t have any intention of stealing a job from anyone, but I thought maybe there had been a misunderstanding between the client and the contractor, and I could help get the ball rolling again.”
Stockla agreed to visit the building site, a 1950s home in an established neighbourhood of Pickering, Ont., a rapidly-growing commuter hub east of Toronto.
“Some real alarm bells went off,” explains Stockla. “The goal had been to put a second storey addition on this bungalow. It was obvious that a demolition had been done and the house had been destroyed, but the structure that was there was completely unusable. They had ripped the drywall off and the insulation out, but there was no framing to support a second storey, no headers, and it appeared very structurally unsound. My initial feeling was that there was no way they could build a second storey on this house.”
The biggest problem – and what had put the work on hold in the first place– was the foundation. The previous contractor had stopped work following the upper-level demolition, arguing he needed to reinforce the foundation before any further construction could be completed. That was going to mean an additional unexpected $27,000 cost to the homeowner, who had already paid out in excess of $60,000, according to the draw schedule that had been prearranged. It was at this point that Naughton sought out Stockla’s advice on the project.
Before agreeing to get involved, Stockla recommended the homeowner spend a couple of days digging down the side of the foundation pillars to determine absolutely if there was any way the bungalow’s foundation could support a second storey. They quickly discovered that, typical of the houses built in the 1950s, the house was resting on pillars, but there were no footings underneath.
“I felt badly, but I said to the homeowner, ‘Rick, this is bad news,’” recalls Stockla. “’There is no value here. The foundation has no footings, and the structure is in the way of putting footings in. The only way to recover the project is to demolish the house and put in a proper poured-concrete basement with footings; in other words, rebuild from the ground up.’”
“The biggest question in my mind was why the contractor hadn’t checked the foundation before he started the work,” says homeowner Naughton. “It was only after the demolition had been completed that I called the city and discovered the contractor had never requested a building permit. The thing is, they would have required an engineering report and completed drawings to get the permit, and they didn’t have that either.”
Naughton wanted to sever relations with the contractor immediately, but Stockla initially had another plan.
“I told Rick he needed to confront the contractor and get some of his money back, at the very least the $20,000 retainer fee,” explains Stockla. “For a bit of sewer work and the demolition, he had already handed over more than $85,000. I valued the work done at less than half of that cost.”
Stockla offered to mediate a discussion between Naughton and the previous contractor to help negotiate the way forward.
“I could tell that Rick didn’t have the fight in him. The contractor had been throwing all kinds of terms at him and trying to confuse him with contractor jargon, so I agreed to sit down with both of them, and try to work out some way to get the project going again.”
Stockla arranged a “Tim Horton’s power meeting” with Naughton, the previous contractor and himself. By the end of an hour-long sit down, they had come to a verbal agreement that would see the contractor return the $20,000 retainer fee to the homeowner, and deliver a completed set of drawings and a building permit within four days.
“I figured if the contractor could give that retainer fee back as an act of good faith, they could start over again,” says Stockla.
But the deadline for the money and the documents came and went, with no result.
“By that time I realized this was not the right contractor for Rick,” says Stockla. “At the rate he was burning through money, he was going to be hundreds of thousands in the hole, with no place to live, because the job just wasn’t going to get done.”
“I told him you need to move on and find someone you can trust,” says Stockla.
Contractor as Robin Hood
With some hesitation, Stockla agreed to take on the job.
“It’s a bit of a Robin Hood project for me,” he admits. “I felt bad for the client, and frankly, I felt bad for the industry. It’s stuff like this that gives all contractors a bad name, and I think there’s a lot of distrust out there toward contractors among homeowners.”
Stockla had originally been matched with Naughton through RENOVANTAGE, a consortium of contractors, trades’ people and suppliers in the Greater Toronto Area (GTA) that are attempting to raise the bar of professionalism in the home renovations’ industry.
“The issue in the residential renovations’ market is that there’s no common brand,” explains RENOVANTAGE founder Mike Draper. “People trust national brands, and businesses can benefit from having a brand attached to their names that represents a mark of quality.”
Each participant of RENOVANTAGE undergoes a rigorous certification process, which includes a thorough review of previous work, a driver’s abstract, an extensive criminal background check, confirmation that the company has a minimum of $2 million in liability coverage, a minimum of $300,000 in annual revenues, a valid HST number, and a valid WSIB clearance certificate. Participating companies then pay each month to put the RENOVANTAGE stamp on their businesses, which includes a $25,000 performance guarantee for the homeowner on each project, access to business coaching advice for the company, and access to a standardized contract addressing all legal and financial elements of a project.
Established in February 2011, RENOVANTAGE is still in its infancy. Stockla, for one, felt the Pickering project was a great way to demonstrate how the RENOVANTAGE brand works.
“Rick is kind of like a poster boy for the RENOVANTAGE program,” says Stockla. “After being disappointed by several previous contractors, he was looking for a contractor that would form a professional and trusting relationship with him, one where he’s protected as well as the contractor. So he went looking for a brand that guaranteed that quality.”
The project in Pickering has since been completely reconfigured. The existing house was almost entirely demolished in mid-October, and work for a rebuild of a two storey, three-bedroom house began a few weeks later. It’s estimated the project will take six months and cost the homeowner up to $300,000.
“The homeowner was pretty up front with me and told me he was short for the price I’m charging, but he’s looking to borrow the money from somewhere else,” says Stockla. “I have to go with my gut on these things. It’s kind of like the old-fashioned gentlemen’s handshake.”
Stockla has a contract in place, but no formal payment schedule. He’s verbally agreed to allow the homeowner to pay him in weekly instalments upon completion of each stage of the work. While Stockla admits this kind of arrangement may look risky from the outside looking in, he feels confident the project will turn out well. Others are not so sure.
The White Knight
“This contractor wants to be the knight in shining armour,” says Leslie Shiner, owner of The Shiner Group, a financial management consultancy for the construction industry in California. “At the same time, he’s opening himself up to working with a potential crazy person, to someone who has unreasonable expectations, or to someone who is just clearly a bad communicator.”
“It’s admirable that the contractor wants to go in and protect the reputation of his industry and be the hero, but the reality here is that this client has a history,” she adds. “Maybe the client has had bad luck, but maybe he has unreasonable expectations. The contractor has to keep his eyes as wide open as possible to find out if there’s more to this story than he knows.”
Stockla admits that his current project is anything but text book. But since the client wrote the first cheque and has continued to submit payment weekly and on-time, as agreed in the contract, he believes there is no more risk to this project than to any other.
“It was always the plan that he would refinance, and he’s done that,” says Stockla. “We have the plan on paper, but mostly we have developed a very open relationship.”
Shiner points to the fact, however, that Stockla is the third contractor on the Pickering job. While the first contractor didn’t get past the design stage, the relationship between the homeowner and the contractor did end on a sour note. The homeowner paid $10,000 for a design and an engineering report, which was completed but never delivered once the relationship had been severed.
“This kind of thing happens all the time,” says Shiner. “One of my clients was in a similar situation. He took over a job from someone else. The homeowner, a woman, had fired the first contractor and hired the second. In the first few months, she stroked his ego and played the victim card, but in the end, she was impossible to work with.”
Shiner recommends contractors go into these types of situations as if they will eventually go bottoms-up.
“He has to document everything religiously. Every conversation needs to be followed up with a written e-mail. Every agreement, however casual, must be put in writing,” explains Shiner. “He has to treat this job as if it will go bad, and ask himself what sort of documentation is he going to need six months from now or two years from now when the job falls apart and people are suing each other.”
“He doesn’t have to go in with the attitude that the job will fail, but he has to document it as if it will.”
The one thing Stockla does have in-place to protect both him and the client, is the RENOVANTAGE contract, which Draper says has been designed to be a pillar of security on every project.
“We’ve put together a fairly detailed contract that we suggest all contractors use for their projects,” explains Draper at RENOVANTAGE. “There are guidelines for the homeowner on payment schedules, guidelines for the contractor on how not to get too far head on that payment schedule. And we recommend that they never get more than $25,000 in arrears because that $25,000 deposit, which we keep in trust, is designed to protect the homeowner and the contractor. If anything goes wrong, we can use those funds to instigate a dispute resolution process – which is clearly defined in the contract – or we’ll find another contractor to finish the work.
Shawn McCadden, a remodelling specialist and business consultant in Chicago spends many months each year running seminars on how contractors can avoid these types of risky business situations.
“My personal experience tells me I would run from that job as fast as I could,” says McCadden. “It is bad business to put his business at risk, his family at risk, and his employees at risk because he wants to be a nice guy.”
It’s his opinion that failing to collect payment and deposits up front is a common malpractice among contractors, many of whom are great at swinging hammers, but find themselves in the position of being the “accidental businessmen,” unsure how to properly manage the financial side of the business.
“Dell Computer is not going to build you a computer until you pay for it, and it’s the same thing here,” he says. “This contractor is taking a huge risk by not taking the money up front. Unless this guy wants to file to be a non-profit business, he has got to go into every project with a mind to protect his profit.”
Too often, he says, contractors learn this lesson the hard way, when they’re unable to collect the money required to cover not just the material and labour costs of the project, but also the money needed to keep the business running smoothly.
“It happened to me once early in my business,” admits McCadden. “It was a $40,000-addition that cost me $145,000 by the time we adapted everything to meet the homeowner’s changing expectations. I had to swallow that loss, but I told myself never again. I learned from it and my whole team learned from it, not only who we would carefully choose for customers in the future, but how we would manage those customers. The accuracy and detail of my paperwork went up dramatically after that.”
Stockla argues there are few independent contractors in the business who get proof of financing in advance of a project. As long as he’s receiving his money weekly, as per the verbal agreement with his client, he’s comfortable continuing the work.
“There are hundreds of cases where a new homeowner puts a $10,000 deposit down on a half million dollar home,” says Stockla. “And the builder goes ahead and builds it and doesn’t collect another cent until the closing date. If anything goes wrong, we have the option, within thirty days, to put a lean on the property, which goes against the deed.”
Still, McCadden believes the best way to avoid any haggling over money is to have the project plan completely laid out before any work begins.
“Most contractors I know are control freaks,” says McCadden. “So why not go into every situation as a control freak? A lot of people say, ‘we’ll cross that bridge when we come to it,’ but the problem with that is it presumes there will be a bridge when you get there. Why not know for sure if there’s a bridge, where the bridge is, and how you’re going to cross it before you start?”
Not only does this protect the contractor, says McCadden, but it goes a long way to protecting the homeowner as well.
“It’s a way of managing expectations,” says McCadden. “It’s working out how you’re going to play the game and what the rules are before the first pitch is ever thrown. Both parties agree what each other’s responsibilities are, and if something changes partway through, a change order is required. No additional work or changes should be made until that change order is written and signed off.”
Similarly, says McCadden, no work should be done until it’s been paid for. Payment schedules, he says, should always be based on milestone completion of the project. And if the homeowner misses a payment, the contractor has every right to stop the work until he receives the money owed to him.
“Good business means a project is properly specified and properly estimated in advance,” says McCadden. “The cost estimate needs to be broken down and done in the same critical path order in which the project will be built. A good business should be able to anticipate cash flow needs.”
“In this case, the contractor has admitted that the homeowner may not have enough to pay for this project. Where’s the money going to come from?” asks McCadden. “What happens when he gets to the point where the money is exhausted. The contractor is going to have to walk away, fine. But depending on how the rest of his business is set up, it’s not very easy to stop work on a Friday on one project, and remobilize in a matter of a few days to start another project on Monday. How can he maintain his overhead when the carpet has been pulled out from under him?”
But Stockla says he has his ducks in a row, and he’s confident that the project is as safe as anything he’s undertaken in the past.
“We have the RENOVANTAGE contract in place, they’ve paid us money on time when we’ve asked, they’re paid up to date, and as far as I understand it, they’ve secured financing to finish the job,” says Stockla. “I don’t expect him to finance my company and I don’t expect me to finance his project. As long as we keep that understanding in place, we’re fine.”
“A written-out draft is more standard, but sometimes you have to go with your spider senses,” says Stockla. “I’ve had cases where I’ve had ironclad documents in hand and things have still gone wrong. In this business it’s all about relationships, and I have a very good and trusting relationship with this client.”
Still, McCadden often tells his contractor clients that, no matter how nice they are, they are in business and they have a responsibility to protect their business assets and their employees, and to make a profit, in every situation.
“It’s okay to be empathetic, but don’t be sympathetic,” says McCadden. “Sympathy means taking ownership of the problem, which is what this guy seems to be doing, and becoming a part of that problem. Empathy is saying, ‘I feel bad that happened and I’m here to help you through it, but I don’t own this problem. It’s your problem, it’s your house. And he’s got to be prepared to just walk away.