The Underground World of Renovations for Cash
Everybody loves a "deal", but when it comes to hiring a renovator
to work on your home, that "special cash price" can come with a lot of serious risks. Maybe it's not quite the deal that you bargained for?
The Risks - What if?
Quality Issues - What if?
Permits and Inspections
The Small Job -What if?
7 Steps when Hiring a Contractor
The Written Contract - What should be included?
You might find it a strange alliance when you hear that The Canadian Home Builders Association and Revenue Canada have joined forces to fight Canada's underground economy in the residential construction/renovation industry.
This partnership has launched a consumer educational campaign called "Get it in Writing" to warn consumers that hiring a contractor on a "cash deal" can often result in potential legal and financial problems. Repercussions when a deal goes wrong, can often cost more more than the original perceived "cash savings".
Paul Wilson of HOME INSPECTORS has seen a lot of "cash deals" go sour. He warns that a cash deal generally means no written contract and no receipts provided for money paid. Without a written contract in place you have no recourse when things start to go wrong
- and they do, quite frequently!
Most homeowners who get enticed into cash deals usually assume that the contractor is cheating on taxes in order to be able to undercut their prices below that of the competition. They also assume that the contractor is the one taking all the risks after all it is the contractor, not the homeowner who is cheating by not declaring the income on their tax return.
The harsh reality is that underground cash deals for renovation projects, involves a lot more than tax evasion and always puts the homeowner at tremendous risk.
The Risks - What if?
OK - So what if something does go wrong? When the underground cash renovator offers you such a low priced deal, what is not explained to you is that they are also passing some very serious risks on to you in order to be able to offer such a low price. If they explained why they can offer you such a deal, you might not think it was such a great bargain and realize it for the nightmare it could become.
No contract means no receipts, no GST or taxable income reported and for that reason, contractors definitely don't want any government involvement like building permits or inspections that might draw attention to their underground industry.
The best way to understand some of the risks that homeowners face during renovation "cash deals" is to ask some - What if ? questions.
- What if the contractor takes a deposit up front and disappears or quits a job part way through?
With a cash deal and no written contract - Good Luck! It is virtually impossible to prove that you have paid a contractor for anything. It becomes your word against theirs.
- What if the contractor damages my home?
Professional contractors who operate their business properly, carry comprehensive business insurance that covers them in the unfortunate event that they damage a clients (or neighbours) home. Underground contractors are less likely to have any such insurance. If this is the case, you can only rely on their willingness and ability to make good and pay for the damages or repairs. Don't count on your homeowner's insurance policy to bail you out here either. Many homeowners policies have limitation clauses that state that they will not cover damages resulting from repairs or renovations caused by third parties which may leave you on the hook financially.
- What if a worker gets injured while working on my home?
This is not a simple question to answer. Companies with more than 1 employee are required by law to have Workmen's Compensation coverage in case employees get injured on the job. In some provinces, self employed individuals may "opt out" but should carry private disability insurance coverage to cover any work-related injuries. In some provinces, if a homeowner hires a contractor without Workmen's Compensation or private disability insurance coverage and they are injured will working on the homeowners property, the homeowner may be responsible for medical and/or rehabilitation costs.
As a homeowner, anyone you hire to work on your property should as part of your contract with them, be asked to provide proof of Workmen's Compensation or private disability insurance coverage. Otherwise it may be very unclear as to the homeowners responsibility in the event of a contractor injury while working on their property.
- What if a contractor does not pay his suppliers or subcontractors?
Under the Construction Lien Act, most provinces have construction liens legislation to protect the financial interests of suppliers and subcontractors from non payment for services or supplies. When you hire a contractor, your contract should specify that a certain amount of money (usually 10 to 15%) must be held back from all payments made to the contractor for a specific length of time (usually 30 to 45 days after the work is completed). If you do this, your financial liability, should the contractor fail to pay suppliers or subcontractors, is limited to the amount of the payment holdback. With a cash deal, where nothing is written down, it's unlikely that you have this protection.
Quality Issues - What if?
- What if a contractor delivers poor quality workmanship?
When homeowners hire a contractor to do a job, they expect that the job will be completed in a workmanlike fashion, in a timely manner and on budget. They also expect the contractor to stand behind their work generally providing both a guarantee and offering prompt and satisfactory warranty service. When you have a written contract, the possibilities of misinterpretations or misunderstandings with your contractor are greatly reduced. You are also in a much stronger legal position if your contractor lets you down. A proper, written contract sets out what you and your contractor have agreed to. For a new home building or renovation project, the contract should include details of the design, material and product specifications, the project schedule, costs and payment arrangements, etc. For simpler home repair jobs, less detail may be needed, but it should still cover all of these important points. And in all cases, the contract should provide a clear warranty on the work-what's covered and for how long. In an underground cash deal situation, you may have a very difficult or impossible task to prove your point.
So what happens with poor workmanship or poor quality issues if they arise? Without a written contract, you may have severe difficulty proving your position. If the case goes to court, which may be your only option, a judge will have to decide who to believe, you or your contractor.
- What if laws are broken?
Homeowners who hire underground contractors to get a "cash deal" often believe that it is the contractor and not themselves who has broken any laws.
However, this doesn't reflect what's really involved in most underground deals. If a contractor isn't reporting income and paying taxes, they won't want their name turning up on other government records, such as Workers' Compensation files, or business license applications, or building permits.
In order to remain "invisible" to all levels of government, they must avoid the paperwork required to operate their business properly. And in some cases, when they break the law, the homeowner can end up being responsible.
Building permits and inspections are the most common example. Most residential construction requires a municipal building permit. This ensures that the plans and construction work will comply with local building codes. Professional contractors know what the building code involves and will ensure that all required permits are in place. In many cases, underground contractors will skip this paperwork, especially with interior work not visible from outside the home.
It is however, the property owner, not the contractor, who is required to meet building code and permit requirements. If a permit is not obtained and the municipality finds out, the homeowner will be considered the party who is at fault. If the work does not meet code requirements, the municipality can (and often does) order it to be torn down, at the homeowner's expense.
Underground cash contractors avoid direct involvement in the permit and inspection process in order to keep their work "off the books". For this reason it's much more likely that permit and code requirements will be violated. When this happens it's the homeowner, not the contractor, who is breaking the law.
There are a number of other laws that can also affect homeowners should they hire an underground contractor. While these vary from province to province, laws concerning to Workers' Compensation coverage, consumer protection against overcharging, security of deposits and prepayments as well as construction liens can all involve risks to homeowners who hire someone who doesn't provide a written contract and proper documentation.
Some provinces also require special licensing and bonding of contractors. particularly if they receive deposits or prepayments from customers.
A contract based on provincial law is the best way to protect yourself and your family from financial risks. Professional contractors know this and for that reason, do not offer "cash deals" done under the table.
Permits and Inspections
Before you undertake repairs or renovations on your home, or have a new home built for you, it's important to understand the municipal permit and inspection process.
Every province has a system of Building Codes. These codes are enforced by municipalities, utilities and their agents, who also carry out inspections to verify that work has been done properly and complies with all applicable codes. Depending on the nature of your project you may require one, or more, of the following permits:
A building permit for the construction of a new home, or alterations, additions or repairs to the structure of an existing home.
An electrical permit for wiring in a new home, or changes to the electrical system in an existing home.
A plumbing permit for plumbing in a new home, or repairs or alterations to a home's existing plumbing.
An HVAC permit for new heating or other installations involving the use of natural gas or propane, or for changes to these systems in an existing home.
A Municipal occupancy permit allowing the occupation of a newly built or substantially renovated home.
A permit is usually required for any construction work that involves modifications to the load-bearing structure of your home, that could affect the health and safety of those in your home.
It is important to determine if the work you plan to do requires a permit. To do this, call your local municipalities building department and explain the planned work in detail. You may be required to visit the municipal office to complete an application form and provide proper drawings of your renovation or construction project in order to obtain the required permits.
Sometimes, nonstructural repairs like replacing roofing shingles or a flooring installation do not require a permit. Other projects, like window replacement may, or may not, require a permit. If you are not sure, check with your municipality before the work starts. And if any contractor you talk to suggests that you can "skip the permit process" because no one will notice the work being done, you may want to look for another contractor.
As the owner of the property, you are the individual ultimately responsible for obtaining all necessary permits and inspections - not the contractor. Whether or not your contractor informed you about the necessity of a building permit, you will still be held responsible by the municipality. And the municipality or utility can force you to correct deficiencies in the work or demolish any work that does not comply with the building, electrical, plumbing or gas codes or municipal zoning requirements.
When you hire a professional contractor and create your contract for the work to be done to your home, you can specify that the contractor will be responsible or obtaining all permits and arranging for all municipal inspections on your behalf. This will make the contractor accountable to you for meeting your permit obligations.
The Small Job - What if?
Often the homeowner who would insist on a contract for a large repair or renovation, will think it OK to waive the requirement on a smaller job. This can prove to be a huge mistake.
The level of risk involved in a cash deal is not really lessened or dependent on the total cost of the project. Granted, if the contractor fails to deliver or quits during the job, your financial burden may be greatly reduced with a small job, but there are other considerations;
- What if a $200 Plumbing repair results in $5000 in water damages?
- What if a worker doing a $300 roofing job falls and is disabled for life?
- What if a simple electrical repair of $100 causes a fire that totally destroys your home?
The only way to be sure is to have a contract that clearly puts everything in black and white. Just because a job is small or not particularly costly doesn't mean it is without risk. The only way to protect both your investment and yourself is to have a written contract and request proof of insurance coverage's for all contractors that work on your property.
7 Steps when Hiring a Contractor
Hiring a contractor generally involves seven steps.
- Determining what type of contractor you need ( Electrical, Plumbing, Heating etc...)
- Locating contractors (Word of Mouth, Better Business Bureau, Research)
- Interviewing contractors
- Checking current references - make sure that you do!
- Getting bids (at least 3 is a good idea)
- Getting it in Writing - A good contract is your best protection
- Making alterations to a contract
The Written Contract - What Should be Included?
A solid written contract should include two sets of information.
First, the contract needs to fully specify and define what you and the contractor have agreed upon. This includes basic information such as:
- the name of the contractor
- what the contractor is responsible for doing and what (if any) work you will do yourself or have another party do
- who is responsible for obtaining necessary building permits and inspections
- timelines as to when this work will be done (start and estimated completion dates)
- types and quality of materials to be used and/or not used during construction
- how much you will pay the contractor for the work
- when and how the payments are to be made - generally based on work completion milestones (such as the foundation having been poured or the framing completed)
- what warranty the contractor provides for the work
Second, the contract needs to ensure that you are properly protected in the event that something goes wrong, if there is an accident or the contractor fails to conduct business properly. This includes clear requirements in the following areas:
- proof that the contractor has adequate business liability insurance
- proof that your contractor is enrolled in your province's Workers' Compensation program, or if exempt, they must carry equivalent private disability insurance
- the contract must provide for construction payment holdbacks in accordance with your province's liens legislation (this should include not only percentages but also timelines).
- the contractor should provide his/her Business or GST/HST Number
- the contractor must show proof of bonding if required by your province.
- if your municipality requires contractors to be licensed, the contractor's license number must be included
These contract requirements are quite general, and should be taken as a guide only. If your project involves substantial cost or is fairly complex, you are well advised to have a lawyer with construction experience review it before you sign.
Under Ontario law, homeowners who act as their own general contractor and hire others to do work on their homes may be considered constructors, and be responsible for meeting the requirements of the province's Occupational Health and Safety Act and regulations.
The Ontario Ministry of Consumer and Business Services offers a useful on-line guide, Consumer Rights that outlines the province's consumer protection laws.
The above information has been provided a a simple guideline and should not be construed as legal advice.
This information is provided as a service to our web site visitors. While we attempt to ensure that all information is accurate and a fair depiction of real circumstances, it is to be used solely for information purposes. Home Inspectors® may not be held responsible for the accuracy of any of the above information. Re- production of any of this information is strictly prohibited without written permission of Home Inspectors®.