Assurex E&O Plus | Pitfalls of a Homeowner Acting as a General Contractor
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Pitfalls of a Homeowner Acting as a General Contractor

01 Jul Pitfalls of a Homeowner Acting as a General Contractor

Posted at 08:30h in E&O Plus Blog by

One of your clients, Bob Smith, contacted you and said he is considering acting as a general contractor to build his new home.  He feels he could save money and asks for your opinion. How do you respond?

First, this could require a legal opinion, and he should consult with his attorney about the possible legal implications of taking on such a project. Perhaps forming an LLC might be a good idea. We never want to appear to be giving legal advice.

Here are a few issues Bob should consider:

  1. Lack of Experience: Does he know about scheduling, acquiring permits and inspections, coordinating with subs, and resolving construction problems? Mistakes in this area can be very expensive.
  1. Financing issues: His lack of experience might make securing a construction loan difficult.
  1. Construction contract: He will need to work with an attorney to draft a construction contract that includes an enforceable hold-harmless and indemnity agreement. If his personal attorney does not have this experience, he should consult with an attorney experienced in the construction industry.
  1. Liability & Insurance Risks: He can be held responsible for job-site accidents and worker injuries. At the very least, he must purchase a builder’s risk policy, a general liability policy, non-owned and hired auto coverage, and workers’ compensation coverage. Exposures are like those of any general contractor.
  1. Legal & Permit Issues: He must obtain proper permits and ensure compliance with building codes. He could be fined or required to redo portions of the work if mistakes are made.
  1. Time Commitment: He must consider the time commitment of overseeing the construction project. A significant amount of time will be required to oversee the job progress, obtain materials, coordinate workers, and resolve construction problems and issues.
  1. Hiring Subcontractors: He will need to interview and hire competent subcontractors, which may take significant time and research. He will also want to obtain certificates of insurance and ask to be added as an additional insured to all insurance.
  1. Managing Subcontractors: He will find it very challenging to coordinate multiple subcontractors. Delays in one trade, such as a plumber or electrician, can cause delays for the entire project.
  1. Budget Overruns: Bonafide general contractors have experience with purchasing materials and hiring subcontractors. They can often secure better deals.  He must understand that unexpected expenses can be very costly.
  1. Resale & Inspection Issues: A construction project that is poorly managed can result in defective work that doesn’t meet codes or construction standards. When selling the home in the future, he might find the construction might not pass inspection, and buyers might be unwilling to purchase the home.

 

Acting as his general contractor for a major building or remodeling project can save him money. However, these savings can increase stress, time constraints, and lower work quality. Bob shouldn’t undertake this role unless he is confident in his abilities and has carefully weighed the pros and cons. He will need to remember that he will get what he pays for.