be working with them for at least six months on this project, and nothing is worse than an unhappy contractor.
Give the contractor problem scenarios. Anyone can run a project that goes perfectly smoothly all the time. You want to know how they deal with problem situations. Create stories of nightmare situations and ask the contractor how they would handle them. For example, what if the framer and the plumber get into an argument, and one walks off the job before the job is finished? If the contractor quakes in their boots with your questions, you’ll know they don’t have the strength to manage your project.
Identifying Insurance Issues
If you arrange outside financing for your project, the lender requires insurance to cover several issues, including at a minimum:
Liability
Workers’ compensation
Course of construction (sometimes called builder’s risk)
Even if you finance the project 100 percent out of your own pocket, you still want to protect yourself. This section outlines the different insurance policies necessary to protect your project and yourself. Don’t wait to discuss these policies with your insurance agent. Not all carriers have these policies available, so you may need extra time to find a carrier and shop for the best price.
Liability policy
Lenders require liability insurance, which protects you against someone getting hurt on the property or by the actions of somebody working on the property, to be carried by either you or the contractor. If the contractor carries the policy, the policy needs to meet the following criteria to satisfy most lenders:
It should be in the form of a comprehensive general policy for $1 million or be a policy including broad-form liability endorsement.
The contractor must be named as the insured.
You and the lender must be named as additional insured.
The property address must be included on the certificate.
You may want to carry this policy yourself because in some states it can be expensive for a contractor to get a liability policy if they don’t already have one. If you carry the policy, the cost will be added to your budget and considered for financing as discussed in Chapter 9. Note that policies vary in cost by state and the size of your home. If you’re carrying the policy or you’re an owner-builder, you can get the liability policy with a few changes:
The contractor doesn’t need to be named.
You’re named as the insured.
The amounts should be for $1 million for each occurrence, extended to both property and personal injury.
Workers’ compensation
Ordinarily, the contractor carries a workers’ compensation policy if they have employees. You can ask to see the certificate because the lender will as well. In many cases, however, the contractor doesn’t have their own employees and hires their labor and subs as independent contractors. If so, these independent contractors fall under your liability policy in case of an accident. Lenders usually allow for this situation by having you and the contractor sign a waiver so the lender isn’t held liable for any workers’ compensation violations.
Course of construction policy
Sometimes called a builder’s risk policy, this policy protects you in case of theft, fire, weather, or other damage to the house while it’s being built. So, if, for example, your plumber drops their torch and burns down the framing, this policy pays for the cost of rebuilding the house to its previous condition before the damage. Lenders absolutely require this policy to be in place before they fund loans. The cost of this policy varies depending on your state and the size of your home. The following criteria need to be included in a course of construction policy:
Coverage must be in an amount equal to the estimated replacement value of the improvements to be built or the loan amount, whichever is lower. Guaranteed replacement is usually acceptable instead of a specific dollar amount.
The borrower is the named insured.
The lender is named as the “mortgage and certificate holder.”
There is a 438BFU Lender’s Loss Payable Endorsement naming the lender as the “loss payee.”
The property address and/or legal description is listed on the insurance certificate.
The maturity date on the insurance is at least one day beyond the end of the construction loan term.
Managing Your Expectations
One of Kevin’s favorite contractors earned the “favorite” title because he was the biggest pessimist around. The problem with being optimistic with a construction project is that you’re constantly disappointed. Materials don’t show up on time or the sub takes longer than you thought to finish — you name it, it’ll probably happen. A custom-home project is a journey with a life of its own. You can follow along and guide it, but you can tightly control only a relatively small portion of it. The best approach is to be well prepared, relax, and enjoy the ride.
Planning a timeline: A custom home is forever (so, what’s the hurry?)
In Chapter 1, we show you a list of all the actions and people involved in the custom-home process. The actual time frame for this process can vary based upon the size and scope of the project, as well as the city or town where you’re building.
