The Expert Podcast

So what's the difference between a licensed contractor, a general contractor, a subcontractor, and which one should you use in your scenario? And also, we're going to talk about what kind of insurance a contractor should have. Don't forget to leave your comments and questions below so we know what to answer for questions in the future. But let's talk about the building contracting industry — who are the players in the industry, in the real estate construction industry? A contractor is a person or company that has to be licensed by the state that they're in.

A general contractor is licensed to do general types of work, and they may hire subcontractors to do certain things. For example, they may hire another contracting company to do framing or roofing or decking or windows or flooring. Those are different contracting companies that specialize in certain areas. We'll talk about how they relate to a general contractor in a moment. There are specialty contractors that need additional licensing. For example, if you're an electrician or a plumbing company or heating and air (HVAC), those require special licenses in addition to your contracting license because you have to have experience. You don't just want Joe Schmoe that knows how to swing a hammer to be wiring up your 240-volt three-phase system — they’ve got to have more experience, more knowledge. Same thing with plumbing. Plumbing is actually crucial to a house — making sure there's no leaks, making sure there's no overflows. There's a lot of damage that can happen from faulty plumbing that can be invisible and end up destroying the house. You have water damage and mold and rot behind a wall; the wall could tip over.

So what a general contractor does is act as a project manager for a larger project. The general contractor may have employees that do some of the work — some of the framing, maybe some of the site work and grading, maybe digging trenches for utilities. The general contractor may do some of that. They're also going to plan and order the materials that are needed — the lumber, order the pick list for all the accessories. They'll have either their own employees or subcontractors do some of the other work. Like, the framing might be either their own employees or they might hire a framing company. The foundation, which is usually poured concrete and rebar, might be done by a concrete company or foundation company. Different general contractors may have expanded skills in those areas.

At some point, you're going to need to hire specialized trades. You're going to need the electrical to come in and wire the premises with both conductors and devices. You're going to need a plumbing company or plumber to come in and connect up all your plumbing utilities. You'll need HVAC to put in the climate control, heating and air, and other related enthalpies. You'll need a roofing company that specializes in roof insulation. A lot of general contractors can do that themselves, but that'll be another segment. Once you have all the roof and walls and the vapor barrier on the outside, the building is what's called “dried in,” meaning that at that point it's not done, but at least the interior is protected from the elements when all the windows are in. Then you can start finishing the inside and do some more finish work on the outside — trim, moldings, siding, paint, that kind of thing — and start doing landscaping.

The general contractor will arrange all that. They'll have a schedule to organize the order of the different trades because you can't just do it one at a time or all at once. The walls have to be put up before the electric installation is done with the wiring, but the wiring can't be completed until the sheetrock is put up because then you put your devices in and then you put your covers on. You have to get inspections throughout the process. So, the electrician may have to come two or three times and they might have weeks or months in between each step. The general contractor arranges all that and also plans for contingencies. If there's a delay in materials and the framing can't get completed, you might have to tell the electrician, “Don't come this week, wait a couple weeks.” That might throw off their schedule. That's what the general contractor does: it plans and organizes the entire work process.

It's also important that the general contractor keeps an organized job site where there's not materials left all over the place. Materials not organized and secured have three potential risks. One is somebody can get hurt — you can trip over things. You want to keep your job site clean so there's no debris or obstacles or trip hazards. You also want to keep it organized so you don't have waste. You're cutting materials to use the most amount with the least amount of trim overflow or waste. You also want to prevent damage to materials. If you have lumber just scattered everywhere, a payloader can run over it, an excavator could ding it, something could drop on it, and now you have to throw away perfectly good lumber or use it for scrap or trim.

The fourth thing is shrinkage or theft. If you have an organized yard that has all your lumber stacked up, all your materials stacked up, covered with tarps and ropes and things, it's less likely to grow a pair of legs and walk away in somebody's truck. So that's another thing a general contractor brings to the table. They may also be able to get better prices on materials than the consumer could. General contracting for a large job is a full-time endeavor. You might have to spend five or six hours a day on the job site managing that job site. So that's generally what a general contractor will work on most.

Now, the general contractor will need to have some good insurance. For you as the client, you want to make sure they have liability insurance — general liability insurance to cover the work that they do. You want to make sure that they have work comp insurance so that employees are covered for injury. If somebody gets hurt on the job site, they have insurance to protect them. That's usually going to be required. You want to make sure they have proper bonds and sureties so that the job gets done properly and they don't just walk off the job halfway through and leave you holding the bag. You want to make sure the subcontractors get paid so you don't have building liens, mechanics liens on your property after the job is done, even if you pay for it. You want to make sure that any other coverages specific to your job site — for let's say material loss, inland marine — are part of your knowledge of insurance coverages because the contracting board in most states requires some basic insurance for a builder, but it may not be at the level that you want for your job. Most contractors are going to have more than the minimum, but you may want to elevate that a little more and make sure that you are listed on the insurance policy as an additional insured or additional loss payee, depending upon what advice you get from an attorney or from proper experts.

But insurance for that general contractor is crucial because you don't want them, if they run into big problems, just to walk away and leave you holding the bag. At the very beginning, a good general contractor will have very well-written client agreements — contracts to notify you of what your rights are, what they're doing, what the terms of the build are — so there's no gray area in the construction that you have to worry about. “Well, is that what we agreed on? It was a handshake deal.” You want it all in writing. You want all your notifications in writing so you know what you're getting and the contractor is able to move forward secure in the knowledge that if they do their job, they're going to get paid properly by the client.