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Risks of Hiring Unlicensed Contractors

Risks of Hiring Unlicensed Contractors

When it comes to home improvement projects, you may be interested in the “DIY” route and make the repairs yourself, but what if you don’t have the appropriate skills or trust yourself enough to learn from a YouTube tutorial? In these cases, you’ll have to hire a contractor.

The first thing you’ll need to do is to conduct research to find a contractor that specializes in your area of need, whether that be a kitchen remodel, bathroom remodel, replacing windows, etc. From there, you’ll look at their portfolio of work, read reviews, and of course, check their pricing.

But there’s one important part of the evaluation process that you might be leaving out — whether or not they have a license. It can be easy to hire an unlicensed contractor by accident, or even purposely because you couldn’t pass up on their (typically much lower) proposed rate, however, this could put you in a dangerous situation. You, the homeowner, can be held liable in certain situations and be on the hook for some potentially expensive damages.

In this post, we’re going to discuss the importance of hiring a licensed contractor vs. an unlicensed contractor and potential risks involved in hiring unlicensed contractors.

Why Would You Hire an Unlicensed Contractor?

It’s expensive to maintain a home, and those needed repairs and updates can really add up over time. That’s why the price will always be one of the main deciding factors when it comes to choosing who will complete the work on your project. Your goal will be to find the best mix of price and proven success rate in your contractor.

The biggest draw for using an unlicensed contractor is the fact that they are usually able to offer a much lower price. Since you may have a tight budget for your home improvement project, this can often be a powerful draw indeed, as an unlicensed contractor will sometimes be able to significantly outbid the competition.

Other times, you may hire an unlicensed contractor not just because they are cheaper, but because they are someone you know, such as a family member, neighbor, or friend. Often, unlicensed contractors gain work through referrals from the same groups of people as well.

However, regardless of how you find an unlicensed contractor or your motivation behind hiring one, you should know that the reason they can quote the work at such a low rate is because of all the corners they have to cut to operate without a license. Like with most things in life: If it seems too good to be true, it probably is.

But the temptation of the potential savings is a common trap that people fall into. The unlicensed contractor offers their much-lower quote while promising to give you the same results as their licensed competition. And then they end up getting hired.

Things may start off smoothly and all of the work appears to be just as you pictured. But then something goes wrong. Then something else happens.

This is where using an unlicensed contractor may come back to bite you in the end — because if and when things do go wrong, you could be held liable in certain situations. This will end up costing you much more in the long run, eliminating those savings you were hoping to gain by going with the unlicensed contractor. And it’s because those corners unlicensed contractors cut are actually important in the construction process, no matter what they might try to tell you.

How Can Unlicensed Contractors Offer Lower Prices?

There are a few different reasons as to why unlicensed contractors are able to outbid licensed contractors.

The first is that it is actually a rather expensive investment for a contractor to get their license to operate. Once they go through the initial licensing procedure, they will also have to maintain their license and pay annual fees to their licensing board throughout the year. This, of course, cuts greatly into their profit margin.

Since unlicensed contractors do not have to pay these fees, they are able to offer you a lower bid, as they do not have to factor in these overhead costs. Unlicensed contractors also will not obtain a bond that protects their work, which we will get further into later on.

Finally, and perhaps most importantly, unlicensed contractors will not have liability insurance or worker’s compensation. These are additional overhead costs that a contractor without a license will not be able to attain, so they simply move forward and do the work without these measures of coverage. However, if your contractor does not have liability insurance or workers’ compensation, the liability to fix any shoddy workmanship, or for any incidents on the job will fall on you, the property owner.

This is one of the biggest risks you will take on should you choose to hire an unlicensed contractor.

Risks of Hiring Unlicensed Contractors

There are several risks involved when using unlicensed contractors, starting with the fact that working on large projects without a license is illegal in many states, including California. However, for the property owner, the financial liability risks are of much greater concern, as they could be incredibly costly.

This is especially true if a worker is injured on the job and your unlicensed contractor is without workers compensation.

Homeowners Can Be Held Liable for Injuries Sustained on the Job

The biggest risk involved in hiring unlicensed contractors comes down to liability.

When you hire an unlicensed contractor, they actually are not a contractor at all — they are your employee. Therefore, it is actually your responsibility to provide them with a safe workplace and cover them should they be injured.

An unlicensed contractor can sue you for damage if they sustain an injury while working on your project and you could be on the hook for expensive medical bills, legal fees, and also have to pay for their lost wages for as long as their injury holds them out of work. These financial damages can amount to thousands of dollars, far more than the initial savings you thought you were getting by using an unlicensed contractor.

When you hire a licensed contractor, they will have workers’ compensation for themselves as well as any employees they hire to assist with the job. If your contractor is unlicensed, he or she and anyone else that is brought on to work on your remodel are all considered to be your employees. This makes them all your responsibility to insure.

It actually doesn’t even matter if you knew that the contractor was licensed or not when you hire them, as many homeowners are in the dark about the consequences of hiring an unlicensed contractor. You, the homeowners, and employer, carry the burden of determining whether a worker is licensed. This means you could be held liable whether you knew they were licensed or not.

Many assume their homeowner’s insurance policy will cover them in an instance where an unlicensed contractor is injured on the job, however, this usually isn’t the case. Your homeowner’s insurance will not cover you in these cases, leaving you vulnerable to have to pay out of pocket. However, if you have a licensed contractor and one of their subcontractors are injured on the job, you will be protected by the contractor’s worker’s compensation insurance should that worker try to sue for damages.

The best thing to do to protect yourself against this potentially financially crippling situation is to hire a contractor who holds the appropriate license to do the work you need to be performed. This way you will not unwittingly become an employer and the target of a costly personal injury lawsuit.

Homeowners May Have to Pay for Additional Repairs

Beyond assuming the responsibility for injured workers, you also need to be wary of shoddy workmanship.

While there is no guarantee that a licensed contractor’s work will be any better than that of an unlicensed contractor, their work will at least be protected by liability insurance and legally enforceable contracts called bonds.

A bond will protect the homeowner should there be any damages caused to your home during the remodel, Contractor license bonds will state that your contractor will work within certain regulations and protect you against the risk of financial loss.

The bond and the licensed contractor’s liability insurance both exist to cover you in the instance that the work done is unsatisfactory. You can have language that requires the contractor to fix any mistakes in construction, or at the very least get financially reimbursed so you don’t have to pay someone else to come and handle repairs.

However, an unlicensed contractor is bound by no such agreement. If their work is unsatisfactory, they are bound by nothing to fix their mistakes, and you may have to pay someone else to come and make the necessary repairs. These repairs may be more expensive than hiring the licensed contractor in the first place.

Using Unlicensed Contractors Could Hurt Your Property Value

You read that correctly — using an unlicensed contractor can actually hurt your home’s property value. How?

Well, remember how the unlicensed contractor has to cut corners in order to complete your project? This includes acquiring the proper building permit for the job.

Certain home renovation projects require a building permit from the city, county, or state. Licensed contractors will always attain them, however, unlicensed contractors cannot, and so they skip this step and do not apply for them. Since the proper permits were not acquired, it can impact your overall property value.

This can become an issue when you decide to sell your home, as you will be required to disclose certain information to your buyers. Failing to disclose this information could actually come back on you and become your liability later on, so making sure you have the right permits, and that work is done up to code, will be of vital importance for any home improvement project.

You Could Even Be Held Liable for Damage to Third Parties

Not only do you need to worry about the safety of your unlicensed contractors and subcontractors, but also that of a third party. This can be a neighbor or anyone who happens to pass by your work site. Should they sustain an injury due to a sloppy work site or falling debris, this is another area for which you could be held liable.

Your unlicensed contractor’s negligence is your responsibility as well, and as their employer, you are responsible for their actions during their tenure as your employee(s). If you don’t see yourself cleaning up your contractor’s worksite so you won’t get sued by a neighbor after their child steps on a nail, you may want to protect yourself and hire a licensed contractor.  

Conclusion – Hire a Licensed Contractor

To avoid being held liable for the hefty costs of medical bills and lost wages as a result of an injury sustained working on your home renovation, avoid hiring an unlicensed contractor. They’ll surely tell you that the risk of something going wrong is very low, but should something bad happen or if they do shoddy work, paying for these damages will be well beyond the potential savings of hiring them in the first place.

Always hire a licensed contractor who has workers compensation and liability insurance. The licensed contractor will acquire any necessary permits and will always make sure that their work is up to code. This is the best way to ensure that your project is done correctly and that you will not be held responsible should anything go wrong.



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