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Saving Money the Expensive Way

Eric Nei - Thursday, March 12, 2015

We all want to reduce our expenses. However, saving money by working with the cheaper service provider may be a very expensive way to save money. Thoughtful, intelligent home and business owners consider a wide range of issues when selecting a service provider. This article provides some guidance on selecting a professional contractor and saving money in the process.


Case Study—Saving Money the Expensive Way

Parts of this article are based on the following court case, 2002 California Court of Appeal decision in Fernandez v. Lawson, 119 Cal.Rptr.2d 767.

A home owner received multiple bids while selecting a contractor for a service. Trying to save money and do the right thing, Mr. Home Owner asked Mr. Low Bid for proof of liability and workers compensation insurance prior to beginning work. Mr. Low Bid assured Mr. Home Owner that insurance was in place and current. However, no documentation was provided to Mr. Home Owner prior to beginning the work. In reality, Mr. Low Bid had allowed insurance coverage to expire in an effort to keep prices lower than his competitors in order to win business. The first day of work, an employee of Mr. Low Bid was seriously injured on the job.

When the injured worker, Ms. Employee, found out she was not covered by workers compensation she sued, naming both Mr. Low Bid and Mr. Home Owner in the suit. Who do you think should pay Ms. Employee’s medical bills?

In this case the court ruled in favor of the Ms. Employee and against Mr. Property Owner. The court stated that the Mr. Property Owner should have verified the Mr. Low Bid’s claims about insurance. Failing to do so, the court ruled that Mr. Property Owner assumed the role of direct employer of the Ms. Employee. As such, Mr. Property Owner was held responsible for the medical expenses of the injured worker. The final cost to Mr. Property Owner of saving a few dollars by going with the ‘cheaper’ estimate was over $26,000!

Save Big Money When Hiring Contractors

There are many ways to save money on services, but hiring a company that exposes you to significant risks and loses is not the way to do it. Here are some proven ways to minimize your risks and still get the high quality of a professional service provider at a great price.

  • Choose an insured and bonded business. Make sure you see copies of insurance binders before the work begins. The binder should be mailed directly to you from the insurance underwriter. You should be named as the recipient on your copy of the binder and the expiration date should extend beyond the last day of work at your property. If the contractor hands you a copy of the binder with these details in place, call the underwriter to verify the details.
  • Negotiate discounts based on volume and scheduling of services. Many service businesses offer discounts during the off season or for repeat, high volume business. At the same time, be prepared to stand by your end of the deal. Many contractors are nervous with this money saving option because of customers that have negotiated a lower initial price only to have the customer walk away from their end of the agreement.
  • Manage cash flow by spreading service payments over 12 months. You can do this by working with contractors that accept credit cards or are willing to provide a payment plan. Again, if they allow a payment plan, be prepared to stand by your word and pay them as agreed.
  • When presented with an estimate simply ask, “Is that the best you can do?” Few people realize the power of this question. When you ask this question, be prepared for a discussion, not an amazing discount. Many legitimate, professional contractors are responding to the current economy by making their first offer their lowest offer.
  • Talk openly about other estimates you are receiving. This allows the vendor to help provide you with an apples-for-apples comparison. A wide variance in prices between estimates usually means there is a difference in services or risk management as provided by insurance. Openly discussing estimate details will allow you to more effectively compare estimates and get exactly what you want.
  • Ask the vendor if you can help them with the job. Taking liability into consideration they may allow you to help in exchange for an adjusted estimate.
  • Review outcomes regularly to determine if less frequent services will still provide what you want.
  • Take advantage of sales and special offers. These are effective sales tactics, but they are also a great way to save money.
  • Consider bartering. Just like you, contractors hire help. If you have legal, book keeping, graphic design, baby sitting, cooking or other skills, explore options with your contractor. Most likely, you have some skill they need. The same goes for material goods. You may have something you can live without that the contractor wants such as tools and equipment, vehicles, etc. Bartering predates money as a way to get what you want. At the same time, bartering is becoming a much more sophisticated process with entire networks of individuals organizing around bartering.
  • Ask for references and then check reference with well prepared questions. You will quickly ferret out those vendors that are price gouging. You will also discover the jewels in the rough of service contractors that offer value laden services at good prices.

There are at least three more important points to consider when hiring a contractor.

First, if at all possible work with local contractors when they meet your criteria for hiring. More than elsewhere, the Northwoods economy is supported by local, small businesses. Shopping locally is the best way to support the local economy.

Second, insurance companies are not enforcement agencies. They do not enforce state regulations regarding the legitimacy of a business and taxation. Anyone can declare themselves a business and buy insurance. This means that when you choose to work with a cash only business you may protect yourself, but you are also supporting someone who most likely has not made a professional commitment to their trade and probably is not paying taxes. In other words, they may be operating illegally in regards to the tax code and they may not be there the next time you need services. Whether to hire a cash-only contractor is an ethical decision. If this is an important issue to you, and it should be, ask the contractor how they receive payment. If a contractor insists on cash only, you need to decide based on your values whether you will support legitimate businesses or fly-by-night workers.

Third, consider this question. With the economy the way it is, can you afford to invest your money with less than the best? High quality professionals cost more for a reason; they are high quality professionals. When you hire Mr. Low Bid you may save a few dollars up front and you may even avoid the risks implied in this article. However, reality is that you may also be disgruntled with the results and you may even expose yourself to significant financial loss.

There is a better way to get the service experience and the price you want, rather than just going with the low bid. Do your homework and learn to negotiate with the contractor that you think will give you the best experience, not just the lowest price.

WARNING

DO NOT, UNDER ANY CIRCUMSTANCES, HIRE YOUR CONTRACTOR BASED PRIMARILY ON PRICE.

THIS MAY BE A VERY EXPENSIVE WAY TO SAVE MONEY.

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