The Pitfalls of Acting as an "Owner-Builder" Publication

With the economy improving, many homeowners are beginning to perform previously delayed construction projects. However, finances can still be a major issue, which is one reason why some elect to forego hiring a general contractor and instead act as an "owner-builder."

When a property owner chooses to act as an owner-builder, he or she is assuming all of the responsibilities usually handled by a general contractor. This may prove challenging if the owner-builder has no experience in construction. It is up to the owner-builder to schedule and supervise the work, as well as to procure all necessary materials and supplies. The owner-builder must obtain all building permits and arrange for building inspections. The owner-builder is also responsible for ensuring that the project passes all relevant building codes.

It is possible for a homeowner to become an owner-builder without intending to do so. Some unlicensed contractors may attempt to have property owners obtain owner-builder building permits without alerting the property owner of the permit's significance. If a property owner obtains a building permit as an owner-builder, they assume responsibility for all aspects of the project. Obtaining such a permit in the property owner's name will place the property owner at risk if any unlicensed workers are injured while on the property. A property owner should carefully review their own insurance coverage before agreeing to act as an owner-builder.

Furthermore, if an owner-builder hires anyone other than a California licensed contractor or a family member to perform the work, then the owner-builder may be considered an employer. As an employer, the owner-builder must register with the state and federal governments. Additionally, the owner-builder would be responsible for providing for state and federal taxes, social security taxes, workers' compensation disability insurance, and unemployment compensation contributions.

Property owners can avoid this responsibility by hiring licensed California contractors and having them pull all building permits in the contractor's name. However, any property owner risks the filing of a mechanic's lien if they fail to pay their contractors promptly. A mechanic's lien can complicate the sale of any property.

There can be benefits to acting as an owner-builder. However, there are many issues and pitfalls which the property owner must take into account. Kring & Chung, LLP has over two decades of experience representing both homeowners and contractors, and can provide guidance for any type of project.

Richard C. Hatem is an Associate with Kring & Chung, LLP's Irvine, CA office. He can be contacted at (949) 261-7700 or rhatem@kringandchung.com.

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