Don't feel bad. Unless you've helped build three or four homes and were the general contractor for another one, you aren't an expert in home improvement, and you don't need to be an expert, because you can hire someone else who is: a general contractor.
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First, you are an expert in your budget. You, and only you, know how much money you have saved up. You, and only you, know your income. You know how many debts you have, you know what your expenses are, you know everything there is to know about your money. If you don't, go and get started on debt counseling, because you are probably already several thousand in the hole and have no business hiring a contractor.
The nice thing about money is it allows you to buy someone else's expertise for your project. You know what you like, but don't have the skill to bring it off, so your expertise in your money allows you to hire someone else's expertise to fulfill your desires.
Which brings us to your second area of expertise: your desires. You are an expert in your likes and dislikes. You many not be able to describe it, but when you see something, you'll be able to say, "Yes, that one! That's the one I want!"
Expertise in your desires is one way of saying you are willing to make decisions. If you are one of the many, many people (like me) who get overwhelmed trying to pick out cereal in the grocery store, then you may have problems making decisions. (Don't worry, I do too: there's just so many choices!) The important thing is that you make a decision in a relatively short frame of time, (For cereal, say, five minutes, for home improvement, say, a week or two.) If you can't make decisions, you won't be able to make vital home improvement decisions, and worse, you may make a decision and change your mind later. The contractor will not be too pleased if you tell him, "Can you change the color of the cabinets?" after he's already installed your counter, hooked up the plumbing, and was about to finish off the contract. Decision making is very important, because, as we see later, not making decisions becomes very, very expensive. Become an expert in your desires, and when you do, that's when you go hire a contractor.
Now, let's use your money expertise and your expertise in your desires to do two things as prep work.
First, decide what needs to be done. Keep this rather general- something on the order of "I want to redo the kitchen" or "I want a new countertop." Keep in mind that you know nothing about home improvement, so you won't be able to make very good guesses about how complicated a project actually is. You are defining what you want as a final result, and this is where you're expertise in your desires comes into its own. If your tiny sink has been irritating you for years, you know you'll want a bigger sink, which probably involve a new counter and at least some cabinetry work....but you don't need to know that. All you need to know is that the sink is bugging you and you want it gone. It's ok if you don't know what you want the final result to look like...that's why you're hiring a contractor, to help you with the design process and installation. "I want to redo the sink" is a perfectly good place to start.
Second, work out your budget. You have no idea how much home improvement actually costs, and unless you want to spend ten years in the carpentry trade, you never will. However, you are the world's best expert in how much you can afford to pay. Sit down and calculate how much you want to spend. Make this a fairly tight figure- whether your budget is $500, $5000 dollars, or $50,000, figure out the most you are willing to spend (or more importantly, can afford to spend) and stick with it. This has the great advantage of proofing you against falling for slick sales pitches where you end up going into debt because they convinced you that you absolutely needed the most expensive version of your home-improvement project, and it will also help you enormously in finding the right contractor.
A note on budget: pay cash. Don't take out a loan to do home improvement. If you do, you won't enjoy your home improvement, because every time you look at it, you will be reminded about how much you still have to pay for it. You will never rest easy with your improvement until you own it free and clear. If you don't have the money, don't buy it.
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AS you have pointed out, there is a lot of time going into the "free" estimate. Please be considerate. they tell you to get three estimates on a job, but do you really want three companies spending that much time when only one or maybe none get any paying work from it? it's just not fair to the contractors you are dealing with.
I have to echo your observation that you have to be compatible with your contractor. they may be the best and most honest people out there, but if your personalities clash, you won't have a good outcome.
You may save yourself some money and still get a great job if you hire instead of a general contractor, a licensed builder. they are licensed professionals with plenty of experience, but who also work at the job themselves. Many are masters of several specialties.
You're right about the amount of work a contractor puts in a contract before he ever gets paid, and I have noticed that people vastly underestimate the amount of work it takes to do something they have no direct experience with, be it carpentry, art, web design or making ultimate domino rallies. This Instructable is from the perspective of what a general contractor would like a customer to do. I showed it to a couple of people who hired general contractors and they responded with "I would never tell a contractor how much money I have, because then they are going to take me for all I'm worth- they'll make sure that everything costs the most expensive amount, or try to get me to pay a higher price than I told them." I'm wondering if I should put in a section about how to spot if you're being taken advantage of, because that's pretty much what every customer asks- "How do I know if I'm being cheated?"
Thanks for the comment!
To address the question of how to know you are not being ripped off. The references check addresses that too. Although that has a lot to do with the customers personality too. I've had people who thought I was ripping them off even though I had cut the price to the bare bones. and other customers who are thrilled and think I work too cheap even though I charged top dollar. This principle applies also to the satisfaction with the quality of your work.