Bartering with a Contractor: How to Mitigate Risk

What are the practical, tax, and other implications of trading services for services?

Home repairs can be expensive, and in a tough economy, it’s important to save money wherever possible. You may want to remodel your bathroom or install new lighting fixtures, but lack the cash to pay a contractor at the full market rate. Bartering with a home contractor is one way of saving some money.

Bartering is when you exchange goods or services without exchanging actual money. For example, a hairdresser might offer a year of free hair care to the family of a contractor in return for work on a home.

These types of arrangements can save you money, but they are also fraught with potential difficulties. If you are considering bartering your services for the services of a contractor, what sorts of things should you keep in mind? What are the common pitfalls?

Put the Barter Agreement in Writing

If you’re an orthodontist bartering with a contractor, it’s easy enough to say, “I’ll give your kids braces if you remodel my bathroom.” While this agreement might seem clear, the obligations it imposes are actually incredibly vague.

For the contractor: What quality tiling is the he obligated to use? Will he pay for those supplies, or will you? How long a timetable does he have in which to do the work, and is there any penalty if he takes too long? Is he responsible for the design itself, or merely the construction and execution of the design?

And for you: How many children does the contractor have? What exactly does “giving braces” entail – follow-up visits? Emergency care? Unexpected dental complications? What if he has more children in the future?

Some of these questions might seem silly, but the devil is always in the details. Bartering can sometimes lead to the exchange of one set of vague promises for another. This can result in major disagreements down the road. The best way to mitigate this risk is to reduce the agreement to writing.

Be as specific as possible. It is in your mutual interest to understand exactly what you’re expected to give, and exactly what you’re expected to get. If the project is large enough, it might be worth the investment of hiring an attorney to draft the contract for you. An attorney with a bit of expertise in contract drafting might think of pitfalls and future fact twists that neither you nor the contractor would consider.

Limit the Value of Services

One of the most important ways to limit risk is to put a dollar value on the amount of services you’re willing to give. For example, if you’re the hairdresser described above, you might say that in exchange for remodeling your bathroom per your specifications, you will provide hair care for your contractor's wife for one year for “up to $2,000 in services.”

This prevents a situation where, for example, the contractor's wife would come into your beauty parlor three times a week and demand the most expensive treatment and products. Without a dollar value cap, you leave yourself potentially exposed.

Be Wary of Tax Implications to Barter Arrangements

Even though no money is involved, bartering does have tax implications. Indeed, the Internal Revenue Service (IRS) has a full website dedicated to the implications of bartering for tax reporting purposes.

While the specifics can be unique depending on the types of goods and services being exchanged, you would generally need to report the fair market value of what you’re receiving as income (often on a Schedule C/Form 1040). Better to be safe than sorry; figure out the fair market value of the goods and services your contractor has given to you (say, the value of that new bathroom) and report it.

Offer “Free” Publicity to Bring Down Contractor Costs

Many contractors depend on word of mouth in order to generate business. This is particularly true if they operate in a small community and have an individually run operation. You might be able to reduce the price of the services by offering various types of publicity.

Be creative. For example, if a contractor renovates your bathroom, you could promise to post an album of the finished product along with a complimentary message on your Facebook or Pinterest account. You could offer to endorse your contractor on LinkedIn. Or you could offer to appear on the contractor's website with a complimentary quote about the work. All of these ideas are ways of selling your personal network to benefit your contractor.

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