I always encourage people to be good neighbors, but it would be prudent to ask him to sign an agreement to accept financial responsibility for any damage done to your property as a result of his work. And not just something immediate such as damage to your plants or sprinkler, but there is always the possiblity that what he does to prevent water damage on his property may result in added water damage to yours.
I would recommend consulting an attorney who can draft a document with appropriate language.
(THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. Answering this question does not create an attorney-client relationship or otherwise require further consultation.)
I would recommend that you hire an attorney locally to look at this. It would be reasonable for you to request that your neighbor pay for an attorney to review the situation and draft the necessary documentation since they are the ones benefiting from the situation. Simply tell them that you intend to allow them to construct, but want legal advice on how to document the situation first.
You are right to watch out for the issues included in your question. First, you want to make sure that the contractor is licensed and insured since he and/or his subcontractors will be operating on your property. Secondly, you want any agreement to include a commitment by your neighbor to put your landscaping back as they found it. You may even want to go so far as to have the property surveyed and have an easement drafted for any encroachment onto your property. Without this, you could end up being the one with a problem when you sell.
There are a number of other issues that could come up, including how this will affect drainage onto your property, and I would encourage you to have a conversation with an attorney who can go over the relevant issues with you in person.
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