Contractor payment schedule advise

[stumpfield]

I never had any major construction work done in the past and a newbie in dealing with contractors. I read many horror stories of homeowner got burned or scammed by unethical contractors. So, here's my question... What's a typical payment schedule for building a barn or home?

I'm contracting out the framing, roofing, siding, windows & doors part of the work. The foundation is done and inspected. Basically, I'm having a weather-tight shell structure build by the contractor. A simple rectangular box... No electrical, plumbing or any interior finish work. I got a price of $56k which I verbally agreed. The contractor want $1000 deposit, 1/3 of the total due when the material is delivered. another 1/3 when rough framing is completed, the rest when the windows and doors are installed and the job is "substantially" completed. What's is "substantially completed" mean? I interpret it as I have to paid him in full even the job is NOT "completely" done. Did I miss understood that???? He doesn't mention anything about what/how much material is delivered or passing inspection.
What's a typical payment schedule for the construction trade? How you do define each stage of the work and what's consider "completed"? I'm looking for comments on what's typical and something that's fair for both the contractor and homeowner... Thanks in advance for your help.

 

[sparkus]

I just finished owner-building my first house.

Here's what I learned:
Keep the final 10% until the punch list is done and they are completely finished (otherwise they don't come back).

While your payment schedule sounds okay, I would propose that you structure it a bit differently.

Tell the contractor that you will pay any material invoices within two weeks (make sure they're delivered on site and not returned!) and then offer to pay labor costs as they are accrued (except the last 10% of course). This allows you to meet his immediate need (meeting payroll and paying the suppliers) while you ensure that you're paying for the work that's actually been accomplished.

Just some suggestions.

 

[SnowRidge]

I have a neighbor who is building a house. He inadvertently paid the electrician in full before the work was completed. That was over a year ago. The work still isn't completed.

As suggested, make sure you have a hold back. If the contractor won't agree to one, find another contractor.

Edit: There are books on how to deal with contractors and subcontractors. It might be worth picking one up. You probably will save much more than the cost of the book. In any event, it would be cheap insurance to make sure you have all your bases covered.

 

[scott_vt]

Mornin Tom,
I think the 1/3, 1/3, 1/3 is on the mark. I would sit down with this contractor and discuss the last third ! What does substantially done mean ! You have to have 99.9 % of the job complete in my mind before this contractor gets his final payment, or as Snowridge mentions, your going to be waiting a long time ! Good luck with the negotiatians !

 

[gordon21]

You will gets lots of good advice on this subject.

Never pay out the last 10% until the county signs off on the work and NEVER do a project of this size without pulling permits.

I am probably as guilty as everyone else here on TBN for not pulling permits on little jobs under $1000. However, you are in the $80,000+ range once this is done. Building inspectors are usually free and can spot problems, improper materials and shortrcuts taken by contractors.

Do you know which Simpson hurricane rafter or foundation ties meet current code?? There are lots of ties to choose from; some meet code and some do not. I can guarantee that the inspector knows. What about your UFER ground? Did you have one installed? If not, you may be in for an unpleasnat surprise at inspection time.

Honest reliable contractors will brag about their good relationship with the inspector. Comments like " my work always passes the first time" are good. Whenever you hear a contractor suggest that you don't need to pull a permit, RUN from the guy. Suggesting no permit means he doesn't want his work inspected. That is a huge red flag.

No one likes to pay a couple hundred dollars for permits. However, over the years I have learned the hard way that that is the best insurance you can have that the work will be done right. Once you pay for permits, the actual inspections are usually an unlimited number at no extra charge. I once had the footing inspection fail THREE times. The first time was for the footers being too narrow and shallow in about 12' of a 150' run. The second time was for the lack of a UFER ground. The last one was because the UFER ground wire was #6 instead of #4 and it was not clamped to the interior run of rebar. The concrete guy clamped it to the outer run of rebar.

 

[EddieWalker]

All very good advice. I'm a licensed general contrator here in Texas, and have also hired quite a few subs and other contractors over the years.

NEVER pay off a job until it is 100% done. I wont' take payment until I'm done and the client agrees that I'm done. It's very, very hard to come back to a job after I've been paid everything I'm due on it. Kind of like warantee work. But it also never seems to end if they think that there's always something else to be done, but I'm not getting paid anymore. If I'm owed money, I want to finish the job and get paid.

Another consideration is that I'm off on another job, or working on getting another job after I've been paid for the last job. It's all about what's next, now what's already done.

Don't pay him his final payment until you pass your final inspection and EVERY SINGLE DETAIL IS DONE!!!!!

As for paying everything in thirds for that size of a job, I like to break it down into more smaller payments. I have the clients pay for materials. I'll order them, arrange delivery and do all of the legwork, but when the bill comes up to be paid, the client writes the check. I don't mark up materials and don't believe it's a contractors right to do so. Tell him you'll pay for the materials when he gives you the bill.

Be very warry of a contractor who asks for an advance. It means they have cash issues and that usually leads to problems during the job. Remember, everybody is your friend before construction starts, but when you have problems during the job, you find out what they are really made of. I personally like weekly payments after the work is done, but depending on the job, will require payment after each stage is done. Done is the key word here. I don't just tell a client that it's done, I show it to them and make sure they are satisfied with what I've done. If not, then I do it to there satisfaction, and then give them the bill.

Remember, you are in charge. If he wants the job, he will do it your way.

Eddie

 

[stumpfield]

Thanks for the comments. I drawn the plan myself and had gone through plan check with the county and building permit in hand. The plan has detail specs on the hardware down to specific simpson part number. The foundation/footing already inspected and concrete poured. I can't handle the framing myself due to some very large beams and my limited time. I need the building shell completed quickly before the rain season.

Any contractor here? What's fair to protect both homeowner and contractor? I want the payment schedule structured in such a way if something doesn't workout along the way, we both can settle and walk away without feeling being cheated. I'm thinking:

Break the quote into 4 separate parts with a dollar figure for each. Framing/sheeting, Roofing, windows & doors, Siding

1. $1000 initial down when contract is signed (california law limits to 10% or $1000 whichever is less)
2. I paid for delivered lumber and all material invoices (paid directly to lumber company in advance when order is placed.)
3. Paid him 10% at the end of 1st day. When framing/sheeting is completed, inspected and signed-off by county, I pay agreed framing cost minus the $1000 inital down.
**if for some reason I'm not happy with the work, we can stop here and
owe each other nothing.
Contractor can also quit if he doesn't want to deal with me.
4. Paid him 10% at the end of 1st day. When roofing is completed/inspected and signed-off by county, I pay agreed cost for roofing.
**if for some reason I'm not happy with the work, we can stop here.
5. Paid him 10% at the end of 1st day. When Windows & doors installed, inspected and signed-off by county, I pay agreed cost.
**if for some reason I'm not happy with the work, we can stop here.
6. Paid him 10% at the end of 1st day. When siding is completed, inspected and signed-off by county, I pay the agreed cost.
**if for some reason I'm not happy with the work, we can stop here.
7. If we get this far, I pay him an extra $1000 bonus.

Any contractor here? What do you think? Is this a reasonable arrangement?

 

[IllMarty1]

Just had a home built 2 yrs ago. Good suggestions about the 10% retainage until inspection passes. Two other things come to mind:

1) Notorized Waivers of Lien from Contractor's suppliers for amount of materials delivered.

If he doesn't pay his suppliers, your on the hook. With these Waivers from his suppliers, you have peace of mind knowing they were paid.

2) Liquidated damages schedule for late completion. Agree to a date of completion and have penalties that make it worth his while to finish on time.

When we built our place, the contractor tried to charge extra for a few things that were clearly in the drawings. I held back the last payment he applied for until he agreed to take off the extras on his invoice. He refused, and filed a lawsuit against me.

My response to him was that he was late with final completion, and the meter was running. His lawsuit COST HIM $600 plus whatever he paid his attorney.

I had no intention of using the LD clause in my contract as he was only a couple weeks late, but he backed me into a corner, and I used the clause to protect my interests.

Marty

 

[stumpfield]

Just had a home built 2 yrs ago. Good suggestions about the 10% retainage until inspection passes. Two other things come to mind:

1) Notorized Waivers of Lien from Contractor's suppliers for amount of materials delivered

2) Liquidated damages schedule for late completion. Agree to a date of completion and have penalties that make it worth his while to finish on time.

Marty

Marty. Thanks for the sugguestions. So, I should add liquidated damages to each phase. Do I need a clause if he takes the 10% and never comeback to work or drag his feet, I can terminate the contract, hire someone else and sue him for liquidated damage.....

Eddie, Thanks. Wish there are more contractors like you.

I'm new to the area. I heard from neighbors that many contractors here wants client with deep pockets and writes blank checks for them to fill-in the numbers. In other words, the contractor don't want to commit to anything. The estimates are not firm and can change due to higher labor and material cost. They want you to trust them and let them bill you for their work and expect you to paid without questions. My neighbor's house end-up 40% more than the original estimate and he still not able to get a certificate of occupancy for the house and can't get insurance. House is completed and contractor is long gone. I don't know all the details but it sounds scary.

 

[California]

You've received some good advice. I'll add a concept that's included large public works contracts: It's reasonable to make a payment schedule that reimburses the contractor all his costs as soon as he completes a phase and that phase passes inspection. It has to pass both the building inspector's review, and your own review to verify any specific issue you named in the contract such as brand names, garden damage, delay penalty, etc.

But aside from reimbursing his actual verifiable costs, you don't pay him the profit portion of his bid until the job is over and you are completely satisfied you never need to see him again. Because you won't.

That 'substantially complete' final payment that someone mentioned has a clear meaning: it's the last day the contractor will ever visit your job. Real completion isn't just site cleanup, it's also the release of all the liens that labor or suppliers could bring.


I near bankrupted the framing contractor on my addition. He somehow go his friend the inspector to sign off foundation reinforcement when he hadn't put any girders and piers under the interior walls that would support the new second story. I refused payment, in front of his crew. He replied his payroll and quarterly insurance had to be paid that day so I had to pay. I told him and the crew that's not my problem, and phoned the inspector to withdraw the approval. Those piers and girders got done faster than any other phase of the project. You need to be ready to play hardball like that then hope you don't have to.

 

[Kendall69]

Your first call should be to a real estate attorney, not here. I don't mean to be sarcastic, but any advice you get here is useless.
Have an attorney THAT IS EXPERIENCED in new construction.
I won't pay for a dinner check unless my attorney looks at it. People are afraid of attorneys, but they have saved me thousands, and only cost hundreds.

Another great thing when you are dealing with contractors is that you can always say "my attorney said blah, blah, blah" - it takes the onus off of you.

Even I won't give you any more advice that that, even though I have built many buildings and developed quite a few things.

 

[SnowRidge]

Your first call should be to a real estate attorney, not here. I don't mean to be sarcastic, but any advice you get here is useless.

Ummm, wow. Who knew? A million posts, tons of advice, all useless. Muhammad, shut down your servers.

 

[EddieWalker]

I disagree with Kendall and getting an attorney involved. All that will do is cost you more money up front, and probably lose you a contractor. I don't have anything against working on a contract, but the second you modify that contract without your attorney, the entire thing is junk. If you think you can build a house, barn or even a shed without any modifications from the original plan, then you're not living in reality. Simple to complicted things come up as the building progresses. This is usually where the budget goes out the window. A flat ceiling can get turned into a trey ceiling real easy. The last house that I built had three totally different changes to the pantry alone!!! Each was fine, but not exactly what the homeowner (wife) wanted. One style of door or window might look fine in the store, or in another house, but when it comes time to put it in, things look different when it's your own home. Outlet locations, lighting, switches and spickets have a real common habbit of getting changed multiple times on a job. The list goes on and on. It's not that anybody is wrong, it's just that until you've built a dozen homes or so, you just don't know what it will look like from the drawings, especially when it's your own.

If and when you make a change to the plan, ask your contractor how much first. Some changes are so simple and easy, it doesn't matter. Others might take a few days and more material. Cost can really varry on these things. As long as you both agree to them, put it in writing, then it's not an issue when the budget changes.

The same goes with materials. I give a price on a job with a certain allowance for materials. Lets say it's flooring and I said $1,000 for a certain room. Before we start the job, they agreed to this price, but after it's started and we get read to buy that flooring, they decide they want something different. If it's the same product, like tile, then my labor is the same. If they change from something like carpet to tile, then labor goes up as does material. This is another common budget buster.

If you had to deal with a lawyer over all these changes, you'd never get anything done waiting on the lawyer, not to mention what the lawyer would charge you. And then what will you do if there is a problem? Hire the lawyer some more to take the contractor to court? Most likely, he'll just quite and walk away from the job before losing money on it. So now you win the case because the contractor didn't even show up. What do you do now? House is still sitting there.

Eddie

 

[IllMarty1]

Stumpfield,

Well I am somewhere between Eddie and Kendal on the lawyer thing. I did hire a local attorney to help draw up the contract, which was what the builder and I agreed to verbally. Money well spent I think.

In that contract, you need to have a way of reimbursement for changes i.e. cost plus x%. No need to get the lawyers involved for that stuff. We had some changes and add ons. He gave me fair pricing which included 15 % profit, and did nice job.

Start with a solid contract that protects your interest. That is why the lawyer is needed BEFORE, so you don't need one after.



Normally LD starts at the end of the total contract completion date.

"Do I need a clause if he takes the 10% and never comeback to work or drag his feet, I can terminate the contract, hire someone else and sue him for liquidated damage....."

You could do it that way in a properly written contract. In my line of contracting, that is usually done with a performance bond. Bonding company assures that work will be completed. Most small builders that I know of dont usually issue these.

You also may want to put into the contract verbage some insurance requirements i.e. General laibility, workers comp, umbrella, etc.


All reasons to go visit an attorney.

 

[California]

The last couple of posts point out something that might not be obvious on a first-time project.

You are going to design as you go along to cover features that were overlooked in advance, and change what was specified in the contract, many times as the job progresses. Each change isn't a crisis, just an event. Your contractor is experienced in handling these changes. Talk to him in advance and anticipate an orderly change process that covers his ordinary cost and profit as things change. You might be able to buy a car on a rigid contract, but not a house.

 

[Kendall69]

Ummm, wow. Who knew? A million posts, tons of advice, all useless. Muhammad, shut down your servers.

Cm on snowridge either read or understand my post PLEASE!. My advice pertained ENTIRELY to giving contractual advice to ANYONE....NOT and I will repeat it so it sinks in this time NOT disparaging any advice by anyone here about TRACTORS.

I hope that's clear enough for you.

I disagree with Kendall and getting an attorney involved. All that will do is cost you more money up front, and probably lose you a contractor

And as far as lawyers costing too much, popycock. How about FREE, yep you heard me, I walked into a lawyer I never talked to before to look over some closing papers, he looked at them said they were fine and good bye...I said what do I owe you, he said nothing. Others have charged from $100.00 to $500.00 to either write or read a contract.

Remember these guys all have these contracts stored in their word processor, all they do is change the name and date and spit out a contract.

You never know what it costs till you ASK, and most often the first conversation is also FREE, but to arbitrarily claim all lawyers cost too much is shortsighted.

Now as far as losing a contractor - my point EXACTLY another benefit for USING a lawyer. If a contractor runs away from an attorney, it's only because he won't be able to screw you. So PLEASE RUN FAR FAR AWAY!

I have NEVER had a legitimate contractor run from an attorney, but I have had some sleezy scum, run far and fast, and I appreciated the attorney even more. I want a contractor to run from my attorney, because that alone tells me every thing about that guy, because the guy that does stay is confident he can do the job and abide by all the rules.

The Attorney will also fight for you with the city or county if they start jerking you around.

Remember the lawyer is there to PROTECT you, and what could possibly be wrong with that. If people don't want protection, than cancel all your auto insurance, and health insurance, and home insurance - after all insurance is expensive also.

Without legal protection you will lose a lot more that the attorney's fees run, and if you don't believe me, watch a couple episodes of Holmes on Holmes, and see how many contractors did poor work, or took all the funds, then ran away.

Do as you wish, but there a lot more people around that have been taken advantage of by contractors unprotected - than protected by attorney's.

.........but the second you modify that contract without your attorney, the entire thing is junk

No what you do is write in the contract hoe "Change orders are handled" Simple clause: This contract will be still be valid, and change orders will be blah, blah, blah. In other words PER CONTRACT LANGUAGE, the main contract will stay in effect, and change orders are new "mini" contracts, simple.

..Most likely, he'll just quite and walk away from the job before losing money on it.

See again the lawyer will help construct a PERFORMANCE BOND ( see again my point is made by Eddie)
A performance bond is a surety bond issued by an insurance company to guarantee satisfactory completion of a project by a contractor.
If he walks YOU ARE PROTECTED - hmmm where have I heard that word before - Oh I know throughout this post.

..So now you win the case because the contractor didn't even show up

This is like shootin fish in a barrel. You win the case because the CONTRACT that was designed to PROTECT you states quite clearly, if you don't show up you are liable for blah, blah, blah, IF you don't finish on time you are liable for blah, blah, blah, You don't get a dime unless you blah, blah, blah.

Chances are most of this won't happen because the lawyer will have helped you select a reliable contractor who follows the rules, is licensed, bonded, etc.etc., and you want nothing less.

 

[SnowRidge]

Cm on snowridge either read or understand my post PLEASE!. My advice pertained ENTIRELY to giving contractual advice to ANYONE....NOT and I will repeat it so it sinks in this time NOT disparaging any advice by anyone here about TRACTORS.

I hope that's clear enough for you.

Here is what is clear to me: A lot of people gave the OP some very good advice, including a very well regarded member who is a GC himself. You disparaged all of that and every member who posted by flatly stating that it was all "useless."

It is one thing to recommend that a contract be run by a lawyer. It is quite another to say that any information that doesn't come from a lawyer is useless.

Also, you may find this definition of interest:

Hyperbole - Wikipedia, the free encyclopedia, especially the final part of the last sentence of the first paragraph.

Cheers

 

[EddieWalker]

Kendall brings up some interesting points about hiring a lawyer, but fails to explain what the lawyer is actually going to accomplish. All a lawyer can do is draw up a contract. He has no authority to enforce it.

If a lawyer, or anybody else tells me to do something, I have the option of doing it, or not. If they don't like it, they can take me to court. The judge can decide one way or another. What most lawyers are good at is threatening and intimidating, but in the end, that's about it. The problem with the home is not being fixed, and could take years to get fixed.

Having a lawyer select a contractor is a new one for me. I didn't realize that there are lawyers who do that sort of thing. I wonder what they do for their screening process? Just guessing, but do we realy think the contractor that the lawyer finds is going to give you the best value for your dollar?

I will only speek for myself, but if a client wants to bring in a lawyer before hiring me, then I'll listen to what he has to say. If it's going to be a pain in the but, I'm not interested. If it's a straight job that's normal without any BS to it, I'll consider taking the job. It's the same if a person doesn't have a lawyer. I'm not into playing games, power trips or wasting my time. I don't have to do any job that I don't want to. It's why I'm self employed.

If it's just about being careful, the banks that I've dealt with all have standard forms and a contract that I sign as the General Contractor when my clients get their loans. I agree to certain payment arangments and lien issues if I don't get paid.

From what Kendall is describing, it sounds more like a government commercial contract, then a homeowner type contract. He mentions his free advice, but sort of omits what it will cost to go to court to enforce the contract and make the contractor do what he's obviousy reluctant to do.

The contracts that I've read and been a part of all deal with payment and fee schedules. None have been about performance, or timing. Weather and getting a client to make a decision, or even worse, stick with a decision are what delays a project more then anything. The last house I just built was took two months longer then planned and was over budget by $20,000. Everything I told them that I'd do, I did under budget, but they kept making changes and upgrades. We also had the wettest winter in decades. It's all part of building their dream. No lawyers or anybody else is needed for that, just the client and me to make it happen.

I honestly don't know enough about the industry to say if a lawyer is a good thing or not. I'm sure for some, piece of mind is worth any price. I just don't understand, nor see any advantage to hiring one for a home or homeowner project.

Eddie

 

[midcarolina]

I am a licensed mechanical contractor.
First insist on a minimum of three references from past cutomers

I think a 1/3,1/3,1/3 is fair, just make sure when you pay for work be sure it has actually been completed.

have any changes in writing, priced and signed by both parties no matter how small the changes seem.

Your contract needs to address possible change orders with the acceptable overhead and profit spelled out.

Substantial completion is everything except punch list items, 10% retainage covers the punch list items.

You can go here Find legal forms, contractors forms, legal software, human resources forms and business plan software at Socrates.com and get all the forms you need or go to an office supply store and buy the CD

 

[Kendall69]

..stating that it was all "useless."

Obviously you still don't "get it"

Yes all LEGAL ADVICE from laypeople, who live in any other part of the county and NOT the posters state or County is useless.

Why useless, because the law is the law is the law. Getting information from a bunch of good ole boys on a tractor site, ME INCLUDED, is useless when it come to the law...WHY YOU MAY ASK, because we are NOT LAWYERS WHO PRACTICE IN THE POSTERS STATE.

Get it, we the TRACTOR POSTERS are not qualified, nor is it legal to give legal advice, since we are not lawyers - and that's the advice the poster needs., not " I heard one time about..., or I had a guy tell me about this guy who.., or the classic I remember 20 years ago we......

Any useless advice like this is doing a disservice to this site and to the poster, and often time posters take what is spewed on the net as Gospel, and get in trouble. That's the bad thing about the net, unqualified "experts" on everything.

We are qualified to give advice BETTER THAN ANYONE ELSE, ( including lawyers) about tractors and other great information and experiences, but t THE LAW - NO WAY! ...Does anyone seriously want to argue that NON LAWYERS, should be giving legal advice...HUH!


ONE MORE TINE: Then I'm through trying to hammer this in. Get legal advice from a lawyer NOT from ANYONE I repeat ANYONE on the ENTIRE INTERNET, as it will be USELESS as it is concerned to your particular situation, in your particular state. It's useless until a lawyer approves every syllable is approver.

Example:
"It depends on what the meaning of the words 'is' is." 烹ill Clinton, during his 1998 grand jury testimony on the Monica Lewinsky affair

What next, should we be giving advice about brain surgery here, and have that taken seriously?

I seriously doubt anyone here is "disparaged" because I am advocating that they can not give legal advice, and that their advice INCLUDING MINE is useless - nice try.