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.