Payments To Contractors

Payments to Contractors

Anxiety is a very common emotion felt by people who are about to begin a massive building or remodeling project. Huge sums of money are often in the balance. 15 or 20 year mortgages are signed. It is serious business. It is no wonder that people get nervous or anxious. Unfortunately, not everyone invests the proper amount of time in selecting the right contractor for the job. A homeowner may select a real bottom feeder. Believe me, there is one in every "sea".

Boilerplate Laundry List

Every year, I see an article in a paper about how to choose a contractor. I see the same old checklist each time. You know, the one that says to call the Better Business Bureau, ask for references, visit completed jobs, etc. Only a small percentage of people ever do these things. Guess what? You can do those things, get good reports, and still end up with an unqualified contractor. The process of finding a good contractor is involved, takes effort on your part, and sometimes is a function of pure luck.

The Root of the Problem

There are probably several basic reasons why you have such a hard time finding a reputable, reliable, trustworthy contractor. The one that I feel is foremost is the fact the industry, as a whole, does not require a formal education. In other words, you and your neighbor can go into business tomorrow hanging drywall or finishing concrete. Not only have you probably never read a technical manual on all the aspects of these tasks, there is a better than 50/50 chance the contractor you do intend to hire has read anything. The industry is loaded to the gills with people who "think" they know how to do things right. Very few contractors have a solid background based upon written facts developed by manufacturers, associations, and the industry as a whole. This means you need to get educated about the work you plan to do. Armed with this education you will be able to ask pointed questions to contractors. By default you will find the one who has the best understanding of what to do.

Payment Problems

Do you know someone who has had a contractor disappear and not come back to finish a job? Do you think that would happen if the contractor was owed a significant amount of money? In most instances the contractor has actually walked away with extra money!

Homeowners routinely advance more money to contractors than they should. The result is that the homeowner has become a lending institution. The homeowner lends money to the contractor and HOPES that the contractor will PAY BACK the money in the form of work. What a mistake! Don't get into the lending business.

Usually, this problem begins at the beginning of the job when a customer has little leverage. You, the customer, want the contractor to hurry and start the job. You can't wait. In a trance, you will do whatever the contractor says. Your judgment is clouded, not quite unlike what happens the moment you walk into a new car showroom.

The contractor asks for money up-front - a deposit - a good faith statement - or some other hogwash. You offer it up. You are now playing the game of catch-up baseball.

Think. Do you give money to the store manager at the grocery and THEN go pick your stuff off the shelves? Do you pay the restaurant in advance for your steak dinner? Do you pay in advance for your dry-cleaning? The point is simple. You usually only pay in advance, or forward a deposit, for special order or custom goods. This is the policy you should follow with contractors.

Some contractors use your money to pay the bills from the jobs they finished months ago. If you end up at the end of this string (and mind you this happens every week somewhere), you will become very friendly with your attorney.

The Solution

I urge you to find a financially stable, trustworthy, knowledgeable contractor. They are out there. Usually, these individuals will agree to a fair, timely payment schedule. They will discuss with you progress payments. They are entitled to a portion of their profit and overhead with each payment. It is unfair for you to hold this over their heads until the conclusion of the job. Use the following breakdowns as a basis for a fair payment schedule for your job.

If you are an accountant or simply like to break things down into smaller components, then you will like the following tables. As you might imagine, residential construction projects can be broken down as well. Banks and savings & loans have done this for years. That is how they make sure they don't give too much money to a contractor as they build a house. When a contractor submits affidavits for a draw an inspector usually visits the job site. They look to see what work is complete. They assign a percentage value to each phase.

Let's look at an example. Say a construction loan amounts to $200,000 for a new home. The contractor submits affidavits for the first draw. The total amount of money requested is $45,000. Let's say the excavation, sewer line, and foundation are complete. If the bank uses a breakdown that indicates this work amounts to 20 percent of the total job, then the contractor will only be given $40,000 (20 percent x $200,000). See why these numbers are handy? These percentages may help you develop a fair payment schedule.