What is progress payment? How are bids done?

[sabinblack]

Hi, I just started a business as a plumbing contractor and I was wondering what the normal procedures on sending in a bid and signing whatever needed contracts. Currently, I just looked over the plans for the job site and I figured out how much it will cost for materials and labor. Now that I have that done, what else needs to be done? What is this whole concept of progress payment? I understand you get paid for the work progress you make, but do I have to pay for the material expenses up front?

The construction company that I'm working with is saying that I have to pay for all the materials up front (without getting any money from the construction company, either a deposit or funds for the materials). Before I entered into this business I assumed that I would get paid a deposit and the cost for materials once the materials arrive (this is even before I start doing physical work), and the progress payment is only pertinent to the amount of physical labor I put into it. Is the company trying to take advantage of me since I just started out in the business? What are the normal procedures?

I checked online to see how it's done and I couldn't find that much information. I found some sample contracts (not about plumbing) and there were at least 3 stages to the deal.

1) Initial deposit 2) Cost for materials once the materials arrive (pipes, etc) + any damaged materials 3) Progress Payment for labor (then repeat 2 & 3 if it's a long job).

Is this the normal procedure? If not, how can you protect yourself from the construction company from not paying you? I heard of horror stories from a friend that's also a plumber who put in $20,000 up front into the job (for materials alone, so basically the plumber is paying the construction company to work for them), and the contruction company never paid the plumber and just used the excuse that the company that hired the construction company is stalling their payments. In the end, the plumber had to file a lawsuit that can take up to 2 years to be settled.

I thought that the construction company is in charge of paying their subcontractor whether or not the company that hired the construction company is paying them. Is that just an excuse that the construction company is using?

Please help me clarify this because I really do not want to fall into the "horror" stories you hear about.

So to summarize. Is this the normal procedure:

1) Plumber purchases all materials and works for 1 month 2) After the month is over, the plumber files in an invoice with the construction company 3) Then a month later, the construction company pays you for that invoice

and the process is repeated?

Thanks a lot. Your help is very much appreciated.

---Paul

[CWatters]

Not if you open an account with a materials supplier that offers good payment terms.

[sabinblack]

So is it normal for the contractor to invest $20,000 into materials and do work for the construction company and wait 2 months until you get the first payment from them?

What happens if the construction company gets fired OR the construction refuses to pay up? Do you just invest money into an attorney to get the $20,000 back in 2 years? What if they file for bankruptcy? Do you just lose the $20,000?

Sorry if these questions sound very trivial, but it would help out a lot if it was clarified.

---Paul

[dpb]

That's why cash flow is important...and you begin to see some of the risks of being in business for yourself. If there's a serious doubt about whether a potential client is able/willing to pay, it would behoove you to get upfront payments to cover out-of-pocket costs.

Many individuals dba sole proprietorships and for homeowners or small business do ask for an up-front payment for materials, but that _should_ be make clear in the bid/proposal, not as a "oh, by the way" after winning a job.

Sounds to me like you're not ready for this step, maybe???

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[PeterD]

I would not say that is normal. It is whatever you can negotitate with the customer! As well, if you don't like waiting for payments, make it so that payments that are charged interest. Most states (today) don't limit the interest, so if that is true for your state, make it substantial (say 5% per month after the grace period, which can be 10 or 30 days, again negoitiate!)

If you don't want to finance the construction, don't do it! No one's forcing you.

If you have to ask, you probably should not be in business. A: whatever you are owed is probably a lost cause unless you are willing to go to court. Make sure your contract allows you to place a lien on the property for unpaid work and materials!

Yes, that's probably what will happen. If you win. And you won't win unless you have a good contract.

Yep. You're probably screwed.

Not trivia, at least you are thinking. And you are asking, which tells me you are worried, but want the job!

I'd suggest if the job is that big (20K materials plus just how much for labor?) then having a (good) lawyer draw up a contract would be a really good move.

I've dealt with companies where I had to pay deposits with cashiers checks, and all kinds of odd things! But, on the other hand, so far no one has hit me for much in the last 20 years or so. I lost one time, and learned that it would have been much easier had I talked to the lawyer *before* contracting the job, not after when the customer had excuses to not pay up! (Yea, they all will say "When we get paid, you get paid...", to which I usually say "bull, when you get paid is your problem, I get paid as the contract says".)

[vMike]

[vMike]

Whoop forgot the text! I am speaking from the customer side. I just signed a contract for the plumbing on a home. The deal is no money upfront. 30% at rough in 40% at top out and the balance at completion. I am in Florida so contractors can put a lien on your property if they are not paid, even if payments are made through a GC the owner is still responsible if the GC does not pay the sub. So if the owner pay the GC and the GC runs off with the money the owner is screwed. So the rules here in Florida are the subs have the rights not the owners, BUT you need capital to be a sub. mike

[sabinblack]

Thank you all for all your feedback. I very much appreciate it.

So it seems like I would have to build some trust with these construction firms so that I would know that they will pay me in a timely fashion. Since I'm starting out, I don't have any connections with any of the firms, so should I just go in and trust the first construction firm that hires me? I'm guessing there really isn't a tip to figure out if a firm is trustworthy or not.

I am willing to put up 20k or even take out a loan IF I know I will get the money back in a timely fashion, such as within a month or two after I purchase the materials. I really do need the money in a timely fashion because if I invest all the money I have saved up and I can't pay off my car loan, it puts me in a horrible position. Also if I don't get the money by then, it will halt my current operations since I need that money to continue on and do other projects. Do these details have to outlined in the contract? Does that mean the construction firm that hires me will give me a contract to sign, and I will have to make my own contract for the construction firm to sign too?

For example, if I take on a 2-month-estimated job and the bid estimate is $100,000 where the cost breakdown is as follows:

1) the bare material cost is $30,000 2) labor cost for employee(s) is $20,000 3) My labor and taxes is $50,000

What do you think the "average" payment procedures? Do I pay $20,000 for the first month of materials and do work for a month, then send in an invoice. Then purchase the next $10,000 worth material and continue on with the work and by the time I'm finished with the work, I would have gotten the payment for the first invoice I sent in. So once the work is done, I would send in my last invoice which should hopefully be received a month later. Is this how the current industry works?

Also, how often do you guys send in an invoice? And if the firm doesn't pay within the grace period how much longer do you wait to take further action? What further actions can you take? There is always the option to sue, but I really don't like that idea because it's a hassle for every party involved (except the lawyers). If it's not that much trouble, if someone can lay down out a simple list of processes they take to start and end a contractor job, it would help me out a lot.

Lastly, what types of forms should I have prepared (my own contract, invoice, etc)? For example, I know I need an invoice form. Do I also need a form for when the firm doesn't pay the bill on time and I have send a second notice?

Thanks so much. I'm glad I can get good feedback from you guys. I just want to do all my research before I venture further into this business.

---Paul

[hawgeye]

There are different ways to handle contracts depending on if you are a sub or the GC or hired directly through the owner. If done correctly everyone has certain rights and should all be spelled out in the contract. One important thing is to make sure there is a payment bond in place especially if you are a sub. This sort of acts like an insurance policy so that the GC pays the sub. Starting out as a contractor can be a tough learning process.

[RicodJour]

This is conjuring images of a runaway kid arriving by bus at the Port Authority in NYC. Lambs to the slaughter.

There is far more to construction than technical skills. Without business skills your business is unlikely to be in business in three years. Cash flow problems are the major cause of small startups going belly up.

Construction and contracting are all about risk. With no business experience and no track record, it's extremely unlikely that anyone would award a contract that large to you. You represent a big risk to the GC and owner. I would suggest you either hire some knowledge or start with far smaller projects. There will be less risk for you and the contractor/owner.

Most firms prefer to use their contracts or standardized contracts. Since you have no experience you won't be able to create a contract on your own that would protect you. The standardized forms are a bit better. You can purchase AIA or AGC contracts and work with those. Most larger contractors and owners are familiar with them and will have standardized changes and addenda. That does not mean that the contractor/owner changes are necessarily in your best interest. Almost assuredly, they're not.

Most contractors would be willing to pay for materials delivered to the job site and stored in a secure area. Most payment procedures on larger projects are based on percentage of completion with retainage (typically 10% or so will be held back from the payment of completed work which will be released upon a predetermined point called Substantial Completion).

There is no simple list. There are no shortcuts. You need to hire help or get a crap load of knowledge quickly, otherwise they'll be eating your lunch while you _think_ you're making money. A newsgroup is not the place to get that volume of information. Neither is the internet. You're starting a business and you need to methodically bring yourself up to speed without leaving any glaring holes in your education.

Go to the library and get some books, buy some online (eBay has used books for far less) and study.

An accountant would be a good place to start, but some software that will take care of billing and invoicing can get you up and running more cheaply. Something like Quick Books or Peachtree will have business templates so the forms will be tailored to your trade. Neither will replace an accountant if you don't understand what the accountant is doing in the first place. No software will help you with that.

Exactly. You'll either spend a lot of time learning the stuff you need to protect your money, or you will be losing a lot of money you've earned and spending more trying to get it back.

R

[dpb]

...treatise on trying to start out in new venture...

I agree w/ Rico -- good advice all.

I'd add there's the SBA (Small Business Administration) which has help and good advice for new business. Perhaps your state or locality has similar functions as well and/or incubation centers/programs where you can get some of the legal/financial consultation you so badly need either pro bono or at greatly reduced rates. Even if you can't find that, you definitely need a session w/ a decent accountant who can advise you on how to handle that end of it. There's also the issue of required licenses and registrations -- IRS, State, and Local for taxes, business licenses, whatever professional certification and/or registrations are required for you to practice your trade in those jurisdiction(s), and that's just the tip of the iceberg...

I'll reiterate cash flow is the killer of 90% I'd estimate of small/startup businesses. As you've just noted, if you borrow or use every bit of cash you have on hand to purchase material for a job, what are you going to use to pay the mortgage, salaries, car payment, etc., while you're busy working to earn this back? The answer is--"you can't do that" and succeed.

I don't know what you're doing now to earn a living, but I suggest that unless you have very deep pockets you start by moonlighting doing small jobs for individuals from your regular 8-5 job until you get the hang of how this works handling projects, materials, billing, etc., in a scenario that won't put you into bankruptcy if you determine being in business on your own isn't your particular cup o' tea. Or, otoh, if it is, you'll pick up the skill set very quickly. Meanwhile, by paying _your_ bills to your suppliers, you'll build a credit history and line with them (and, thereby trust). If you do good work, that too, will get around and can be parlayed into the first house, etc., as a sub for somebody you happened to meet through those contacts. It doesn't happen overnight, but it can happen...

Good luck, but I'm thinking you're overreaching for the start from what is available to read here...

HTH...

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[Art]

In Virginia, once the owner pays the GC, the sub cannot put a lien on the property. The sub has to go after the GC for his money. This is to protect the homeowner from having to pay twice.

[CWatters]

Your quote should have YOUR terms and conditions attached. Big Co. may well ignore them and pay you at their leisure ....but it means if you did have to go to court then you should get paid based on your terms if they accept the quote. Best try to get acceptances in writing as well. If you don't get a written acceptance send them a letter confirming what was said in the phone call.... "I refer to your call of accepting my quote of and on that basis I will be pleased to start work on "

[PeterD]

I'll emphasise that written is much more valuable than oral with regard to contracts, and that if one part of the contract (any part) is written, then oral statements generally cannot modify the contract--once on paper, everything must be on paper.

Many contracts contain verbage to the effect: "And any written addendums or changes (attached) to this contract, now and in the future, shall be construed as being part of the body of the contract."

but regardless, if you start with a written contract, then everything must be written--what was said in a phone call, without written confirmation is generally difficult if not impossible to confirm and enforce.

[Matt Barrow]

Before you even respond to an RFP, you should be doing research into the company submitting the request.

Look into the BBB records, as well as any outstanding or past legal actions against them.

That depends on the contract stipulations.

That's pretty much standard, but that's why you should be doing the research mentioned above. Your #1 question should be, "How reputable is this bunch and what is their history?"

Do not rely on referals...dig, dig, dig. (No pun intended).

You seem to making a lot of assumptions, and by this, you're setting yourself up for a beating. I must say, too, that you seem fairly naieve about the industry. There's a lot of people have specific skills but NONE pertaining to running a business (and that entails much more than just doing paperwork).

That part might be included if you're contracting directly with an owner.

If some protection (for you) clause is not in the contract, walk away.

I'd be willing to bet that's not the first time such a state-of-affairs has occured with that construction company.

It depends on the contract terms, and in it's absense, state law.

You're doing your research on step two, but you've missed step one: know the state laws and find out about the company history.

A GC or IC that works for me must provide materials. I pay GC's and IC's at completion of phase (usually no more than 7-10 days) and accpetance by me or one of my inspectors. This includes all material used up to that point. I stipulate in my standard contract that I will inspect within 3 days of phase completion and pay that segment within 48 hours thereafter.

You need to do some study on contract law and business process. Also, you need to find where, in your area, you can delve into a businesses performance and legal history. Companies _typically_ have either a very good track record, or an abysmal one - seldom in between.

Don't get too anxious to get some work and be willing to walk away (reject) from a job that sounds fishy.

Good luck!

Matt Barrow

[CWatters]

and ask other trades if they pay on time.

[Matt Barrow]

A "breaker" with sleazy companies is a contract requirment that any legal action to collect will be compensated (loser pays). If they will not include such a clause, walk away.

[Matt Barrow]

(i.e., 30-45 days same as cash)

[RicodJour]

Parsing that another way:

30-45 days = cash time = money R

[dpb]

...

If he's just opening a new business, getting that kind of a credit line is probably going to be tough initially unless he can back it w/ his personal credit. Even that may be tough a a jobbers...

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