When To Pay A Contractor?

[El Castor]

I'm involved in getting bids for a roofing job on a group of condominiums. I have a bid for $42,650 which we will probably want to go with. We will be signing a contract in the next month, but the job won't be started for 5 to 6 months. there are reasons for the delay which have to do with the nature of the job and our ability to extract a special assessment from the home owners.

The contractor, a relatively new firm that has been in existence for two years, is asking for payment as follows:

1. Deposit of ,250
2. Payment at commencement of work in the amount of ,200 Commencement of work is defined as the delivery of materials or performance of labor.
3. Payment of ,200 within two weeks after completion of job.

Maybe I'm just being paranoid, but I'm not too keen on those terms. Over half the job could conceivably be paid for before any significant work was completed. Any suggestions on what would be fair for both parties would be appreciated.

Jeff

[MLD]

[James Nipper]

The deposit isn't too bad, but the payment of $19,200 before ANY work is done is not advisable at all.

A more fair approach would be about $15,000 after 1/3 is done, additional $15k after 2/3, and the balance 2 weeks after completion.

It would be nice if both parties could agree on the designation of a third party such as a home inspector or roof inspector, to be the arbiter of the completion schedule. Talk to your banker, who may suggest the third party, with industry experience that could be helpful. Your roofer may be made to feel more secure if you could put the money up with your bank, to be held in trust pending percentage completion, as confirmed by the bank's verification of the work done. You may also want to talk to your county building inspector for ideas and suggested inspectors.

One of the very most important aspects of your job now is to make absolutely sure that you comply with the Mechanic's Lien Law of your state. If you don't, you could end up paying twice, once to the Contractor and secondly to roof suppliers of materials and laborers. Once again, your bank would know how to meet these requirements. In most states, you need to file a Notice of Commencement, and then obtain what is called a Contractor's Affidavit, before you make the interim and final payments. The Contractor has to swear under oath that he has paid everyone else, before he accepts payments from you.

You need to consult with a Lawyer in your area, and/or with your bank.

These are only general ideas, and please follow the advice of your lawyer.

Good Luck !

--James--

[Rileyesi]

Not sure if this helps, but when we ship products internationally, we use an irrevocable letter of credit. In a nutshell, this is something set up at a bank where the customer deposits the money at the time of the order, but the seller cannot withdraw it until the order is filled. There is a cost to set something like this up, but it might be worth looking into.

Good luck.

[Duke]

I have been in the contracting business for 24 yrs. My early years I was afraid of getting stuck with non-payment and would prepare my contracts similar to what has been proposed to you. After almost going out of business because of proposals (people not trusting me) I had to drastically change my ways. My payment terms now are something like: $100.00 to bind the contract, 1/3 down when all material on job site at the end of the first working day. 1/3 when 1/2 complete, balance upon satisfactory inspection by the city inspector.

That is a bunch of $$$ to entrust to someone new in the business.

[Toller]

Payment terms are subject to negotiation just like price.

If the terms are unacceptable to you, offer different terms. If he doesn't accept them, then you have to use a different contractor.

I worked for a small company with serious cash flow problems; we would work much cheaper for someone who paid in advance because that is what we needed.

You lay your money down and take your chances.

[Richard J Kinch]

Never pay up front, no deposits, no progress payments except on big jobs and then only significantly behind what has been completed. Half the job is not worth half the money. Pallets of unused materials are not worth a dime on a dollar to you.

If the contractor can't afford to advance the materials, then he isn't solvent enough to be trusted, and this is not somebody you want to deal with. Same with the job expenses. Someone has to provide the financial liquidity for the project, and you take that on at your peril.

Your debt to the contractor for work performed is secured by liens. Your advances to him are not.

If the cheaper bids are from outfits that insist on advances, then the reason is almost certainly that they are counting on not having to perform and weaseling out of details.

Contractors will moan and act like this is unreasonable. The fact is, getting paid is their incentive, and you can't give that up until they have performed. You want a big final payment to insure the last details are properly finished. Contractors are masters of haggling and disputes, that is what they do; you are the amateur. Once you give up the money, you are snookered.

[Jeff Cochran]

Then don't agree to them. You may get the contractor to change them, or you may have to find another contractor, but it's your money. Spend it in a way that makes you comfortable.

Actually, the above schedule is fair, and close to what would be customary around here. 10% down, half the balance on delivery of materials and half on completion of work. The cost of materials is covered that way for when you don't pay the balance, and you have the materials if the contractors doesn't complete the work. Locally on a job this size you'd probably see 10% down, 40% on delivery of materials, 40% on passing final inspection and 10% within 30 days of completion or the customer signing off on the job.

Jeff

[Joseph Meehan]

I would just want # 2 changed to indicate that all materials are delivered and they are your property at that time in the event of a default.

[Brian in Vancouver, BC]

I would want to see invoices for materials delivered and some form of guarantee that the material has been paid for before advancing the money. Also the material would have to be adequately secured at the job site so it doesn't "walk away" after you have paid for it.

Although some payment for material on site is normal, you want to ensure you haven't paid too much in advance of the value of materials in place, i.e. value of work in progress with a good reserve for unfinished work. If your contractor walked after "75% complete, it would cost you much more than 25% of the contract value to replace him.

At the completion of the work, it is common to hold back 2x the value of incomplete or unsatisfactory work until the contract is complete and all necessary approvals are given.

Brian

[jim]

$42,000 is a lot of money.. if you borrow that from a homestead to build a house(at one time you could get a house for that).. i built my house in 1971 and the loan people(homdstead) had a contract written up for the money to be issused to the builder when certain parts were completed.. they never gave him anything up front... dont do it.. a bigger company can handle the materials without worrying about upfront money.. the smaller guys cant get the stuff on credit and the $42,000 job is too much for a place to give him credit for any length of time.. and if he runs out then the money is gone... the contract i had with my homestead loan company and the builder protected us(the lender and me) so even if the builder left town and did not complete the job the money would not go to him and we could get someone to finish the job.. matter of fact he did not get the last $3,000 til one month after the house was completeed and accepted by us.... see if you can get a copy of a loan companies contract for a building loan... these people were in business since 1866 and never lost money like the savings and loan companies that went out of business in the 1980.......from bad business practices....

[Phisherman]

I would not be comfortable either. It may be possble to put the money in an escrow account? Being a new firm increases the risk.

[Edwin Pawlowski]

I'd change things a little. At signing, a deposit of $500. (you don't want him sitting on your money for six months) Additional deposit of $4000 three days before delivery of materials.

Then, depending on how long the job is expected to take, three additional payments of 1/3rd. Interesting that he wants a lot of up front, but will give two weeks on the back end for final payment.

All of this is negotiable. You just don't want too much up front in case he does not finish the job or makes for a lot of delays. . Ed [e-mail]

[Tony Hwang]

Hi, No lien hold back after the job is done to satisfaction? Tony

[Edwin Pawlowski]

Sure, good idea. Everything is negotioable.

[Art Todesco]

[Des Perado]

The large payment of $19,200. on commencement of work would indicate that the roofer doesn't have the money to buy the materials nor does he have the credit terms with his Supplier to be able to pay for the materials in 30 days. That could be because it is a fairly new firm who has not qualified for credit terms yet or it could be that the roofer has a bad track record of paying his bills. I would check out his credit rating with one of the major credit bureaus and if you haven't already done so, get some job references from a year to two back and check their satisfaction. Also, contact the major Roofing Material Supply companies in your area and ask them if they would recommend dealing with this guy or do they have someone better that they could recommend. Is this guy cleancut or does he look like a biker? If you give him $19K before starting the job, he is in the driver's seat. Roofers are notoriously bad business managers and many have severe alcohol and drug problems and are unreliable. Especially if they have $19K in their pocket. Des

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significant

[HA HA Budys Here]

I don't know what you do or where you're from Jeff, but a job paid for in excess of 50% before the first hammer is swung is customary NOWHERE. Delivery of materials is not a sign of progress.

Jeff what you describe is a jackleg con-artist contractor's dream.

[HA HA Budys Here]

Another suggestion - roofing is fairly straitfoward materials-wise. Why don't YOU provide / supply the material yourself, and take the materials ordered/ delivered/ paid on credit issues completely out of the equation and just have the contractor provide the manpower?

[bambam]

Several thoughts, Jeff.

Check with other condominiums in your city. What have they done? $42 thousand is not a big job.

Do you not have professional management to advise on these things? If not, get a real estate and construction lawyer. Very cheap insurance.

The terms do not strike me as particularly onerous or unusual. One thing missing is a hold back -- generally 15 - 20% for 45 days (or whatever the period for filing mechanic's liens is in your area.) Another is a mechanism for resolving disputes -- ie arbitration.

I'd be less concerned about his being around only two years and more concerned about his reputation and ability to perform.

All things are negotiable -- he's trying to cover himself in case you don't pay (many condominiums here have very poor reputations with contractors). Could he post a performance bond? See the third paragraph!

Ken