Sensible Payment Plans
The ideal payment plan keeps you in control of things but is fair to your contractor as well.
Writing checks for your remodeling project is never fun. The amounts can be staggering and there's always the concern that maybe you didn't get all the value you were due. Besides, every check written means you have less leverage over your contractor.
Payday gives contractors the jitters, too. Although pros like to get paid, homeowners often save up their frustration until check-writing time and then unload it.
Both of you can avoid this stress by agreeing on a fair payment structure. Then schedule separate progress meetings to review any concerns or complaints you have—no reason to further complicate these meetings with check writing.
When it comes to paying your contractor or anyone who does work for you, a payment plan should be spelled out in the contract, and you should never pay for work that hasn't been done, except for the initial payment that goes with the contract.
The amount due when you sign the contract ranges widely, but a general rule is
10 percent of the overall job. In fact, some states limit the size of down payments to prevent fraud. In California, for example, the first payment is limited to 10 percent of the job total or $1,000, whichever is less. Some remodelers deservedly ask for more up-front money if they are ordering custom products that need to be fabricated ahead of time, such as countertops, windows and custom tile. But if you're wary of this arrangement, ask to pay the custom shop directly, or simply ask your builder for receipts.
For a job costing more than $25,000, payments should be pegged to job milestones. For example, when the job is 20 percent complete, a payment is required, and so on. The problem is, most homeowners have difficulty judging the progress of a large job. If you're having an addition put on and the framing and sheathing go up, what part of the job is complete? Actually, a very small percentage. And when it comes to plumbing, wiring and HVAC, these behind-the-wall systems can take weeks to complete. During this time you see little progress, though the remodeler knows a lot of work is getting done. These differing perceptions can be troublesome when the remodeler comes for a check and you complain that it doesn't look as though anything has been done since the last payment.
To solve this problem, my company, as do many others, schedules payments based on inspections. City building inspectors are required to inspect and sign off on the foundation and framing, as well as on electrical, plumbing and HVAC systems. These are easy milestones to tie the dispersal of funds to. Paying out around
15 percent of the overall job cost at each of these stages works fairly well, but you will need to add other milestones for later phases of the job that aren't officially inspected. The ones I use include "drywall up and mud applied," "finish carpentry completed," "painting completed" and "punchlist completed." Just make sure the final payment is at least 10 percent and that it isn't due until after the final punchlist has been completed.
You won't need as many milestones for a smaller job—they're overkill. For projects under $25,000, we like to use the third-third-third method. With this payout system, the homeowner pays one-third of the gross cost at contract singing, a third halfway through and a third at the end of the job, with 10 percent of the final payment held in escrow to ensure loose ends are tied up. (Again, check with the agency of your state government that regulates remodeling—often the department of consumer affairs—for any limits on down payments.) This system is easier for you and doesn't involve huge risk; remodelers like it because the checks they receive are substantial and allow them to pay off their material costs all at once.
PAYMENT SITUATIONS TO AVOID
Some contractors will suggest unusual payment plans either at the contract stage or once the job has gotten under way. If this happens, the contractor is either dishonest or just a bad businessman. Either way, protect yourself by following this advice:
Never pay weekly.
Although the request isn't unusual, demands for weekly payments show that your remodeler does not have the financial wherewithal—or the relationships with subcontractors and suppliers—to support even a typical 30-day billing cycle. Worse, near the end of the job, you will have little leverage. A less-than-reputable contractor who underbid will be tempted to walk off, knowing he's only leaving a week's wages behind.
Don't make payments in cash or with checks made out to "cash."
Any remodeler who wants payment in cash is probably trying to avoid paying taxes on income, has a bad relationship with the bank or doesn't have a bank account at all. It should also prompt you to make sure his workers' compensation and liability insurance policies are active.
Don't pay earlier than called for in the contract.
A remodeler might come to you claiming he has underestimated material payments or, worse, underbid the job and needs an early progress payment. Hard as it might be, you have to turn him down. If the contract clearly states when payments are due, stick to it. Paying early probably won't help the remodeler anyway, because he'll just be in a deeper hole before the next payment is due.
Pay the same person each time.
Your remodeler should have a designated "banker," someone who is the point person for all financial questions and complaints. If one week you pay the carpenter and two weeks later the driver and the drywall foreman after that, the lines of communication aren't clear. You don't know whom to speak to about a real problem, nor do you know who's really authorized to take your check to the bank.
Warning Signs of a Job Going Sour
If you experience any of the scenarios described here, confront your contractor right away. Also, keep good records in case the dispute goes into mediation or
ends up in court.
- If a subcontractor tells you he hasn't been paid or asks for payment directly from you, inform your remodeler about the situation and have him promptly remedy the matter.
- If a lumberyard or distributor calls you for payment because your remodeler's account is long overdue, discuss the matter with your remodeler.
- If your remodeler claims he
underbid the job and won't work until you agree to pay him more, show him the contract. He's got to eat his own mistakes.