Residential Renovation 101: How Much and When to Pay Your Contractor
By David Katz
Residential renovation projects often involve a lot of money. When it comes to payment, it would not be fair for a contractor to receive one lump sum at the end of a project, just as it would not be fair for a homeowner to pay the full cost up front. In fact, conditions of payment are one of the most important considerations of any construction contract.
How much one pays initially, how subsequent payments are spaced out, and what they are based on should be discussed and agreed to in a written contract prior to the start of any job. For small projects, the terms can be simple: a deposit up front, an amount halfway through, and the final amount upon completion. But for anything more complicated, other considerations need to be taken into account to avoid headaches.
In most cases, the General Contractor (GC) you hire will hire sub-contractors to do some, if not most of the work. For example, the GC might build walls and paint, but hire plumbers, electricians, and flooring installers to take on specialized work. Because payment terms should always be tied to the amount of work complete, a good contract should include a schedule of values — a form produced by the GC indicating the entire cost of the project broken down into the various areas of work. While the frequency of payment is negotiable, a request for payment from the GC should include a list of the percentage of work complete for each area in the schedule of values. If the cost of plumbing work is listed as $10,000, the GC might indicate 50% complete and a corresponding amount due of $5,000.
But how does a homeowner verify the percentage complete is accurate? How do they verify sub-contractors received payment for work for which the GC is billing? And, how can a homeowner be sure the GC will remain on the job through completion?
For small projects, the terms can be simple: a deposit up front, an amount halfway through, and the final amount upon completion. But for anything more complicated, other considerations need to be taken into account to avoid headaches.
With regard to the first question, the homeowner should rely on their design professional’s expertise in judging whether or not the amount requested is legitimate. But because a request for payment may include work complete that is not entirely visible, the honesty of your GC plays a role. Choosing a reliable GC is crucial and our advice is to always check references. Speak with several past customers and sub-contractors to get a full, unvarnished picture of what to expect. If nagging doubts persist, work with someone else.
Nonetheless, because sub-contractor agreements are made directly with the GC, a homeowner generally has limited knowledge of payment terms between the two parties. As a protection to the homeowner, standard forms of agreement between owner and contractor indicate a GC is responsible for paying his or her sub-contractors within seven days of receiving payment from a homeowner. But to get proof this payment was made, a homeowner can require “lien waivers” be submitted with each request for payment. A lien is a right to keep possession of property belonging to another until a debt owed by that person is paid. A lien waiver is a document stating that in exchange for payment, the contractor and sub-contractors waive their future right to claim property associated with the payment being requested.
When it comes to keeping a GC on the job through completion, owners can hold back a “retainer” usually equal to 10% of the value of all payments. The GC receives this final 10% upon satisfactory completion of the entire project — a judgement normally made by the owner’s design professional.
While payment terms are just one aspect of a construction project, it is essential they be clearly defined ahead of time. We recommend consulting terms found in the standard AIA contract between owner and contractor. They cannot guarantee the success of a project, but lack of such terms will almost certainly lead to difficulties that could have been avoided.
