With all the building and renovations taking place since spring, I have received a significant number of calls from people telling me about problems they have been having with contractors “taking their money but not delivering what they promised.”
It is apparent to me that homeowners undertaking build outs, renovations and smaller projects often lack sufficient experience to recognize the pitfalls of simply paying contractors without an understanding in place. Homeowners are often left in an undesirable financial situation by scammers who take their money and run. They are also finding themselves in a financial bind even by legitimate contractors who simply mismanage the construction job.
If an owner has prepaid for a large portion of the construction but only a small percentage of the work has been performed, it is the owner who is at risk. It is always a better idea to have a payment plan that only has the homeowner pay the same portion as the work performed. And to always have some small percentage – say, 10% – of the final payment held back until the punch list which follows every construction project is also completed.
In addition, the homeowner must be sure the contractor does not fail to pay all subcontractors hired who have furnished labor, services or materials for the project. Just because the homeowner has paid, if the contractor does not, the subcontractors who are not paid may be able to place liens on the property, in which case the owner may have to pay for the same work twice because the contractor is long gone! Although I adhere to the position that one should never trust a contractor with both your project and your money – even if the contractor is personally known by the homeowner to be of the highest competence and integrity, and solvent – because unforeseen circumstances may occur which render the contractor unable to perform and complete the project, again leaving the homeowner holding the proverbial bag.
A few suggestion for homeowners to take into consideration are:
1. Start with a good contract that spells out the rights and obligations of both owner and contractor. I recommend the homeowner have it prepared, or at least reviewed, by a knowledgeable lawyer. The few dollars upfront for a lawyer to review the proposed contract may prevent costly mistakes.
2. Specify requirements for progress payments and be sure the contract spells out the payment schedule. Although many contracts call for intervals based on monthly invoicing and payments it is a usually a better idea to establish completion of different stages of the construction; such as, completion of pouring the foundation, the installation of the plumbing, etc., as the triggers for payments. And the homeowner should provide for the ability to observe and verify that there has been a completion of that stage of the work for which payment is to be made. In fact, it is highly recommended that in construction projects involving a significant expenditure of funds that the homeowner provide for an independent party to verify the completion of each stage – an architect, home inspector, or other competent person. Having a knowledgeable owner’s representative or other construction professional supervising and administering payments is the best way to protect paying out funds that are not yet earned. Although there is an extra expense, it may well be worth the added expense simply for the homeowner’s protection.
3. It is suggested that the contract provide that the contractor’s progress payments should be based upon an invoice which provides for production of supporting invoices, subcontractors’ lien waivers, and be in the form of a sworn affidavit which shows as of the date of the payment request, all self-performed work and the work of all subcontractors and suppliers. The information which this affidavit or invoice should include should identify each subcontractor and state the following for each:
a. Original contract amount;
b. Updated amounts which includes any change orders in the scope of work;
c. Percentage of the project completed to date;
d. Balance paid to date;
e. Then current balance due on the current payment draw, less retention;
f. Total balance remaining due; and
g. Always be accompanied by an affidavit (such an affidavit is a stock form that is readily available from the American Institute of Architects) that payment of subcontractors and suppliers has been or if not yet paid, provision for the payment for that portion due the subcontractor to be made by check payable to both the contractor and the subcontractor.
Final payment, including release of any escrowed funds, should always be conditioned on the contractor’s delivery of all documents necessary for close-out the project, including manufacturers’ and equipment maintenance manuals, all warranties for labor, materials and equipment, all as-built drawings, and final lien waivers from all subcontractors as well as the contractor.
The information contained in this article is intended to provide only general legal information and is not intended to be relied upon for specific legal issues or any particular legal matters. For specific legal issues or any particular legal matters, the reader is advised to consult with and secure the legal advice of an attorney of their choice.