The most common complaint I hear from my fellow remodeling
contractors and custom home builders has to do with getting
that last payment. Many who have come up on the short end chalk
it up to the cost of doing business, relying on luck and their
ability to judge character to see them through. But I think
there's already too much uncertainty in the construction
process, so I have developed procedures that increase the odds
that I'll get paid everything I'm owed without a hassle.
your relationship with the client starts determines how it
ends. It's essential to maintain a professional attitude toward
both the clients and the work. Many hands-on contractors like
to take a personal approach with clients, but there's a
difference between being friendly and treating clients like
friends. Professionals aren't asked to do favors, but friends
are, so clients who perceive us as friends often expect us to
do little "extras" free of charge. We've all heard clients say,
"While you're here, would you mind patching that hole in the
drywall?" only to have them later refuse to pay for the time
and materials we spent making the repair.
The building process can be stressful for clients, and part
of your job is to help them through it. But that doesn't mean
you should give your work away for free. All of the systems I
use reinforce my image as a responsible business person. They
show the client that I take my work seriously and keep my
commitments, and that I expect the same from them.
Contract Scope of Work
you want to control the outcome of your projects, you need a
good contract. I'm not talking about printed proposal forms you
can order out of a catalogue - they are way too vague for
anything but the smallest jobs or handyman work. I mean a real
contract that can be customized for each job. Since clients
often refuse to pay the final bill because they feel they were
either shortchanged or overcharged at some earlier point in the
process, use the contract to define the scope of the work and
to explain exactly how unexpected work will be handled.
Exclusions. Your contract should not only
explain the work you plan to do, it should also specifically
exclude work that you do not intend to perform (Figure 1).
to the nature of this construction, there will be
some damage to the landscaping. Dumpsters and heavy
equipment shall be necessary and may cause damage
to the driveway blacktop and lawn. As long as
Builder shall exercise reasonable care, it shall
not be liable for any damage to the above-mentioned
landscaping, lawn, or driveway. Builder shall cut,
prune, or remove any trees or shrubs as necessary
to perform its work and will only be required to
backfill any excavation. Any additional work shall
be at an additional cost, as agreed upon by an
Additional Work/Change Order, signed by both
In the event that there are any conditions not
apparent or disclosed, or changes or deviations in
the Construction by Owner which are not required by
the drawings and specifications herein mentioned,
which require additional work and/or material by
Builder, an Additional Work/Change Order shall be
signed by Owner and Builder. If said work requires
additional time, the completion date shall be
misunderstandings that may hold up the final payment, the
author's contract lists work that is excluded from the project,
and specifically provides for Additional Work/Change Orders to
handle deviations caused by hidden conditions.
For example, if you are remodeling the kitchen, include
contract language that excludes any work in any other room of
the house. Then, when the client asks you to patch some drywall
in the entry or to touch up the paint on the bathroom ceiling,
it's clear that this is extra work that will raise the cost of
Hidden defects. In
remodeling work, extra costs are often the result of conditions
you weren't aware of when you quoted the job. Hidden plumbing
stacks, illegal wiring, rotted structural members, and other
problems are sometimes revealed only after demolition begins.
Your contract should clearly state that the expense of dealing
with these kinds of concealed problems is not included in the
price and constitutes an additional cost.
Often, the owner's failure to make choices or supply material
or labor on time can cost you money. For example, say you
agreed that the client will supply the plumbing fixtures, and
that they must be delivered on June 1. But the client's
brother-in-law couldn't borrow his uncle's truck that day and
nobody told you, so the plumber and your foreman are there
waiting, but the fixtures never arrive. Not only are you out
your foreman's wages and the amount the plumber will bill you
for his time, but you now have to juggle the whole job to get
things back on track.
If you screwed up, you would expect to be held accountable,
and so should the client. Make sure your contract clearly lists
any responsibilities the client has to supply materials or
perform work that will affect your part of the project. The
contract should also explain that the client is liable for any
additional costs incurred because of delays or other problems
due to the client's failure to meet those responsibilities
2. To avoid delays, the author's project schedule
includes "Key Dates" for material selections and other critical
decisions required from the owner. A clause in the contract
stipulates that if a missed deadline results in additional
costs, the owner will reimburse the builder.Change orders.
It's not enough to include
contract language to define contingencies - you also need to
draw up a change order every time you do additional work or
something unforeseen affects the original scope of the project.
Include the cost of the change, the revised contract price, and
any additional days you need to add to the completion date
a detailed description of the work and its cost, the author's
change order form states the number of days the completion time
will be extended. Payment is due when work for the extras or
changes is complete.
Make sure the client signs that change order - it's hard to
claim a faulty memory later on when you can show them their
signature on a document.
Never let change order invoices accumulate till the end of
the job. I bill separately for change orders as soon as they
are completed. This practice ensures that there are no surprise
expenses for the owners at the end of the job, and it also
prevents me from forgetting to collect for a change order.
payment schedule can make or break the job, but sometimes
traditional methods don't work. In the old days, we got
one-third on deposit, one-third when we started work, and the
balance upon completion. I don't want to think about how many
thirds I never saw. Dividing the contract amount into equal
weekly or monthly payments doesn't always work either, because
there is no predictable relationship between time and the value
of the work performed. For example, exterior doors and windows
are expensive, but don't take very long to install. Unless the
timing is just right, a monthly billing system could mean you
have to pay the window supplier nearly 30 days before your
client pays you. Even a weekly billing schedule could cause
cash flow problems if the timing was off.
Phase completion. I have an easier way. I
submit an invoice for payment when a predetermined phase of
work is complete. This system is a little more complicated than
it sounds because on a typical custom home, I may list 20 to 30
phases (Figure 4).
Owner agrees to pay Builder
for all of the Construction the sum
hundred twenty-two thousand eight hundred dollars
(hereinafter referred to as the "Contract Price"),
to be paid as follows:
1. $10,000 deposit upon signing.
2. $20,000 upon start of work.
3. $15,000 upon completion of demolition.
4. $10,000 upon completion of concrete.
5. $15,000 upon completion of 1st floor exterior
6. $15,000 upon completion of 2nd floor deck
7. $15,000 upon completion of 2nd floor wall
8. $20,000 upon completion of roof framing and
9. $10,000 upon completion of roof.
10. $15,000 upon delivery of windows and exterior
11. $10,000 upon partial completion of exterior
12. $15,000 upon completion of exterior wood
siding and trim.
13. $15,000 upon completion of plumbing
14. $10,000 upon substantial completion of AC
15. $10,000 upon completion of electrical
16. $10,000 upon completion of heating
17. $20,000 upon completion of sheetrock and
18. $15,000 upon AC system working.
19. $10,000 upon installation of oak
20. $10,000 upon delivery of marble and
21. $10,000 upon substantial installation of
22. $15,000 upon delivery of plumbing
23. $10,000 upon installation of interior
24. $15,000 upon substantial completion of wood
molding and trim.
25. $10,000 upon installation of stairs and
26. $10,000 upon installation of closet
27. $12,800 upon installation of granite and
28. $10,000 upon installation of plumbing
29. $10,000 upon completion of wood deck and front
30. $15,000 upon substantial completion of
31. $10,000 upon finishing of oak flooring.
32. $10,000 upon substantial completion of
electrical trim, and substantial completion of all
33. $15,000 upon completion of punch list, and all
items Builder is responsible to perform to obtain a
Certificate of Occupancy.
Although the sums set forth for each of the
items are specific, the order of completion of such
items is only a guide. An invoice for any work
completed or substantially completed work shall be
delivered to or faxed to Owner. Owner's fax number
is 212/555-5555. Owner shall make all payments
within seven days of receipt of invoice. Failure to
make such payment shall be deemed a breach of this
contract by Owner.
Figure 4.Basing progress payments on 30 or
more phases makes for good cash flow and reduces the
outstanding balance at the end of the job. The payment schedule
also establishes job milestones that the client can easily
Many of my colleagues think this excessive, but none of my
clients has ever objected to handing over a check for the
completion of a phase that also happens to be a milestone in
the project. Clients don't mind making more payments if they're
smaller, and they find security in being able to verify that
the work is done.
Getting paid at completion of each phase also makes it
possible for me to pay my subs faster. For example, I divide
the electrical work into two phases, rough-in and finish. My
subs know that when the rough wiring is complete, they won't
have to carry their costs till all the switches and outlets are
installed. And because I don't make subs wait 30 or 60 days, I
get excellent service. The same is true of my material
suppliers. By dividing the job into smaller pieces, I can pay
for materials sooner. This helps me negotiate better pricing,
because a supplier who can collect quickly can turn over his
inventory more times and increase profit, even at a reduced
Timely billing. If you want the payment,
however, you have to send out an invoice. You might be
surprised how many tradesmen don't have time to send out the
bill. Even honest clients who are surprised by one big bill at
the end of the job are more likely to balk at paying. In their
shock, they'll scramble to find some mistake in your math or,
worse, they'll desperately look for some problem with the work
- anything to cut that final bill down to size.
No one can pay for something they have not been billed for.
When a phase is complete, I write up an invoice within 24
hours. Also, I hand-deliver or fax all invoices. I find no
shame in asking for my money, and I expect timely payment.
Typically, my payment schedule specifies that the homeowner has
seven days to pay an invoice. If the owner has designated an
agent or representative (usually the architect), that person
has 48 hours to visit the site and verify that the phase is
complete and payment is due. Otherwise, the work is considered
done and payment deemed due.
Of course, I have a non-timely payment clause in my
contract, and I have had to stop work on several occasions.
This was upsetting to the clients at the time, but they soon
realized that I expected them to honor their side of our
Small deposits. On a large job, I ask for a
deposit of $10,000. On a $350,000 project, that's only about
3%, but it's enough to get the job going. Remember, this
business is service-oriented, not product-oriented. The only
time you should lay out your own money is when you're building
on spec. In return, you get total control, so you don't have to
wait for design decisions or color selections to get the work
done. But when you're working for the homeowner, you should be
working with their money. The deposit covers startup expenses
and helps you pay the first set of bills on time. Subsequent
payments "replace" the deposit, which makes for steady cash
flow, and takes a little pressure off you.
project is ready for the owners to move in, it's "substantially
complete" - the paint is dry, the switch and outlet covers are
installed, and the carpet is in. At that point, all that stands
between me and the final payment is the punch list.
Some may take issue with this practice, but I "seed" the
punch list by touring the job with the foreman beforehand. I am
a firm believer in leaving a few items for the client to find
during the real punch list walk-through. In my experience, it's
human nature to want to discover something left undone during
the final walk-through, so I make it easy by "forgetting" a
door stop or a switch plate or a cabinet pull - obvious but
simple to fix. When the client finds these obvious omissions
during the real punch list walk-through, they don't look very
hard for other problems. In fact, if they overlook one of the
seed items, I point it out to them. I'm not trying to shirk my
responsibility to take care of any incomplete details, but I am
trying to avoid having thousands of dollars held back on
account of a 98¢ door stop.
Because I only want to be responsible for one punch list, I
make sure we walk through every room of the house. I even offer
to go into the attic and crawlspace if the clients will join
me, but no one has ever taken me up on this. When we're done, I
have the client sign and date the punch list, and I leave them
a copy. Typically, we return over the next few days to take
care of everything on the list.
The Final Payment I remember
when the "standard" final payment was 10%, but I think that's
too much. Even on a $50,000 job, 10% is probably more than the
contractor's net, but it's way too much money on bigger jobs.
In my system, the final payment is small - usually no more than
3-1/2%. That's because the incremental payments received during
construction at the completion of each phase cover most of the
project cost. There are no surprise change order costs either,
because additional expenses were collected at the time the work