I Paid my Contractor. He'll Take Care of the Rest, Right?
Only if you’re lucky. Owners undertaking buildouts, renovations and smaller commercial projects often lack sufficient experience to recognize the pitfalls of this approach. Owners can be left in the lurch by scammers who take the money and run, or by legitimate contractors who simply mismanage the project. If an owner has paid for 50% of the project but only 15% of the work has been done, much of the owner’s capital is at risk. And if the contractor fails to pass payment on to subcontractors who have furnished labor, services or materials for the project they may lien the property, in which case the owner may have to pay twice! Trusting a contractor with both your project and your money is prudent only when your contractor is personally known by you to be of the highest competence and integrity, and solvent. Here are a few tips for owners to consider.
- Start with a good contract that spells out the rights and obligations of both owner and contractor. Have it prepared, or at least reviewed, by a knowledgeable lawyer. It’s worth a few dollars upfront to prevent costly mistakes.
- Specify requirements for progress payments. What is the payment schedule? Thirty-day intervals for submission of payment applications are common. Milestones, such as completion of a certain phase of the work, may also be used. Make sure that both owner and contractor can observe and verify progress of the work for which payment is to be made.
- The contractor’s application for a progress payment should consist of a schedule of values, supporting invoices and lien waivers to date for all self-performed work and the work of all subcontractors and suppliers. The schedule of values should identify each trade and state the following for each:
- Original contract amount;
- Updated amount to include changes in the scope of work;
- Percent work completed to date;
- Balance paid to date;
- Outstanding balance due on the current draw, less retention;
- Total project balance outstanding; and
- Include an affidavit that payment of subcontractors and suppliers has been or will be made from the funds for which the application has been submitted.
An industry standard form is available from the American Institute of Architects (AIA-G702).
Final payment, including release of retention funds, should be conditioned on the contractor’s final application for payment as above, delivery of documents necessary for close-out, such as manufacturers’ instructions and maintenance manuals, warranties for labor, materials and equipment, as-built drawings and final lien waivers.
Consider engaging a knowledgeable owner’s representative or other construction professional to supervise and administer payments. The extra expense may be well worth it for the owner’s protection. It’s your money.
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