Contractor Pay Schedule

49 Replies

Last year I had a contractor walk in the middle of a job with a few extra thousand dollars we had paid them, and it cost more than that to get another contractor in there to complete it.

I have a $150,000 project right now, and I am wondering what clauses, or what payment schedule people use to ensure that contractors are finishing projects and are motivated to do so through a draw schedule that ensures they are never being paid for work that hasn't been completed.

Thanks in advance for any advice.

Michael, 

(coming strictly from my experience in commercial construction) 

I would suggest starting with a schedule of values (SOV), which will clearly define the pay schedule and allow the contractor to submit a percentage complete for each scope of work he has completed (at the end of the pay period). At the end of the month when the contractor submits his pay application you can review his work and confirm the percentages are accurate and make payment (or have him revise it based on the real percentage complete).  Just google "AIA-G703 template", and you will find plenty of excel spreadsheets that you can modify with your company and project information and incorporate into your contract as an exhibit or addendum. 

Retainage is another tool that you may consider if you have not worked with the contractor before. This allows you to hold back a percentage of the payment until the entire contract is complete. For example, if the contract is for $150K and the retainage is 10% and pay application #1 is for $50K, you will retain $5K of the $50K as part of the retainage. 

Hope this helps 

It is fairly simple, i never paid any contractor or subcontractor beyond work completed. I made sure I inspected work prior to any draws and always stayed ahead. Many of the contractors I worked with in the past had payment schedules in their contracts which were fair and it was a simple process of inspecting the work completed to make sure it was done before cutting a check.

Now that I am a contractor as well, it is much more simple for me as I only need to worry about my subcontractor contracts.

Lastly, the contractor that walked on you, report him to the state contractors board if you gave a legit argument.

Michael-

On the flips we do, we provide to the GC a detailed Scope of Work by category that is tied to the schedule we laid out at the start of the project. We monitor the progress as a percentage of the total tasks and pay for the progress made by ACH transfer every Friday. Our goal is to run about 5% behind in payments for the work completed so that at the end of the job we are 100% complete and 95% paid. The remaining 5% is for retainage to make sure final punchlists are completed and all permits have final inspection and pass. The detailed SOW also prevents getting change ordered to death - the most common cause of cost overruns. Hope that helps you - $150k project is big.

Always pay slightly behind, and be wary of any contractor that doesn't have contractor accounts that let them float materials at least 30 days (ie they need a big chunk of "down payment" money from you to get started). Reputable contractors that do regular work have Net 30 accounts with suppliers in your area, so they don't need to pay up front for material to get started, which means you really shouldn't either. 

It is common to retain 5-10% on the project until the whole thing is complete and signed off on - this percent is usually the contractor's profit, more or less. Once these guys are paid in full coming back for your punch list is going to be way, way down the list. 

@JD Martin As a contractor, I wouldn't stake my line of credit of my supplier to a client that I haven't worked with, there is no guarantee of payment. That works for previous clients that have done or a corporate client or government client.
@Michael Moikeha Pay schedule on a contract could be vague, and there could be a potential slip of overpayment, say on your 150, contractor might frontload it to be 40k demo and leave no money for finishes. Draft a Schedule of Values for them to fill in, be broad as possible, and if you can assign "Item #" on each line SOV, do be it, then attach that Item # to a detailed scope of work. 150k isn't that much, so it's easy to control, 15 line items should do it, I've done a 300k contract with 15 line items.

Originally posted by @Manolo D. :

Jd Martin As a contractor, I wouldn't stake my line of credit of my supplier to a client that I haven't worked with, there is no guarantee of payment. That works for previous clients that have done or a corporate client or government client.
Michael Moikeha Pay schedule on a contract could be vague, and there could be a potential slip of overpayment, say on your 150, contractor might frontload it to be 40k demo and leave no money for finishes. Draft a Schedule of Values for them to fill in, be broad as possible, and if you can assign "Item #" on each line SOV, do be it, then attach that Item # to a detailed scope of work. 150k isn't that much, so it's easy to control, 15 line items should do it, I've done a 300k contract with 15 line items.

 I understand your position, but I suppose it depends on where you are. Out here, it's relatively simple for an unpaid contractor to get a mechanic's lien on a property. So there's relatively little risk of a property owner stiffing you for payment. And I suppose it also depends on the nature and size of the job. If your line of credit is at risk for a sub-6 figure job, it's probably not very hearty to begin with; but if you're talking a quarter-million dollar rehab, yeah that's something where you are going to need more than a handshake and promise to pay. 

As a project manager I like to provide benefits in ways that protect the investor, while allowing the contractor the cash flow to get the job completed. 

Retainage is almost always a good idea- use a sliding scale: small job higher % retainage, big job lower % retainage- never go below 5% (multi-million $ projects still have 5% retainage)

However, retainage only works for direct contracts (GC, Subs contracted by you not the GC), and retainage requires inspection and speculation of the percent complete for a job.

Pay scales- get separate line items for labor, materials, overhead and profit, and taxes. Pay for materials to get them on site then work through schedule to understand % complete projections- have a stipulation to institute a penalty for delays (note that some delays are not the contractors fault and should not be penalized). If the project stays on schedule, pay according to the payment applications with retainage (note that the payment applications should state trades completed- ensure to maintain retainage for each trade for punchlist completion). 

Add incentive- Provide an incentive for the contractor to stay on schedule and further incentive to complete ahead of schedule, not necessarily monetary. Remember we are in the people business, and we all like to have a reason to do a better job for you- especially when there is so much work to be done that jobs can get lost in the fray. 

Having a project manager can improve the construction speed, design quality, and business relationships, just as a general note. Construction Administration is complex and every job has things that require different strategies.

@JD Martin Mechanic lien laws are true on a federal level, but they are useless if it is owner occupied and will not be sold in the near future, or they could buy a lien bond to have it lifted and you end up chasing your money with no additional compensation and most probably a negotiated settlement. Liens are just that, a hold to a share of the property (like a lender), that if left untouched, will simply stay. Government will not help collect or force collect, they have better things to do. What someone could do is open their own lines of credit to my local vendor and assign me as authorized representatives, then simply pluck me out when the project is done, since all the materials are delivered directly to site and there is only one jobsite (set authorized reps can't add sites and no will calls), it assures the owner that no materials are diverted, if they are, it falls under theft and CGL will cover it once claims filed. Construction companies operate differently, and assuming investor grade or semi-investor grade, a 20k ticket/AR could cripple their operations for months if not year or so.

@Michael Moikeha Here's one for that SOV and what our informal commercial  proposal looks like. I have a building improvement contract but it is too simple, it was meant for residential < 50k. For anything above 50k, I'd do AIA Owner-Contractor A101.

@Michael Moikeha The jobsize does not need motivation, the figures itself is enough motivation, it needs a solid contract with a solid contractor. Set the Change Order prices, i.e. Skilled labors at $xx/hour (you could go trade level) and Unskilled labors at $yy/hour, materials at 10% markup. Retension at 5-10% and paid 30 days after certificate of completion. Liquidated damages (even if not implemented) should also be present to keep them up on their toes. Termination clause as to negative slippage (work is behind schedule) should be around -15%. Bar/Gantt chart also needs to be submitted and approved (SOV lines and figures should be same), you could get them at vertex42.com website.

Originally posted by @Manolo D. :

@Jd Martin Mechanic lien laws are true on a federal level, but they are useless if it is owner occupied and will not be sold in the near future, or they could buy a lien bond to have it lifted and you end up chasing your money with no additional compensation and most probably a negotiated settlement. Liens are just that, a hold to a share of the property (like a lender), that if left untouched, will simply stay. Government will not help collect or force collect, they have better things to do. What someone could do is open their own lines of credit to my local vendor and assign me as authorized representatives, then simply pluck me out when the project is done, since all the materials are delivered directly to site and there is only one jobsite (set authorized reps can't add sites and no will calls), it assures the owner that no materials are diverted, if they are, it falls under theft and CGL will cover it once claims filed. Construction companies operate differently, and assuming investor grade or semi-investor grade, a 20k ticket/AR could cripple their operations for months if not year or so.

@Michael Moikeha Here's one for that SOV and what our informal commercial  proposal looks like. I have a building improvement contract but it is too simple, it was meant for residential < 50k. For anything above 50k, I'd do AIA Owner-Contractor A101.

 True but I assumed we were talking about investment/ flip properties. Still, your points are well taken. 

@JD Martin Yes, I am assuming a smaller contractor. Trust needs to be put somewhere, but first three or so transactions is not it. I do understand that leverage in an investment is a great tool, but setting up systems for your business that can serve any type of contractor (big and small) is far more greater in the long run.

As a contractor , I provide the contract to the customer . We get 1/3 down at the contract signing . The 2nd third when the job is started , and the final third upon completion . Extras are paid for up front .We NEVER use our credit or cash to supply materials to a customers job . Thats what banks are for . All change orders are signed by the customer .

We ALWAYS supply materials , customer does not get a copy of OUR reciept . We never do time and materials , we sell jobs , not man hours .  if a customer wants a breakdown of labor materials and profit . I kindly explain to them how much I make is my business . 

@Matthew Paul

So on $150,000 project (as the main post on this thread states) you would require $50,000 to sign the contract, $50,000 to start it? You want $100,000 without having done ANY work!?! I'm sorry, but that just doesn't seem reasonable from my point of view.

A lot of the reading I have done says that you should always stay about 10% behind the progress of the property. So if its 50% completed, I should be at 40% paid.

With your system, what security do I have that you will do anything now that you have $100,000?

Its Maryland home improvement law . And yes thats how we do it . The first 50 grand gets eaten up pretty quick when materials are ordered . There is a lot of office time getting things set up and ordered , permits have to be paid for etc . i pay subs quick , thats why they jump right on my jobs .  The second third is what pays the help . The final third is what keeps the company running , covers the office , trucks, tools, insurance, etc . 

As far as security you have a signed contract ,If  I dont complete the project I lose my license and face fines etc.  As a contractor I look at it like this , what security do I have in getting paid unless I am always ahead on the money ?   As soon as money stops flowing so does the work .  My contract is 30 pages and then some   it covers exactly whats included in the job . It also covers whats not in the job . If its not covered its a change order with an extra cost .  

I have been at it 30 years , in the beginning I was flexible with terms and got burned a few times . 

Contracting is a business and should be run like one . 

Good and reliable contractors are not cheap , they dont have to be . The majority of good contractors only work for homeowners , thats where the money is .  And those same contractors are also flipping a few houses here and there .  Working for investors isnt anywhere as profitable as homeowner work . So whats left , the new guys or the fly by nighters , and chuck in a truck . Sometimes you find a good one , most of the times you dont . 

I get about 4 calls a month from someone who bought a house and wants a rehab , But they havent researched the market as to what good contractors cost . 

You have more security than I have, as you can lien on the property. As a flipper, that means you are going to get paid regardless. If I was a normal homeowner, that lien may not do you much good as they could live there for another 10-50 years.

You may get a fine and lose your license, but you now have a huge chunk of my money, and to try and get that back, I will be fighting you in court, while all you need to do is close up shop.

I know contractors get burned, and I know investors get burned. We are all recovering from burns while trying to find the best way to move forward. 

We have a few good contractors who work for us. They did the retail, but you have to deal with homeowners who are emotional. Flipping, its all about the money and they can get in and out without having to work around a homeowner or have that homeowner breathing down their neck.

I had a pretty solid contracting relationship with a company that had 5 projects going at the same time for us (after doing a handful before that) and we got comfortable with them. They asked for money we paid it, but then they got up on the payments and held us hostage. 

Wouldn't continue work without another check even though they had money for work that wasn't done yet and they weren't on track. We lost a lot of money. Im not interested in paying people for work that hasn't been completed anymore. Its a tough situation for both parties.

Would you mind sharing your contract with me? I would be interested to see what it consists of.

Originally posted by @Matthew Paul :

As a contractor , I provide the contract to the customer . We get 1/3 down at the contract signing . The 2nd third when the job is started , and the final third upon completion . Extras are paid for up front .We NEVER use our credit or cash to supply materials to a customers job . Thats what banks are for . All change orders are signed by the customer .

We ALWAYS supply materials , customer does not get a copy of OUR reciept . We never do time and materials , we sell jobs , not man hours .  if a customer wants a breakdown of labor materials and profit . I kindly explain to them how much I make is my business . 

 Any large size job I typically see high up front costs.  50% to start and 50% when job is completed for larger jobs I see pretty typically. With smaller jobs, with contractors Ive used a number of times, Ive done 100% at the end of the job at times, and 100% at the start of a job as well.  

Getting a lien in Maryland is time consuming and expensive and there is a short window to do so . 

As far as running off with a measly 50 or 100 grand , and lose my license , that would be plain stupid  , like cutting off your nose to spite your face .  Signing up a $125,000 room addition is the norm around here . 

As far as sharing my contract , it cost me way too much to freely share it , sorry . 

Michael.

What we do for our projects is we have a draw schedule when the work is completed. You can go and verify the work has been completed yourself or if you are investing out of state like we are they you can have some other boots on the ground check out the work to make sure it is completed. Of course sometimes you are going to need to put up a chunk of change up front in order to get the rehab project started and that makes sense. Do your work up front on the contractor and call their references!


So on $150,000 project (as the main post on this thread states) you would require $50,000 to sign the contract, $50,000 to start it? You want $100,000 without having done ANY work!?! I'm sorry, but that just doesn't seem reasonable from my point of view.

A lot of the reading I have done says that you should always stay about 10% behind the progress of the property. So if its 50% completed, I should be at 40% paid.

With your system, what security do I have that you will do anything now that you have $100,000?

 You are correct to assume that 100k without any work is not the right thing to go, I would never do that and will never take that from anyone (in my case subs), if they are not willing to sign my agreement/meet my terms, I dust my hands and move on to the next, you don't have to deal with terms like that, and there is more than 1 good GC out there. I don't care if they could install gold tiles for $1/sf but if I don't like the way they work I tell them to hit the road. It is not 10% behind but 10% of the work being billed, so a 50% bill will be paid at 45%. You retain for a reason, "punchlist" is the most heavy reason for the 10%, it's not security of the money. If you want more security that you are not overpaying, you reduce the percentage work done. You had some good advice on the early posts, go with it, some are advising using AIA forms/contracts, those are commercial grade, and offer equal protection between clients and contractors, know how to use it and you should be all set. You can't tell a business how to run their system, but you have industry standards that help you guide, to me it doesn't matter how one runs their business, but I'm not comfortable with it, they could kiss my dust for all I care. 

Originally posted by @Account Closed :

Michael.

What we do for our projects is we have a draw schedule when the work is completed. You can go and verify the work has been completed yourself or if you are investing out of state like we are they you can have some other boots on the ground check out the work to make sure it is completed. Of course sometimes you are going to need to put up a chunk of change up front in order to get the rehab project started and that makes sense. Do your work up front on the contractor and call their references!

1. You don't have to put a chunk up front unless you hold that money. 

2. Calling references is not enough to guarantee they are good/will not mess you up.

Originally posted by @Manolo D. :
Originally posted by @Antoine Martel:

Michael.

What we do for our projects is we have a draw schedule when the work is completed. You can go and verify the work has been completed yourself or if you are investing out of state like we are they you can have some other boots on the ground check out the work to make sure it is completed. Of course sometimes you are going to need to put up a chunk of change up front in order to get the rehab project started and that makes sense. Do your work up front on the contractor and call their references!

1. You don't have to put a chunk up front unless you hold that money. 

2. Calling references is not enough to guarantee they are good/will not mess you up.

 1. I don't know what you mean "unless you hold that money." 

2. Nothing is enough to guarantee anything. 

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