How to pay your builder or contractor

"That will be $1xxxx before I can get started....What?!!"

How to pay your contractor

Paying contractors seems straightforward, but unlike buying a coffee machine from John Lewis, you cannot refund it if it goes wrong within the warranty period. In addition, some of the amounts might be very large, and therefore there is risk of the contractor not completing his/her work or creating work that you are not happy with, and if you have already paid, then it is often too late. The disagreement may lead to an argument of words, shouting and other active and passive behaviour on the part of both parties. Most of these issues can be avoided by following a straightforward playbook.

Different payment requests

There will be many different payment requests. For example, some contractors will request payment upfront before the job even starts. They may do this because you are a new customer and they don't want payment risk themselves. Or they may not have the sufficient capital in their business to buy the materials and pay for the labourers all the way until a job is done. This is particularly the case with bigger projects as many general contractors have under capitalised businesses.

There will be others who request payments on milestones being met. For example, they'll work for a few days and then request payment to complete the job. These situations are always fraught with risk because they may just bugger off and leave you with incomplete work once they have received their milestone payment, which may even include costs for future work that they haven't even done. Once again, proceed with caution.

Proceed with caution

Embarking on a home improvement project is an exciting venture that promises to enhance the comfort, functionality, and aesthetic appeal of your home. However, this excitement often comes with the daunting task of managing finances and ensuring that your hard-earned money is protected throughout the process. Key to this is the relationship with your general contractor, the linchpin of your project's success. To navigate this financial journey safely, there are critical steps every homeowner should take before making any payments. These steps include understanding milestone payments, drafting a watertight contract, insisting on invoices, and considering the use of escrow services.

Milestone Payments

Milestone payments represent a structured payment schedule that aligns with the completion of specific stages of your project. This approach is vastly superior to a lump-sum payment at the project's end or substantial upfront payments before work begins. Milestone payments offer a transparent framework where payments are released upon the completion and approval of predetermined phases of work, such as the foundation laying, framing, and finishing work.

This method not only helps in managing your cash flow more effectively but also holds the contractor accountable for progressing as agreed. It's a mutual incentive: the contractor is motivated to maintain pace and standards to receive the next payment, while the homeowner can see tangible progress before releasing funds. Before any payment, ensure that the milestones are clearly defined and agreed upon in the contract, including the specific work to be completed and the payment amount for each milestone.

Making a watertight contract

The cornerstone of any successful contractor-homeowner relationship is a detailed, watertight contract. This document should outline every aspect of the project, from the scope of work and materials to be used, to the project timeline, payment schedule, and detailed specifications of the work to be done. It should also include clauses for dispute resolution, warranty, and termination of the contract.

A comprehensive contract protects both parties by setting clear expectations and providing a legal framework to resolve any disputes that may arise. It's crucial to have a lawyer review or help draft this contract to ensure that it covers all bases and complies with local laws and regulations. This contract serves as your primary safeguard against misunderstandings, subpar work, or financial disputes.

Documenting every transaction with an invoice

Before any payment is made, always insist on receiving a detailed invoice from your contractor. This invoice should itemise the completed work, materials used, and any other charges incurred during the milestone. The importance of this document cannot be overstated; it provides a written record of the transaction, which is invaluable for accounting purposes and essential in the event of any disputes. No business will pay out without an invoice, it is needed for tax accounting. As a consumer, you should take the same approach. You will find that if you do not pay until an invoice is generated, the contractor will be able to generate an invoice very quickly for you because he/she wants to be paid as fast a possible.

The process of requesting, reviewing, and approving invoices adds a layer of financial diligence to your project. It ensures that you are only paying for work that has been satisfactorily completed and agreed upon. This practice also helps to avoid any surprises or hidden costs, as every charge should be accounted for and justified in the invoice.

Consider escrow services

For homeowners looking for an additional layer of financial protection, escrow services offer a secure way to manage payments. An escrow service acts as a neutral third party that holds the funds for the project and releases them to the contractor as milestones are completed and approved. This service provides peace of mind for both parties; the contractor is assured that the funds for the project are secured, while the homeowner has control over the release of payments based on satisfaction with the work completed.

Using an escrow service can add a small cost to a high value project, but the investment is often worth it for the security and dispute resolution support it offers. It is especially recommended for larger projects or when working with a new contractor for the first time. There is also the possibility of created a refund reserve, that means that a small part of the overall price is held back in case the work is not up to spec and needs to be fixed at a later time. This is very similar to the sales reserve that retailers create to cover the expected refunds and obsolescence of a product.

Consider an income check

Whilst this is not a common request, it is often used in business to business transactions. A Dun & Bradshaw check is done to check the credit of another company. As a consumer, you can do an income check using companies that support Teal, which is a software that enables a check on a person's income to be done in real time. You can then show the builder that you can afford to pay, and you can request the builder to also undergo the check to see that he has the means to financially cover the project until milestone payments are to be made.

Make the time and effort for the process

Home improvement projects are significant investments, and the financial transactions involved require careful management to ensure that your interests are protected. By implementing milestone payments, ensuring a watertight contract is in place, insisting on detailed invoices for each payment, and considering the use of escrow services, homeowners can significantly reduce the financial risks associated with these projects. These steps foster a transparent, accountable, and positive relationship with your general contractor, paving the way for a successful project completion and the transformation of your home into the space of your dreams.

Project managing is not natural but can be learnt

We are not all natural born project managers. But most of us have had dealings with other people and in order for people to do as they say they will do there are many variables such as time horizon of the relationship, the value at stake, the history, the complexity of the ask, and many other things. So, by sticking to a playbook where the work is specified and costed and there is a dispute mechanism, you will be able to stay on top of things. After all, you are the person paying, you are the customer that the vendor needs to please.