Spell Out the Payments A clear payment schedule is a basic part of any contract. However, there are a few things you should include to keep yourself from running into trouble when it’s time to collect.
First, make sure payments are tied to the beginning of construction phases, not the end. That way, a customer can’t tie up money that you need for wiring, insulation, and dry-wall, for example, simply because a small portion of the framing is still incomplete. Linking payment to the start of a phase rather than the end eliminates any ambiguity.
Second, make sure that you clearly define what constitutes completion of the project as it relates to collecting your final payment. “Many contractors don’t pay attention to the relationship between the final payment and the punch list,” says Judith Ittig, of Ittig & Ittig, P.C., a Washington, D.C., firm specializing in construction law. “So they get into a position where the homeowners are holding back the [substantial] final payment for a few low-dollar punch list items.”
Larry Heuvelman, an Antioch, Ill., remodeler, specifies in his contract that final payment is due when one of three things happens: a certificate of occupancy is issued; the final inspection is completed; or the work is done. In the first two cases, the certificate or inspection acts as “approval for payments,” Heuvelman says. “Anything left becomes a punch list item.”
Agree on How to Disagree “We like to see arbitration clauses in our clients’ contracts,” says D.S. Berenson, Washington, D.C., managing partner of national construction law firm Johanson Beren-son LLP. “But it must be carefully worded in order to get the maximum benefit.” In other words, find a legal professional to help you with yours.
Heuvelman doesn’t have such a clause in his contract (he’s considering adding one), but Eldrenkamp is one of a growing group of remodelers who have incorporated dispute resolution language that makes litigation the last resort. Eldrenkamp says that his state (Massachusetts) mandates arbitration clauses, but due to a colleague’s bad experience, he’s gone a step further: He stipulates the parties involved in the dispute will undergo four hours of mediation first, sharing the cost.
If you do choose to go the arbitration/ mediation route, make sure to spell out the details from the get-go: who will pay for it, where it will be held, etc.
Include Policies for Changes Every remodeler who has been in business for any significant length of time has some kind of horror story regarding change orders. Nip this in the bud by being thorough, starting with your contract.
Be clear about what a change order is: a modification to the original scope of work. Train your leads well enough to write small change orders in the field, while insisting that all COs over, say, $500, come through the office first.
Laying out the ground rules for change orders prior to beginning the project is only half the battle. When the homeowner does decide to go for the more expensive counter-top or the extra skylight, make sure that you and your employees follow the procedures you’ve developed. If your contract states that change orders must be signed by the homeowner, don’t order the new material until you’ve got that signature.
And a check, too. Waiting to bill for big change orders until the job is finished gives clients time to forget about them. Then, when you go to collect, there could be a question as to what you’re billing for. Having that signed change order will be enough to get the money you’re owed, but if clients perceive it as a surprise, it can leave a bad taste and ruin an otherwise successful job.