Russellbriss has never had to bid or negotiate a contract. Word of mouth and a handshake have been enough to keep his business prospering. Until now.

After five months of providing advice that “greatly impacted the final design,” he asked the customer for payment. It added up to several thousand dollars in unbillable time.

The response? It’s all part of the contractor’s job.

“I would rather not ‘roll’ this into the project, padding some phase, as I don’t work that way,” he writes. “It seems disrespectful of my time and contribution that no compensation is justified in their view.”

To make matters worse, Russellbriss’ doesn’t yet have a contract for the job, which could come in at about $1 million. And the customer says he wants to start in two weeks.

Any suggestions? he asks in his post to the Fine Homebuilding Breaktiime business forum.

So where’s the contract?

It’s a plus when the builder is part of the design process, says studio513, and there’s no question russellbriss should be compensated for his time.

But he probably dropped the ball on this one.

“Presenting a bill for work that has already been done, but without any agreement on what is billable and at what rate doesn’t sound good to me,” studio says. “If you have been doing business on a handshake basis and it’s been working out for you, OK,  that’s fine. But doesn’t the handshake usually involve a discussion of your rates, when bills will be presented, etc, etc?”

When you work without asking for money, why should the client expect anything different?

“As a small bit of ‘been there, done that’ sort of advice,” adds Handydan, “you were asking all the right questions about two months too late.  It seemed to me that they were just getting what you were giving them.”

Davidmeiland agrees: “A contract is absolutely normal, and in my opinion should have been in place once it became clear that you were going to spend time on design development. Two separate contracts would be OK, one for the design work, probably just an hourly rate, and a separate later contract to cover construction.

“If they are hesitant to start flowing money your way this is a bad sign,” he adds. “The money has to start happening.”

Where does it go from here?

Although Russellbriss is in the hole for several thousand dollars, there’s nothing wrong with rolling that into his overhead for the job, says junkhound, assuming he gets it. “Pefectly ethical,” he writes.

“The stuff I do has lots of overhead rolled into everything,” says junkhound, “billable about 2.5x salaries/hourly rates before taxes.”

If the customer is expecting a fixed price, davidmeiland adds, the design costs could certainly be added. “If they’re expecting some sort of [time and materials contract] then you might have a harder time hiding the extra money that you should have already been billing for.

“When I get in these deals I ask for a contract fairly quickly,” he adds. ” Fish/cut bait etc.”

Another way of looking at an unpaid design fee, says DanH, is to think of it it as advertising, what a builder might expect to spend on marketing to win a single customer. The key is deciding how much you’re willing to spend on this kind of job-winning strategy.

“If you’re below that number it’s overhead,” he says. “If you’re looking to surpass that number then you need to decide when you’ll either drop the job or start asking for something up front.  It would be good to try to come to an ‘understanding’ with the customer about ‘up front’ money well before that limit is reached, however.”

“Assuming you want the job, have a frank discussion with the client, pointing out that you have put more than you thought you would into the design process, but that’s OK,” says studio513 “[Even if it really isn’t totally OK, you have to accept this situation.]  But you want a retainer at this point, that’s a reasonable request.”

Sometimes clients walk away from a job

There’s another potential problem here. Even if the customer does come through with a contract and puts some money down, there’s always a chance he will decide later to cancel.

So warns NYCJames. Although he’s used to dealing with much smaller jobs, interior remodels running between $15,000 and $30,000, the weak economy has given three customers cold feet after they’d made an initial payment of between 25% and 33% of the contract. Then they wanted some money back.

“They are not unhappy with my work and they are not hiring someone else, they just say there finances have changed,” he writes. “In a couple cases the there really isn’t much left (or they owe me a bit!) when I account for the time spent planning, discussing setting up the site and lost work days as I scramble to line up a job to replace the dropout.”

If the customer promises work in the future, NYCJames may promise them credit if the call. It really amounts to rolling with the punches. “I understand taking a bit of a loss in this situation in order to keep good relations,” he adds, “but I don’t have the volume of work anymore to just hand them what they ask even though that sum is usually under $2000.”

This, too, is a problem that can be solved with straight talk at the start of the project, says Tim.

“The proper way to deal with this is in inital negotiations and in the contract paper,” Tim says. “Explain to them, as you take their deposit, that you have to arrange for labor and materials to be committed to this project and that if is canceled prior to completion, not all of the costs will necessarily be reflected in tangible work performed.

“The promise of future work is useless,” Tim adds. “Put a clause in your contract pertaining to their voluntary cancellation of the job, that states that your cost and time up to the point of cancellation is to be compensated. You cannot realistically recover lost work days to scheduing, that is your loss, and the way it goes.”

Jim Sargent, a custom builder in Dallas, Texas and advisory team member at Green Building Advisor weighs in with his take on this topic:

“Our first meeting is to listen to the potential client’s desires and to explain how we work. We will not volunteer any of our strategy thoughts on the project or the name of the architect we will bring to the table until we have a (one page) retainer contract and nonrefundable fee in place.

I explain that the fee is based on the amount of time I personally anticipate spending on the project in the design phase.  For a fairly standard project, the fee is usually $2500.  I have charged $10,000 a number of times, and in one case I added $2500 to a $10,000 fee a year later when the design was still in progress.  The client will also pay the architect’s fee and the soil-exploration cost directly during the design period (consulting phase).  I review each set of plans during the design before the client sees them—I don’t want them falling in love with something dumb.

I will not let the client sign the consulting agreement at the first meeting.  I will give them a blank copy to take home.

At the end of the consulting phase, the client will have a set of plans designed to his site and a budget that we have prepared.  At this point, the obligation to each other is over.  The client does not have to use us as the contractor, and we do not have to build the home.  We refer to the consulting period as a dating period.  During the design, I freely explain all the strategies that are incorporated into the home to conserve energy and to be more renewable.  The client leaves the consulting phase with a fairly good understanding of the building science incorporated in his design. He also understands that just having a plan designed to the site is not enough to create a high-performing home.  The plan must be assembled with care and understanding.  We end up building almost every home that goes through the consulting period.

Our construction jobs are considered a marriage.   They are mostly cost plus a percent and occasionally cost plus a fee.

Texas may not have been hit as hard as other areas in this economic downturn, because our business has stayed steady.  We usually have 10 custom homes under construction at all times.  Our consulting business (jobs in the pipeline) is at an all-time high.

Ad lib:  We build and remodel in just about every price range that could be considered green.  In the lower price range where upfront funds might be more of an issue, we adjust our consulting fees accordingly.”

Watch a video of Jim Sargent as he tours a home with happy customers

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