The builder has finished an itemized bid for me and we are going to meet . Can you give me a few idea`s on what to do and what to look at when we get together? thanks….I think it may hurt to finally see some numbers. Thanks again.
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I'm confused.
If it is a firm bid, there would be no need to itemize. There should only be one number to see.
Well, maybe two, counting the completion date
Excellence is its own reward!
Ask for the names of references and talk to these people. Don't go on price alone. You usually have to pay for Quality.
Even if it is a total bid, the specifics of what that implies should be spelled out.
That is why you need to compare bids not only on the total price but what you are buying in that price range.
Our bids included so much for many features, broken down by the different parts and what size/quality, even brand of fixtures were going to be used.
It also has amounts as allowances for things like brick/hardware/cabinets/tile/appliances/light fixtures, etc. You may want, when choosing them, higher or lower costly ones and that money you may save in one place you can then spend in another.
The bids we received read: "Job specifications" and it starts with the foundation to be laid and the testing of it, the framing and kind of materials in it, insulation, plumbing, heating+air conditioning,electrical,roofing, walls/paint/trim, windows and doors, misc items, allowances.
Each part had from 5 to over 10 items specified in it.
There were starting and closing dates and references.
The contract later will have this bid added to it, with a payment schedule and other conditions, such as insurance, mechanic's lien (so if a sub is not paid he can't tie the house up in a legal process, among other possibilities) a trash container and porta-potty on site, etc.
You need them at least to put in writing the basics of what each bid entitles you to or you can't compare them properly. A total figure floating in the air and promises of "good materials and craftsmanship" is too open to interpretation if later there are misunderstandings.
Ruby is right! The only other thing I would suggest to hopps is to ask for the contract to be an AIA document contract with addendums and attachments stating all work to be done per plans and spec's with a completion date, pay schedule and itemized allowances protecting himself and the GC.
We file an RMC sheet with the local municipality to protect us if one of our sub contractors sub's out his work and does not pay him once we have paid the original sub.
It's not all about the price!
well, hops... all pretty good advice... but most of the suggestions made , i would turn down...
i like a little more even playing field.. my contract is one page and i will not sign an AIA contract..
i will give lien releases if NECCESSARY... but they sure do slow down the process.. and i sure will add something in to the price to cover the aggravation and additonal work to process them
mostly... check the references.. and look at the contractor's caracter.. has he got any.?...... do you ?
two people of caracter makes for a better projectMike Smith Rhode Island : Design / Build / Repair / Restore
Mike,
We do about 2.5 million a year and 95 % is with AIA contracts. We have not had a problem to date. This includes sub contracts which spell out their scope of work clearly.
We also take pic's weekly, daily reports and get signed change orders from the owners. This has worked in our favor twice in the past when someone wanted to go to court. (haven't been yet)!
I guess you just get use to it and plan for the delay's
Not all people have character. Our slogan is "Building On Integrity". It seems to work for us.
my point was that the advice was good... but be prepared for lot of good contractors to walk away from some of the suggestion..
anyways.... what is your market .. sounds like custom new homes.. tell us moreMike Smith Rhode Island : Design / Build / Repair / Restore
Mike- I am with you. Almost all of the AIA contracts that we have signed have been with businesses and non-profits and were on the advice of their architects. We have had no problems with any of these folks. Most of our residential work is a much more collaborative process and not really suited to this kind of contract. The work is much more dependent on the establishment of trust between the parties. A client insisting on layers of protection for himself but not for us would set off all sorts of alarms and we would probably find a way out of the deal, if only by raising the price. Maybe this is cowardly but do we need the headaches? Every time that we have failed to listen to that little voice of doubt, we have regretted it.
---"A client insisting on layers of protection for himself but not for us ..."---
That is what contracts are supposed to prevent, the one sided advantage one party may have over the other without them.
The contracts indicate who is to do what under what terms, for both parties.
Our attorney, in his practice, represents both, homeowners and contractors. He is known as an ethical person that would not advise any one party to do wrong to another.
He has "seen it all" and can prevent problems before they may happen. That is invaluable in any business.
I am assuming that he also picks his clients, as you do. Some people are trouble no matter what.;-)
I'd be a little leary of a lawyer who thinks he's seen it all. That's probably a step down from a knowitall.Tom
I'm here to help the humans.
---"...a lawyer who thinks he's seen it all..."---
That was my impression, from what I have learned about him, not his words.
He is a man of few words.<g>
We do alot of jobs for Doctors, Dentist's and the professional business owners, ie, computer companies etc. We build commercially and do customs for our clients in the southeast.
Commercial work is pretty much anywhere they want, but the residential side is in Charleston, Kiawah and Hilton Head. Some additions have been in eccess of $300,000.
We are a small company and have a good working relationship with our clients due to the fact that we put the client's desires and budget first. They seem to trust us and to date we have not been stiffed by anyone.
The client has to trust us to do the job and we need to trust the client to pay us in a timely maner. That been said, we have found that the AIA gives the owner that extra sense of comfort that we are professional.
Thats very true. But trust in a business relationship is earned . You probably earned the trust of your clients by doing work for them in the past. but in this case where I dont really have that relationship with him or his subs, I want to protect myself. the last thing I would need is to find out later on that the sub put a lien on my property because he didnt get paid for the material or labor or some other thing that I the HO would absolutely know nothing about. One day 5 years after I go to sell my home I find out there is a lien on it by some sub who didnt get paid or therwise owed some money because I trusted the GC and I got to foot the bill to sell my house...yea that gives me a warm fuzzy. My philosophy is trust but verify. How would I verify ..in this case when it came time to sell my home and everything was clean no probs ie work not done to code, no liens, passes buyers inspection on work he performed for me..then I know I can trust the guy and will use him again.
Darkworksite4:
Estamos ganando detrás el estado de Calif. Derrotando a un #### a la vez. DESEA VIVO LA REVOLUCIÓN
I was PM on a job for an attorney this last year/year... about a 9 month job, whole house remodel inside and out, 4 man crew, lots of subs, approaching $1M. He had a lender involved and could only pay on their inspections and approved draws. He was a detail oriented guy who understood the whole picture. When we requested payment he would come to the office, look over the invoice with me, review payments to subs based on printed subcontract audits from Master Builder, and then write us a check on the spot. Our subs provided conditional lien releases on an ongoing basis, based on the amounts paid to subs. Client came to the job every day, knew all of the guys, stayed on top of issues and problems, and kept himself aware of everything. If there were any unhappy subs or payment problems developing, he would have known about it. I made (and make) a point of paying subs instantly. I'm probably the only guy who calls them and says stop what you're doing, go make out my bill, and get it over here.
Yes, this was a relatively involved administrative process with a lot of trees cut down to make paper for all those reports. However, client was happy, subs were happy, bank was happy, and in fact so were we.
One more thing--this client was the World's Nicest Guy. He stayed on top of the whole thing and never once made me feel like he was crushing my rocks. How's that for people skill? I felt the entire time.
Do you have the opportunity to manage your project like this? If you do, you'll be able to prevent any lien issues and prevent a lot of other problems too. You need the aforementioned people skills to pull it off.
"Our subs provided conditional lien releases on an ongoing basis, based on the amounts paid to subs. "
What is a conditional lien release?
Of course this will vary by the state, but I have not heard of this before.
BTW, I ran into someone on another forum, don't believe that it was buildign related. Anyway he was so afraid of of contractors and liens that he said that he would never hire anyone again. That he would use HD when for a bath remodel that he wanted to do.
One of his problem had been with a lien that a roofing supply company had put on his house (or at least sent notice that they would however CA works). And he had paid with a joint check to the roofer and the supply company. Seems that the roofer was couple of jobs behind in paynents so they applied it to the oldest job.
I sure that was totally illegal and that the supply house could be in deep dudu for doing that.
Conditional lien release--states that sub has been paid X dollars, usually at the point when they are given a progress payment. That's as opposed to one release at the end that covers all the money at once, even though progress payments have been made during the job. It's a good way of demonstrating that someone has been partly paid, and is useful when the owner and the owner's lender are watching like a hawk.
We did not issue a check to any sub without a conditional release for the check amount. A typical sub with maybe 3-4 payments during the job would sign 3-4 releases. Our office manager had it totally down--cut the check, print out the release, hand over the check when the sub signs the release, and file the whole thing with both the job file and the sub file. I remember a couple of times when the owner of the project I described above called to ask that we fax a batch of those to his lender.
When you have the personnel and the tight procedures to handle stuff like this every day, people can get very comfortable working with you and appreciate the thoroughness of your organization.
One thing I learned during that project was that it was NOT acceptable for the office manager or someone else at the sub's office to sign the lien release. It is necessary for the owner or a partner to sign the doc, otherwise it can be thrown out.
Edited 12/7/2003 3:40:29 PM ET by davidmeiland
Also referred to as a partial lien waiver. Says basically, "I've been paid X against an agreed price of Y, and hereby waive my rights to lien the work for which I've been paid." I was in commercial work for quite a while, and this was done as a routine on every job. Partial lien waivers are almost always exchanged at check time; i.e., sub gives you the lien waiver, in exchange he gets his check. Keeps everybody honest.
Ditto!
You are right when you said that working with such a tight set of proceedures as the AIA and billing, everyone from owners to sub's and the banks have a level of trust and respect for you and your orginization.
All of our work is billed with a schedule of values showing the percentage complete from each task billed for that pay period. One copy to the owner and one to the Architect when necessary. The bank sends out and examiner to check on work billed for and stored materials and will change the pay request if he has a legitimate complaint.
We pay our sub's within 3 business days of the receipt of the check for their work % complete to date per the pay request, partial lein release included.
It really is one of the best ways to keep all happy and protect all parties involved. Most contractors are not concidered to be orginaized, so when you show a client you have your stuff together, they end up telling everyone about you and how easy everything went. Quality, Integerity and people skills do count and should be at the for front of any business.
Nice to know I am not alone in the way I do business. There are some quaility people in this forum and I enjoy the interaction.
Great reply. Details details: You can't put enough of them in a contract. An additional recommendation would be to talk to friends and associates about their problems in building their house and then address these problems in your contract also. By the way you should come to a contractural agreement clarifying the work quality that will be required so that the builder or you will not be in for some suprises at closing. It is MOST important to specify your rights to observe the construction while it is in progress. Many things can and are covered up with drywall etc. Finally keep detailed notes on any and all discussions you, the customer, have with the builder( ie dates, time parties to the discussion and disposition.) Details are so important that they must be made binding by the terms of the contract. Later
I don't really know anything about all this, but have one of the best board certified contract/real estate attorneys around here, very experienced, that has represented the local builders association, builders, HO and their associations etc. at different times. He has seen much over the years, has seen the business environment change, the explosion of building and new builders in the last few years, etc.
He is highly regarded as ethical in a field where many are suspect just by belonging. Heard any lawyer's jokes lately?;-)
Our GC is second generation in this area and has been in business himself 30+ years, is the current president of the builders association and has a clean record.
He has built three houses near here, in this rural area, in the last three years and done an excellent job, is recommended by all three HO's. He is a little higher, 3%, than the next higher bid, but maybe he does earn it. He helped cut the house down to be able to accomodate the budget a little closer and still get us what we wanted.
Sure looked high and dry for another as good as he is but cheaper, couldn't find any. With the advice here, took my time learning and looking but went with him after all. Good start, I think. Will let all know how it ends.<g>
Not all situations are clear like this one, so to be careful is surely the best for all, GC's and HO's.
Good advice. Will heed it.
Will be hard for me to know those things you mention. This is a straight up simple house, gable roof, tile floors on a slab (no "subfloor"), fairly open plan. I don't know anything about building so will have to learn about those materials as we go.
I will be around, more or less, since I live here. I will make myself busy on the cattle/horse pens and farmland behind the building site when they are here, so I will not be in anyone's way, but still handy to oversee and be there for any questions.
The builder has already asked if I would be able to direct the suppliers when they deliver, so as not to have to come all the way out here from town or send someone, on the items that don't need t be approved and signed on arrival, that can be later rejected if not right, I assume.
Some of the subs are personal friends that have done work for us before and I don't think that they would let him cut corners or that he would ask them to.
Sorry that you had to worry so to be on top of your building project, that they didn't quite do what they contracted to do. Hopefully that won't be much of a problem here.
Ruby: I would definitely get something in writing from the contractor specifying that you accept no liability or responsibility for the construction material that he is requesting that you oversee. Also history has shown that major problems can and often do occur when "friends" enter into the equation. I presume that you are building on land already owned and paid for by you. If this is true then if any problem(s) occur then the builder,bank et.al. could place a lein on your property until such claims are settled. As I said a legitimate forthcoming builder will recognize your concern and will have no objection. In fact his response will be a good test. Building a house today is an extremely tiring and frustrating exercise. My house is apparently more complicated than yours but one must be vigilant regardless of the circumstances. Again KEEP GOOD NOTES WITH DETAILS. that was a godsaver in my case. Regards
---"KEEP GOOD NOTES WITH DETAILS"---
I am. I will continue to do so. "Things" happens to the best laid plans.
This house building process will be an interesting event, hopefully not as interesting as yours is.
Further to the discussion previously about holdbacks and mortgages, in new construction, I finally found the spreadsheet I had. It's in excel format for those who are interested.
First off, let me say that the banks around here will not give you a mortgage for the full amount of the cost of the house, but I've used those figures for comparison. And it is standard practice for the banks to not give any money until the house is 43% complete. Why 43? Dunno. Thats at the closed in stage, windows, roof, doors, sheathing. And the other stages, 70 and 85%, are set by the bank as well. And they are not flexible on these milestones.
So, if the builder wants, say, 20% down, then 25% at the 50% complete stage, and then another 30% at the 75% stage, and the final 25% at closing, you have a case where the homeowner gets no money from the bank until the house is 43% complete. Since at the 50% stage, the builder wants 50% of the funds, they are still behind but not by as much; by that point, they have paid the builder 76K, but have only been given 73K by the bank. At the 75% stage, they've paid 127K, but only recieived 119K; at the 85% mark, he is able to access more for a total of $144K to date.
That's where "bridge financing" comes in, the banks will give you a line of credit to cover the shortfalls. It's complicated, but it shows that if the builder understands how the mortgage is created, the client and contractor can work together to make it smoother. For example, if possible, trying to keep the milestones the same would make it easier.
I've shown the figures with the 15% lien holdback taken out of each, as the banks will hold that money out. The contractor gives a bill for the full amount due, and they get the 85% of that amount.
Around here, some builders provide extra help with the financing, going with the HO to the bank to work out all the details. They use that in their advertising, as an extra feature.
I guess that is what you are providing with that information.
Dear TenPenny; You understand why the bank holds back funds as that is what you described in your e-mail: They are protecting both themselves and the future homeowner. As each stage of the construction is complete it's value is implied so that if the builder/contractor should go bankrupt or run with the funds he can hardly run away with the construction to-date. It is not a rare occasion here in North Carolina where a builder will run away with a large sum of money meant for construction OR will declare bankruptcy end the bank/homeowner is left holding the bag. I would not accept that risk. Thanks, Harry
Pardon my ignorance, but where does the 'down payment' fit into the new-house-mortgage scenario? It doesn't appear on your spreadsheet that any dough is coming out of the HOs pocket, it's all from the bank. With a typical mortgage for an existing house, the HO would have to come up with a down payment, ideally 20%, plus another few percent for closing costs. In your $200K-purchase-price example, I would expect to cough up about $43K to close the sale if the house were already built. I doubt that a bank would exceed 90% loan-to-value in most cases, so the client should have at least 10% ready up front to provide a deposit or progress payment. Isn't that money available to you as the builder?
I gotta say, there's at least one advantage to working for folks who are not borrowing the money--they can pay you, if they want to!
"'down payment' fit into the new-house-mortgage scenario?"
The land.
If it's not already listed on the bid, be sure to ask what items are not included. Was he bidding off a set of drawings? If so, the bid might say "everything as shown on plans dated ___ with the following exceptions:" If the excepted items are required (building permits, utility deposits, etc) then be sure to include them in your total budget. And be sure the referenced plans are the latest ones, with all the latest changes.
Do it right, or do it twice.
Edited 12/4/2003 11:04:29 PM ET by ELCID72
Is this a new house, or renovation?
If a new house, are there allowances for flooring, kitchen, etc, or are they firm spec'd? If allowances, do they seem reasonable? How much weasel room is in there? Do you have any input on colors, styles, etc? If so, be prepared to make your decisions quickly, so as not to hold things up.
Here's one that's bound to upset the apple cart - can you get a credit check on your builder? Wish we'd had one. He was 31 yrs in business, probably the most respected builder of custom homes, pres of the home builders association, won awards, etc etc, but went bankrupt building our house. Turned out, he hadn't paid any of the subs on our house. Or the one he built before ours. Thank god for the mechanics liens act, it protected us, anyway. A sure warning sign is that most of the subs (sparky, plumber, etc) were not the ones he "normally" used - turns out, they wouldn't work for him until they got some money. But we were given various explanations, and no one would tell us the truth.
(thread hijack alarm activated)
Ruby wrote: "other conditions, such as insurance, mechanic's lien (so if a sub is not paid he can't tie the house up in a legal process, among other possibilities)"
TenPenny wrote: "Thank god for the mechanics liens act, it protected us, anyway. "
Sounds like subs aren't entitled to payment...? I thought that lien rights were so they would be paid.
Disclaimer: this applies to my particular jurisdiction only.
Around here, the mechanics liens act provides that there should be a holdback of 15% of all payments to the general. Moneys to be held for 60 days after closing. The subs have 30 days (from the time of their last work on the site) to file their liens. If, for example, the contractor doesn't pay any of the subs, or his suppliers, they get to fight over the 15%. So, for example, if the total claimed by the subs is $100K, and the gc billed $200K, the holdback moneys would be $30K. So the subs would get 30% of what they wanted. Generally, the subs will agree to a distribution like this. If the subs who filed a lien choose to dispute it, the whole thing goes to court. The courts generally will make sure that the homeowner pays for what was received, ie, if the court determines that the work to date is worth $200K, and the payments to the GC have been $200K (less the 15%), everything is fine. Anything over or under is to be adjusted; ie, if the work to date is about $200K, but the GC has only been paid $150K (less 15%), the homeowner will be expected to add 50K to the lien pot, since that work has been done, and not paid for. What it does is protect the subs to some extent, on the assumption that they won't let the gc string them out too far, and it protects the homeowner from having to pay for everything twice.
Note that if a lien is filed against the house, the bank may ask for the return of any money advanced to the homeowner, and you cannot get a mortgage on a property which has a lien filed against it.
Some GCs will get the homeowner to agree to skip the lien holdback. This is a dangerous move for the homeowner, because legally they are responsible for the 15% whether they held it back or not. If you are dealing with a mortgage institution, they will typically ensure that the holdback is kept.
Clear as mud, right? Seriously, I've been through it.
No, it's quite clear, thanks. The 30 days to collect your money is probably an issue sometimes, both in terms of the GC getting paid and paying his people, and in terms of subs getting around to doing thir billing. Gotta stay on the ball, I guess.
I once worked for a Company that had been in business for over 100 years, and had a sterling reputation. What no one knew was that the owner, (grandson of the founder) was planning on leaving his wife and moving to the west coast, where his mistress had moved. We were in the middle of a restaurant remodel. The client was a doctor, who loved to cook. He already had two restaurants, and a rep for great food and atmosphere. His business partners, were........ well, they were Italian restaurants and this is Northern New Jersey, so , you fill in the blanks....
I used to go to the office every Friday during this project. The doctor would show up with a ton of cash, and I would walk my boss to the bank. ( I am a Tai-Kwon-Do black belt). It turned out he was putting the money in a safe deposit box, not the company checking account.
One Monday, when we all meet at the office, he told everybody to go home, that we were closing down. That was the last time anyone has seen him. The subs had not been paid, to the tune of over $500,000.00. Because of the company reputation, the Doctor had not asked for a waiver of liens from all the subs. The restaurant never opened. and the doc lost a lot of dough. Rumor is that NO ONE will ever see our boss again.
Moral of the story is, do not take any chances, or expect the worse. Get waiver of liens from everybody, or ask for proof that all subs AND suppliers have been paid. Greed, or bad business practices, can do in the best of us. The client should not have to pay twice.When all else fails, use duct tape!
I think you have it backwards - I'd never sign a waiver of liens; by doing so, you are setting yourself up. The liens protect both the client AND the sub. At least around here. See TenPenny's post - if he/she had signed the waiver, legally, he/she would still be responsible to pay the subs, because in many jurisdictions, no matter what you sign, you are still legally responsible for the holdback/lien money. And make sure the holdback is held by your lawyer.
The subs sign the lien waivers after being paid, which proves such to the owner. Larger vendors should be asked to do the same.When all else fails, use duct tape!
Ah, sorry, I misunderstood. I have known of some contractors who ask their clients to skip the holdbacks....
I wasn't thinking that you were commenting on the pro side, which should, of course, have been my first thought, considering the forum.....it's snowing and my brain is cold. Is that an acceptable excuse?
NP..................
Most of the Architects in our area require the GC to use the A.I.A. Contract Form #707. Part of that states that the owner is to keep Retainage in the amount of 10% of the Amount completed to date. Once the Amount completed reaches half of the contract amount, the retainage is reduced to 5%. That 5% ends up being the final payment after completion of the punch list. I add an addendum to that form, and one of the things I require is that the owner put that retainage in a separate interest bearing account. At the end of the project, I get the interest. Otherwise, it's like giving the owner an interest-free loan, since it is really money you have earned, but don't get yet.
We also have a short form that gets signed by my subs, stating that they have been paid a certain percentage of their contract amount, (No actual monetary figures) which is presented to the architect with every payment request, which they must approve before it goes to the owner. The architect actually approves that the stated % of work done in each line of the schedule of values has really gotten done.
I also require that the owner provide proof of finance, showing that they already have the money or the financing to cover the project. You wouldn't want to start the job and then find out the client was turned down for a necessary loan. If the loaning bank, or whoever, requires site inspections, I make sure I know who to call so it doesn't take weeks to get paid.When all else fails, use duct tape!
Re the proof of finance, how do you see the proof if the owner is not financing? An owner can say he has the cash, but a great portion may be invested, say, short term bonds, or other instruments. Does one insist that invested money is not good enough, that instead, in the case of an owner not financing, that 100% of the contract amount be in cash and placed in an escrow account?
I have a clause that says that the Contractor has the right to halt all work if payment has not been received within five days. If they have to constantly transfer funds, it will slow up the job. Another clause, used for time and material costs, states what my daily overhead charges are. So, after five days, I would go elsewhere, while they get charged by the day, until the check clears, not until it is received.
This is explained at contract signing. I suggest that the funds be placed somewhere local, where they are readily available. The only time escrow is suggested is if the client is not the owner of record, such as a trust or an estate. When all else fails, use duct tape!
As a HO, for proof of available funds for building, I opened an account and deposited the amount in the builders personal bank and gave permission for him to review the figures in that account, that is in my name only, of course, so he knows the money is available.
He was pleasantly surprised.
He has to trust me not to withdraw it for anything else, but then, how much more, short of escrow, can a person do?
BTW, he checked out financially sound, at least right now. Trust has to go both ways in life, after all, there is only so much one can do to check others and if someone is not on the level, any contract will be very hard to enforce and costly.
Contracts are a way to insure all are on the same page on what is to be done, to avoid misunderstandings. They offer much protection but there are ways around that if owner or builder are inventive crooks.
Thankfully, most builders are honest and want to do a good job and most HO's will pay promptly for that.
I use to have a boss who for owner financing. He would require the client to open a joint check account for 50 % over the contract. That account would require both of them to issue the check . That way both had to but their names on the check (issue) the check to get any of the money out of the account. The reason for the extra 50% cover change orders.
If it was financed by the bank the boss would make the client prove the bank would lend him money 50% in excess of the contract .
The boss would require 25% up front and then a check 48 hrs after he billed the client or the work stopped.
You hit it right on the head, Ruby. I tell everyone, client or not, do not give a contractor a deposit or down payment. If he needs it financially, you shouldn't be doing business with him. Successful contractors do not need to take any money for something that hasn't been done yet. The only exception to that is if the contractor needs to pay money in advance for materials for the project. Contractors cannot be expected to be the owners bank.When all else fails, use duct tape!
what a crock....how am i going to schedule if i don't have a commitment ?
and how do i havea contract without a quid pro quo ?
" you give me money and i will such and such"
no deposit .. no contract..
it's just like commissioning a work of art...
daddoo... you're out to lunchMike Smith Rhode Island : Design / Build / Repair / Restore
How does your "I need a deposit up front" theory work when the owner is financing most or all of the project with a bank?
I spent mucho years in the hard knocks world of commercial contracting, and never ever saw an owner who would pay a GC money in advance, and never ever saw a sub get any startup money either.
However, in purchasing big-ticket custom machinery, with price tags upward of a half a mil, and significant engineering involved, it is customary for owners to upfront some cash to the vendor.
In residential work, when a contractor asks an owner for upfront money, it makes me think the contractor is saying to the owner, "I don't trust you, even though we have executed our contract agreement."
What is your logic in requiring deposit money? Is it that you exclusively do design-build, with significant costs in developing plans and specifications?
nope..... local custom...
in 30 years of contracting, i've always got a deposit... sometimes months before we start..
and it doesn't matter wether it's bank financed or owner financed.. i explain .. if there is a bank involved .. i still have my payment schedule.. not the bank's..
and i have them show my payment schedule to the bank.. everything is hunky-dorey..
now .. some states have laws AGAINST deposits... too bad for those contractors doing business in those states.. but don't tell me i've been doing it wrong for 30 years
if i'm going to commit 3 to 18 months of my life to my customer's home, you're damn straight i'm getting a deposit... one that they are not going to walk away from either..
want to rent a house in Rhode Island for a week next summer ?.... lemme see you get a commitment without a non-refundable deposit..
my subs don't ask for deposits from me.. only rarely.. usually specialty subs.. but if they want it .. they'll get it.. guess where it's going to be comming from ?
look.. the world of contracting is funny.. and the laws vary from state to state.. this is what it's like here..
i 've worked both sides of the desk.. public authoritys... town govt.... heavy & highway, marine construction, some of it under the laws of public bidding.. some of it private.. deposits are NOT a bad thing.. so get rid of that idea
and it's not just because i do design / build.... the design part is a SEPERATE contract.. and yes .. i get a deposit on that before we start also....
Mike Smith Rhode Island : Design / Build / Repair / Restore
Edited 12/8/2003 11:25:22 PM ET by Mike Smith
I'm working a job right now where I have a 20K deposit. I've got 16K out in advance special orders to commit. I'm turning over 50-60K/month in it and thinking I should have required a 40K deposit, but doing OK because they pay promptly. I wouldn't dream of doing work without a deposit for anything over a couple grand.
Never have.
Can't buy a car or a piece of land with no down payment either.
Old standard for making a contract live was "earnest money" Without any exchange of value, the contract was not valid.
Micro - I'm sure you've noticed that there are other differences between commercial and residential work..
Excellence is its own reward!
My experience with bank financing has only been for new construction. Here is an example.
Builder bids a custom home job for the client, the number is $600K, the client owns the land. Loan is for $450, the bank will require that the owner escrow the diff, being $150. Bank says it is a five-draw deal: foundation completion, weathertight enclosure, drywalled and primed, cabinet delivery, finish.
Deal is inked on March 15, expected dig date is May 1.
Contractor says, "I need $100K as a deposit so I know you are for real and to hold your spot in my schedule."
What does the client do, rob a few cash machines? Borrow it from Dad?
Around here, in new construction, most builders require a deposit of 15 to 25%. When financing, the bank will only advance money on the mortgage based on the percent complete. Therefore, you will typically be short until the 50% or 70% mark on the completion. However, the banks around here always provide bridge financing along with the mortgage; it's essentially a line of credit that is used until the mortgage kicks in. If you're tight financially, you may have trouble with the bridge financing. I have an example spreadsheet, but it isn't on this computer. It's one of those neat surprises you get when building.
And, further to the lien holdbacks I mentioned earlier, it is supposed to be done for renovations as well, although typically the lawyers aren't involved. Depending on the size of the renovation, the homeowner and contractor will work out how to do it.
well, i guess i 'll have to stop taking deposits and furring my ceilings....Mike Smith Rhode Island : Design / Build / Repair / Restore
So, with a deposit, you are always ahead, or not? If I give you your deposit of $100K on a $400K job, and first draw comes at foundation complete and capped time, is your draw request for $100K less the $100K deposit? Equals zero? Or do you want to stay ahead for now?
first .. i got sucked into the 3-draw bank finance ONCE.. i made sure that never happened again..
a $400K job would have at least 10 payments... with easily recognized payment points both parties will not be arguing over..
do i strive to get ahead and stay ahead on the cash flow ?... you bet.... if not... then my float has to finance the project... that's out of balance..
here's the balance... (the owner provides money = we provide the product )
they are supposed to even out based on the specifications and plans
i'm NOT supposed to finance the project.. if i do.. then i figured it wrong... shame on me
Mike Smith Rhode Island : Design / Build / Repair / Restore
I am spit on this one! Our company does not ask for a deposit. In our contracts to the owners it clearly spells out the billing and pay schedules/dates. The average time between payments is somewhere around 30 to 45 days with a clear definition of a must have check in hand 3 days after due date on the contract. So we end up floating the job or are thirty days in the rears when the check comes in.
Our sub's all work the same way. I get leery when a sub ask's for money before starting and for the most part, unless I know them, I do not pay or use them. It you are in business for yourself, you should be able to have payroll for this length of time and have accounts that allow you to charge materials.
That being said, I sometimes feel like I'm playing banker for the owner and would like to get some of their money in the beginning, but we have been operating this way for so long we are use to it.
well, ok...
.<<That being said, I sometimes feel like I'm playing banker for the owner and would like to get some of their money in the beginning, but we have been operating this way for so long we are use to it>>
kinda like getting used to being a leper..
i've never had a customer bat an eye when i tell them i want a deposit to bind the contract and get on our schedule...
working capital is for emergencies and to facilitate our discounts.. ongoing operations are supposed to be carried by the project..
gotta go get changed for our Lion's Club Christmas party..
Mike Smith Rhode Island : Design / Build / Repair / Restore
I didn't understand the furring the ceiling thing.................
But I want to say that I am talking about Remodeling only for not needing a deposit. With new building, you have nothing to lien but the land. My contract has a clause that states a penalty, usually a percentage for cancelling the contract after signing and the three day wait period. When I build new construction, it is always very custom, very high priced. I do not get a deposit, I get a retainer. I get involved during the design phase, and take it all the way to the housewarming. In New Jersey, you need a license to do designing; either Architect or Engineer, depending on what is being designed. Then, I also bump the overhead to cover the bank headaches.
By the way, do your employees get paid a week in advance?When all else fails, use duct tape!
furring is new england ... a local custom.. just like a deposit
and , what kind of semantics is " i don't get a deposit, but i get a retainer ?.... hah, hah, hah
Mike Smith Rhode Island : Design / Build / Repair / Restore
A deposit is defined as an amount of money, usually a set percentage of a set price, as in a contract amount. A retainer is a set amount of money received at a outset of services being billed on a time and material basis, such as legal fees, or design costs.When all else fails, use duct tape!
I understand the logic of requiring a deposit. The contractor is committing himself to the job. If for some reason the contract falls through(and who hasn't this happened to?), he will not be able to collect a dime on it but will have to scramble around to close the hole in your schedule.
However we have never required a deposit. It does go against the need to establish trust at the beginning of the job. And we all know that the most difficult payment to get is the last one, not the first.
Your commitment is your contract, with everyone's signatures. It confirms and defines the scope of work and the costs to the client; the more detailed the better for all. It gets the ball rolling. It's when we file the permit package, which can take 6-8 weeks to be processed, depending on the size and complexity of the project.
The AIA contract we use stipulates many things, and, I agree, is somewhat slanted toward protecting the homeowner and the architect more than the contractor. That is why we add an addendum to the contract, with a few more items covering our butt. But here in New Jersey, the building departments help even the playing field also. It is illegal for the builder to get his final payment until the issuance of the Certificate of Occupancy; but it is also illegal for the owner to use or occupy the new work until the Certificate has been issued. It is requested by the builder, issued to the contractor, and given to the owner upon receipt of the final payment. I have had the building department fine a client, and force them to remove furniture from a master bedroom addition until I got paid.
I'm out to lunch? Yes!, with a happy client paying the check.When all else fails, use duct tape!
Typically, around here, the holdback is held in trust by the homeowners' lawyer; some builders like to have thier lawyer hold it, depends on the reputation of the lawyers involved. And here as I mentioned, our holdbacks are 15%, as determined by law, and are supposed to be held for 60 days after closing.
Since this is standard, everyone allows for that in their pricing. Typically, the homeowners lawyer (if he/she knows what they is doing) will not release the money until he/she is certain that no liens will be filed. Some will use the holdback as a lever to make sure the "punchlist" is finished; however, that's not the purpose of the holdback. The only purpose of the holdback is to ensure that suppliers and subs are paid, it is NOT supposed to be a lever to make sure the contractor finishes all the fiddly callback issues.
I've done some projects where 'punchlist' was a separate budget line, 1-2% of the total, and that amount was not billed or paid until the job was punched out. That meant we could bill for any retention when the job was complete, less the punchlist, so we would be 98% paid. If the owner has money held back for the punchlist and they want to prepare their own list (which they often want to do), they'll usually drag their feet on it. Floating 15% for 60 days sounds like a lot of dough hanging in limbo to me, especially when the list usually dwindles down to a couple thousand bucks or less, and it's usually based on a few long lead items that we don't have yet anyway.
Since you said it was held until closing, I assume you are talking about a new structure. My projects are all remodels, where the owner doesn't need to involve a lawyer. and may not have one.When all else fails, use duct tape!
Make sure there is a clause in the contract to protect you in case the GC doesnt pay his subs and they put a lien on your house. Also make sure you have a clause for change orders. Make sure the payment schedule is clear and concise about when the builder will recieve payment and the per centage of work that will be completed for each payment and method of payment .
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