What is the One Thing All Bad Contractors Have in Common?
- All bad contractors want lots of money up front
- Don’t be too trusting as an owner
- Pay vendors and suppliers directly
- Always request a lien release every time you pay your contractor
- Ensure that you are holding enough money on your side of the table as the job progresses
The answer is pretty simple. Dishonest contractors always want lots of money up front. As an owner, you can protect yourself by limiting the amount of money you give a contractor early on in the job. You are best protected when you have enough money on your side of the table throughout the course of the project. So, if anything happens with your contractor, you can obtain another contractor and finish the project with the remaining contract balance you still have.
A client of ours is in a very similar situation at the moment because he was a little too trusting. He is renovating a very high-end condominium in South Florida. Based on a recommendation, he selected a contractor. He then paid the contractor paying all invoices submitted, paying almost 95% of the contract balance when the job was only about 60% done. He was unhappy with the pace and the quality of the work so he got us involved. We did some digging and it turned out there were lots of things wrong with this contractor. He didn’t have a license; the contract was unenforceable; and the contractor hired unlicensed and uninsured subcontractors. This contractor was less than honest with the owner. And because this contractor got lots of money up front, our client had very little protection. If the tables were turned and the owner held back sufficient money, he would have some recourse. He could fire the contractor and finish the job with the remaining contract balance.
What can you do to protect yourself?
Limit the amount of money that you give a contractor at the outset of the contract
Try to limit the amount you pay to the least amount possible. Some contractors will request about 10% of the contract to hit the ground running while others will demand you pay half upfront. If the demand is more than you are comfortable with, try to find out why the contractor wants so much money up front.
Pay vendors directly
The most common answer contractors will give for requesting a large percentage of money upfront is that they have expenses and materials they have to buy in advance to start your job. If that’s the case, pay vendors directly. Instead of giving the money to the contractor and run the risk that the contractor may not pay the vendor, make a direct agreement with the vendor and the contractor, and issue what is called a joint check to both the contractor and the vendor or the supplier to insure yourself that the money is going to the right place. You can do that with lots of vendors and suppliers during the course of the job to make sure that when you give a check to the contractor, it is going to the right place and that you won’t find a lien on your property later from an unpaid supplier or subcontractor.
Get lien releases
You always want to obtain releases every time you pay anyone on a construction project, including the contractor. Our construction law firm has plenty of clients that find themselves in situations that could have been avoided had they properly obtained lien releases from their contractor, subcontractors, suppliers and vendors every time they made a payment. You need to understand that the lien law is very complicated and the best way to protect yourself is to obtain lien releases from everybody that sent you a Notice to Owner every time you pay the contractor, even if someone is no longer on the job or has provided you a final at some point in the past.
Make sure you are holding back enough money throughout the entire course of the job
This is called retainage. It is common for most contracts to have a retainage provision. The industry standard is 10 %. That means, if the contractor submits a bill to you for $ 10,000, you will pay $9,000 and hold 10 % until the end of the job. It is very important you try and find yourself in a position at every point in the job that if anything were to go wrong with this contractor, you are holding enough money on your side of the table to finish that job with another contractor.