Dan Bawden, CGR, and his client agreed on everything: design, products, scheduling and even price. When it came time to sign the contracts, there was only one remaining concern: how the money should be paid. That proved to be a sticking point. "She wanted to control the draws completely and be sure we weren't ahead in payments vs. the work, whereas our approaches are designed to be a little ahead so we can use the payments to continue buying products," Bawden says. Working out that schedule took nearly as much negotiating as the rest of the agreement.
SNAPSHOT: Legal Eagle Contractors Co.
Location: Houston Type of company: Full-service residential remodeling company Staff model: 2 office, 1 field Annual jobs: 75 Work week: 60 hours Bio: Years in business: 22. Education/skills: B.A. in Psychology and J.D. law degree. Key to success: "Good communication is vital."
Reaching an agreement on how much and when money will be paid remains a delicate situation. And receiving that last check, even though it’s for a relatively minor amount, can be the most difficult part of the entire project. "There’s no more emotional aspect in remodeling than the fear generated over paying the money," says Bawden, owner of Legal Eagle Contractors Inc., in Houston. "And that’s true of both sides--I’m worried about being paid so I can maintain my cash flow, and the client is worried about paying too much too soon and losing control."
With 22 years of experience, an undergraduate degree in psychology, and a law degree, Bawden has learned how to adapt his payment program to reassure clients that they remain in control. At the same time, he ensures that he receives the payments he needs so he can complete the job and keep his suppliers happy. In general, Bawden has found that one of three payment schedules appeal to his clients. The key comes in knowing the pros and cons of each for both the remodeler and customer and being able to offer options that meet the client’s personality traits and comfort level. Here are the three Bawden uses in his business:
Payment Plan 1
10 percent at signing Week 1: 25 percent due when contractor begins work, defined as delivering materials or performing labor, whichever occurs first. Week 3: 20 percent due Friday. Week 5: 10 percent due Friday. Week 7: 10 percent due Friday. Week 9: 10 percent due Friday. Week 11: 13 percent due Friday. Week 13: 2 percent due on completion of the final punchlist.
Time Payments. These consist of a one-third initial payment and then smaller, usually equal payments made every two weeks during the course of the project, based on the estimated time the project will take. Some clients prefer this method because it smoothes out payments and ensures that they know how much is due when. "This format is the absolute best for the remodeler," Bawden says. "There are no questions about when payments are due, and there is enough being paid early on to buy required products. Customers usually understand that you have to buy materials right away, so they don’t argue about the larger initial payments."
Making certain that payments stay ahead of activity usually is easy because projects almost always change and become extended. "You can work out a five-week schedule if all goes well," he says. "But something always comes up or the customer adds more to the project, and a five-week project has a seven-week schedule. So you receive most of the money by the end of week five."
Payment Plan 2
10 percent at signing (nonrefundable; covers specification writing and time spent to date). 10 percent when tear-out and demolition begin. 15 percent when electrical rough-in begins. 15 percent when drywall work begins. 30 percent when cabinet work begins. 15 percent when painting and finish work begin. 5 percent balance on completion of the final punchlist. The customer agrees not to hold 10 percent retainage because the contractor shall provide the owners with a Certificate of Completion and Release of Lien upon receipt of the final payment affirming all subcontractors and suppliers have been paid. Homeowners will walk through the project with contractor to ensure all punchlist items punchlist have been completed, at which time final payment is due. Owners may withhold 150 percent of labor cost (at $60 per hour) required to complete any remaining touchups.
Clients, needless to say, are wary of this format for exactly those reasons. Few require such a regular and equal payment process and are willing to give up the control over activity-based payments to achieve it. "Some customers are concerned at the beginning about having enough money at the right times, and they’re concerned about the process," Bawden says. "This approach offers them a thin veil of comfort on those concerns."
Pivotal Points. This format ties the payment to a particular event. For instance, at the point when drywall work begins, 75 percent of the project payments should be received. "The remodeler knows where he is at this stage of construction, how much is done and how much is left," Bawden says, "and it marks a clear point for both sides."
This approach ensures that if delays occur or the job moves faster than anticipated, the payment schedule flexes to accommodate that. Customers appreciate this, because it implies that work must have been accomplished before more money is paid out, giving them more control and assuring them the contractor will continue working on the project.
Bawden warns that while this approach offers advantages for the remodeler, it has disadvantages. "If there are delays, it can hold up payments that are needed to pay for already ordered products," he says. "You have to have it adjusted far enough to your advantage to ensure that a slowdown in some activity doesn’t slow the payments that will put you behind in your own cash flow." (For more on cash flow, see "Cash is the Gas," May/June 1998, page 62.)
He also says the payment points must be exact. "Always tie payments to the beginning of the next activity rather than completion of the previous one," he says. Customers sometimes can nickel and dime an activity, such as framing, to the point where having it "done" can take many extra days. "There’s no arguments over when framing begins-it’s when the framing lumber starts going up."
Progress Payments. Bawden’s preferred method is a variation on the Pivotal Points approach. Rather than tie the percentage completion to a key event, he prefers to break down all the work by percentage and give the customer updates every two weeks on how much of the project is completed, with payments based on that percentage.
Payment Plan 3
10 percent due at commencement of work to cover design and specification preparation time, due at signing of contract. 30 percent due the day the foundation passes inspection, when framing lumber and other materials will be in the process of being ordered. Remaining balance will be paid in progress payments every two weeks, due on Thursday. The site superintendent will determine the percentage of progress and review the work accomplished during that payment period and work remaining to be done. 5 percent will be retained as a final balance payment due when the final punchlist is completed. Owners may withhold 150 percent of labor cost (at $60 per hour) required to complete any remaining touchup items.
In all three formats, Bawden typically asks for 10 percent at the time the contract is signed, as a nonrefundable payment to cover work performed on designing, specifying materials and holding meetings. "This way if something comes up, I’m covered for the time I’ve already put into the project," he says. It also ensures that the customer is committed to the project and work can be scheduled.
He also asks for another 25 percent when materials begin to be delivered. "By the time the crew shows up, I’ve received 35 percent of the project payment no matter what format is used," he says. "That gives me a cushion so I can stay a little ahead of the project costs. It also keeps later payments smaller, which makes it easier for customers to write them." Bawden has no trouble obtaining a significant amount early. "Most customers really don’t have a clue about how long a project takes or the process," he says. "When you’ve finished framing, most of them are so impressed, they think you’re a gift from God and would pay 60 percent right then."
Bawden ensures that the payment schedule is attached to the contract, along with key elements excerpted from "Residential Construction Performance Guidelines," available through the NAHB bookstore. Having definitive guidelines is critical with some clients.
"It’s vital to sit down with the customer near the end, have them list everything they see that still has to be done, and estimate for them how long each of those will take you," he says. "They see 500 paint touch-ups left to do and want to hold back $10,000. I try to explain that work will take us about three hours to do. But they’re afraid we’ll abandon them as soon as they pay that last money, despite having a signed warranty from us."
From contract to punchlist, money is an emotional player in the remodeling process. It takes a fine balance, a strong understanding of the client’s psyche, and a lot of experience to know which draw schedule to use. The right format will keep cash flowing and the customer smiling.
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Also See:
How To Snag that Final Payment