Hi,
This is one topic where investors need to error on the side of caution!
Holding money back against the contracts labor and materials is called “Retainage”! In all US states the industry standard and the law say’s “Retainage is limited to 10% against all contracts” this is the way it is and anything more than 10% Retainage from draws is illegal!
In the State of California for instance the law say’s a licensed contractor is entitled to a 10% down payment if requested and failure to furnish a down payment when requested voids the contract! A California licensed contractor can only request 10% for a down payment on the day the contract is signed! Most contractor license law states have provisions for supplying financial payment when requested as a part of a contract being considered binding!
In most “Contractor License Law States” if you prohibit a licensed contractor from working diligently to complete there contract according to building code and industry standards you are liable for the time delay which includes labor, burden and reasonable profits per man hour!
As Contractors we all know without being told that we work for our clients however when there is a contract signed and that contract is for a fixed price to complete a project on time and under budget it’s not professional to play games with your contractor! For a six man crew a 10 minute delay is equivelant to one man hour which may cost upwards of $60 to $75 dollars an hour, and on a hard contract the contractor has the right to run his crew with all speed and efficiency to ensure his right to make a profit on his contract!
Ethical contractors with whom you have checked thier references, the state contractor board and verified there validity to be in business may from time to time request change orders which are generally in your best interests, normally contractors don’t make profits in small residential contracts requesting change orders: However no contractor can see inside your walls! No contractor can ensure your architect supplied accurate drawings! And no contractor can plan for installation of all products if they were not listed on a materials sheet at bid time and are being supplied by you as the property owner!
In a license law state a contractor is entitled to labor, burden and reasonable profit in accordance with construction cost data like RS Means!
Some reasons for down payments regardless of who is buying materials is: Staging? (When I was contracting in California just getting job boxes and tools / equipment to a job site could end up taking 2 or 3 hours of driving time each way with labor to move stuff from our company yard, storage or other job site into a new project!) Street Use Permits? (We may have to physically drive into the city offices and request / file paper work and make payment which could be hundreds of dollars for a permit to park temporary rubbish box, tool and equipment bins or temporary office facilities on a public street!) Rubbish Boxes? (Most haul-off trash companies expect payment in advance to drop a 20 yard / 40 yard box at a job site for rubbish removal!)
Contractors are entitled to run there business with the intent to profit, to grow there business and to finish your project in a timely manner, be careful of friviously tying up the time of any contractor or his crew and don’t make unreasonable demands on the project outside of the original contract and scope of work or beyond reasonable industry standards for quality and finishes!
The law is pretty clear in most states what you can and can not do and what the contractors obligations are to the completion of your contract in a efficient timely workmanship like manner! If you end up in mediation with a contractor in a license law state the contractor has the right to call as witnesses any city, county or state inspector and can obtain an independant construction management firm to review the documents, scope, contract, schedule and work for confirmation of industry standards, if your in the wrong be prepared to spend thousands of dollars because the contractors damages could be varied and wide in scope depending on what happened, the delays including not being available to start a new contract on time, and all associated cost’s of non payment, labor, burden, profit, legal consultation, independant examination all cost money and just because you refuse to pay a $1500 dollar balance or deny access to removing equipment your liability can be significantly more than a balance!
If you supply materials make sure you specify who supplies nails, screws, fasteners, fittings, brackets, boxes, etc. I started a job once where owner suppied all materials and he was animate, in fact he outlined and initialled his request in my contract, my crew and I sat for 6.5 hours waiting for him to run around town and purchase these items, needless to say he did not appreciate my backcharge for 46 man hours at $60 dollars an hour! It was a very expensive lesson for him to learn and this project was decided in mediation as his payment for this backcharge was never paid and it went to mitigation where his total damages were almost three times the original charge as damages and additional cost’s were added to the judgement of record against him!
Be very careful dealing with contractors especially in states with Contractor License Laws which I think are something like 36 states now!
GR