Friday, April 04, 2008

The Payment Schedule

Most construction contracts include a schedule for payments that looks something like this:

33% on signing

33% at completion of the rough inspection

33% upon substantial completion.

Although this would appear straightforward, in many cases it is not, and both parties need to put more thought into the payment schedule. From the contractor's point of view, he wants to make sure that he gets paid regularly, so he can pay for his subcontractors and materials. From the homeowner's point of view, she does not want to get so far ahead on payments that the contractor has an incentive not to finish the job.

In addition, payment becomes a way of monitoring performance and ensuring that each side lives up to his end of the bargain. The contractor has to perform before payment, and the homeowner has to show good faith and pay so the contractor will perform.

Most importantly, the payment schedule must allow for verifiable stages when payment will be made so both sides know what to expect. Sometimes payments are broken down further.

For example:

$x on signing
$x on the start date
$x once framing is completed
$x electrical
$x plumbing
$x at rough inspection
etc.

The advantage of this kind of payment schedule is that it gives both sides the incentive to keep to a schedule and perform.

The kind of payment schedule to avoid is one that is based on percentage completion (who will decide?) because this becomes an opportunity for debate on both sides about how to determine this percentage.

Finally, in Massachusetts, final payment cannont be demanded until the work is done to "the mutual satisfaction of the parties."

So, when preparing a contract for construction work, give some thoughts to the payment schedule. It may have more of an impact than you might think.

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