Thursday, June 04, 2009

When Your Contractor Runs Out of Money

I have gotten numerous calls over the last few weeks from homeowners whose contractors have run out of money. Either the contractors tell the homeowners that they are unable to continue, or warning signs occur. The contractor starts asking for payments ahead of the work, he presses you to sign new contracts or change orders for additional work, subcontractors start to complain that they aren't being paid, or he just disappears.

The homeowners are frantic and they ask me what to do. The contractor hasn't quit, but they are stuck.

First of all, I would recommend confronting your contractor and asking flat out if he or she is having cash flow issues. Contractors frequently apply funds to previous job, subs or suppliers, and in this economy, they are getting caught short. If the contractor is honest and tells you the truth, it may be worth your while to advance some money to the contractor or pay extra and ask for some extras. It may save you money and aggravation to pay your own contractor a little more to get the job done.

Second, do not just terminate or fire your contractor. If you do, you run the risk that your contractor may bring an action against your for breach of contract. Go back and read your contract and see if there are any clauses that address bases for terminating the contract.

Instead, write a demand letter to your contractor. In it, state that you are proposing a schedule for completion and payments to serve as an addendum to your contract. If the contractor does not agree to your proposed schedule or suggest one of his own, then you can state that he will be in breach, and you will "mitigate your damages" (reduce damages) by hiring another contractor to complete the job. That way, the contractor will be the one who is in breach.

A note to contractors: I represent contractors and construction companies and I am sympathetic to your situation in this economy. That said, it is better to be honest with owners and try to work things out then to disappear or keep asking for more money. Now is the time to fess up and ask for additional funds to complete the job. It may maintain the good will you have generated and result in more work from referrals in the future.

13 Comments:

At 8:42 AM, Anonymous Leigh Monette said...

Contractors in New York run a serious risk of facing a trust fund diversion action if they apply funds received for payment on one job to invoices on another job.

Penalties can include jail time. Ouch.

 
At 11:30 AM, Blogger MyContractorList.com said...

I agree 100%

Times are tough for contractors right now and as a result they are trying to "out bid" each other and of course the end results, they come up short on cash...Great advice!!! Hope you don't mind I may post this on my site for other contractors to view...

 
At 11:20 AM, Blogger Martin said...

What does a contractor do when you finished a job just to stay afloat but, made no profit can you ask for more money or your stuck?

 
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At 8:49 PM, Blogger Annabelle said...

This is really one the common issues in home improvement. Financing contractors is not that hard at all, especially if they are being cooperative. I have heard this Enerbank same as cash kind of support for contractors which offers financing customer's home improvement projects. I sympathize with contractors too, as my husband is one.

 
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