Thursday, August 15, 2013

What to do When Your Contractor Doesn't Pay Subcontractors and Suppliers

Recently I was contacted by some homeowners when their contractor told them that he had run into financial troubles and would not be completing their renovation work.  They quickly discovered that he had not paid numerous subcontractors and suppliers and left them holding the ball.  Over the years, I have seen this scenario many times.  Contractors who are not adept at running their businesses “rob Peter to pay Paul.”  At times, it is simply mismanagement of their finances, but sometimes it is intentional and criminal.
How can a homeowner avoid getting caught in this kind of situation?  At its worst, I had a client who discovered that fourteen of the sixteen subs were never paid.  The homeowner pays his general contractor in good faith and then faces the prospect of having to pay twice for the same work and materials.  There are some ways that a homeowner can protect himself.

1.       Make sure your contractor is properly registered and insured.
2.       Ask references if the contractor was reliable, came to the work site regularly and followed the payment schedule. 
3.       Be wary of contractors whose bids are substantially lower.  They may request more change orders in order to jack up the contract price to what it “should” cost.
4.       Start with a good contract and link payments to the completion of milestones.  Have a clause in your contract that allows you to cancel if your contractor fails to pay subs and suppliers.
5.       Make the payment schedule detailed and spread evenly throughout the project (for example, 10% upon pouring the foundation, 10% upon completion of the framing, 10% upon completion of the rough inspection).
6.       Avoid an overly large deposit.  In Massachusetts, the deposit cannot exceed 33 1/3% or the cost of special materials; whichever is greater.
7.       Require lien waivers in the contract as subcontractors complete their work and are paid.
8.       Be wary of contractors who ask for payments in advance of the payment schedule.
9.       Make sure that materials have actually been ordered by your contractor.
10.   Make sure the payments do not get ahead of the work.
11.   Periodically ask subs and suppliers if they are being paid as required.
12.   If you are not able to be onsite to check the progress of the job, hire an owner’s construction manager to monitor the work for you.

If you sense a red flag, do not ignore it.  Confront your contractor and find out why payments are not being made.   If you are not satisfied that the job is being run properly, reserve the right to terminate your contractor and hire someone else to finish the job.

One of the homeowners who was abandoned by his contractor found himself in an excellent position.  He had enough money left to finish the job with another contractor and did not suffer any damages.  Even the best home improvement contractors have found themselves in a cash flow bind.  The honorable ones will be forthright about it and address the issue.  Be wary of the contractors who may abandon the job.

My next post:  What to do when the subs and suppliers ask you for payment.