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.
Make sure your contractor is properly registered
Ask references if the contractor was reliable,
came to the work site regularly and followed the payment schedule.
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”
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.
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
Avoid an overly large deposit. In Massachusetts, the deposit cannot exceed
33 1/3% or the cost of special materials; whichever is greater.
Require lien waivers in the contract as
subcontractors complete their work and are paid.
Be wary of contractors who ask for payments in
advance of the payment schedule.
Make sure that materials have actually been
ordered by your contractor.
Make sure the payments do not get ahead of the
Periodically ask subs and suppliers if they are
being paid as required.
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
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.
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.
next post: What to do when the subs and
suppliers ask you for payment.