HOW CONTRACTORS GET PAID
The most common way that contractors bill for their work is with a fixed-price bid which includes the cost for labor, materials, products and markup (the contractor’s 20- to 25- percent fee, which pays his overhead and his salary) for each phase of the job.
Some contractors prefer to work on a time and materials (T&M) basis. Instead of a set price, they charge as they go for the cost of labor and supplies, plus a markup. Working on a time and materials basis, you pay only for the hours worked and the materials used, but it means less certainty about the final cost of the project.
The T&M contract may be especially appropriate for a project where there are a lot of unknowns, such as a remodeling project where you’re uncertain what the contractor may find once he starts opening up the existing house. An unscrupulous contractor can use a T&M contract to work slowly and pad his fee, so never sign a T&M contract unless it has a price cap (T&M, not-to-exceed contract).
Once you've selected your general contractor, he or she should present you with a contract. For the protection of both you and the contractor, always have a written contract. It should be clear and concise and should lay out all of your expectations and understandings about the job. Do not sign anything until you understand it all. You may want to have your attorney review the contract before you sign it.
The contract should include:
- the contractor’s name, physical address, phone number and license number
- the scope of work, as detailed in the architectural drawings and specifications, including each material used and each product’s model, size and brand. If some materials will be chosen later, the contract should say who’s responsible for choosing each item and how much money is budgeted for it (allowances)
- the itemized bid (if you are using a fixed-price contract)
- estimated project start and end dates
- any agreements you’ve made (e.g. when the workday starts, who is responsible for getting necessary permits, or whether the contractor is responsible for trash hauling and clean-up work)
- a statement explaining any warranties on materials, labor or services (be sure you understand any exceptions or limitations)
- the payment schedule for the contractor, subcontractors and suppliers
- how changes orders are handled
- a requirement that the contractor obtain lien releases from all subcontractors and suppliers
THE PAYMENT SCHEDULE
A contract for construction should include a payment schedule. The contractor may ask for an initial down payment. After that, the contract should call for progress payments - that is, installments made when certain predetermined parts of the job (framing, mechanicals, drywall) have been completed to your satisfaction. Never let the dollars get ahead of the work, so that you’re not paying out money for work that hasn’t been finished. The final payment (retainage) should be at least 10 to 15 percent of the total cost.
Before you sign off and make the final payment, check that:
- all work is complete and meets the standards spelled out in the contract
- the contractor has given you all of the product manuals and warranty certificates
- you have proof that all subcontractors and suppliers have been paid (via lien waivers)
- the job site has been cleaned up and cleared of excess materials, tools and equipment
The general contractor should give you lien waivers each time he is paid, as proof that he has in turn paid his subcontractors and suppliers for their labor and materials. If you pay the general contractor, but he fails to pay his subcontractors or suppliers, the subs or suppliers can put a lien on your home.
Before, during and after construction, keep all paperwork related to your project in one place. This includes:
- copies of the contract
- change orders
- any correspondence with your home improvement professionals
- a record of all payments - you may need receipts for tax purposes