You’ve heard an owner say, “I’m not going to pay until . . .” or “I’m a little short right now because . . .” or worse, “My attorney tells me . . .”
Words like that are serious when a progress payment is late. But while work is still under way, you’ve got plenty of leverage. For example, you could walk off the job until payments are brought current.
A late final payment is fundamentally different. Most of your leverage is gone. The owner is comfortable, probably using what you’ve finished. You’re the one with problems. Suppliers and trades are demanding payment. All of your overhead and profit are tied up in that last check. Your reputation is on the line. A dispute over final payment can make every day as tense as a Martin Scorsese cliff-hanger.
At one time or another, every contractor will have trouble collecting a final payment. If you haven’t had that problem yet, you will. When it happens, your best defense is a contract that touches all the bases.
Take this test. How many of the following are in the contract you’re using?
My contract . . .
- Includes all the notices and disclosures required by state and federal law. Don’t play it any other way. An illegal contract gives the owner plenty of rope to hang you out to dry.
- Grants me the right to run a credit check on the owner. Don’t do business with an owner who refuses to share payment history.
- Sets an iron-clad procedure for closing out the job. Your contract should define substantial completion and cover the final inspection, the punch list, handling defect claims and payment for work not in dispute.
- Makes using what you’ve finished an acknowledgement by the owner of substantial completion.
- Includes a way to handle disputes. Arbitration is the quickest and cheapest way to settle disputes. Courts won’t take a case if the contract requires arbitration.
- Requires that the owner cover your attorney fees if payment is wrongfully withheld.
- Leaves no doubt that changes required by the owner, inspector or site conditions are extra work. The cost of extra work is your usual selling price.
- Sets a date when payment is due. Three days after presentation of an invoice is a reasonable time for most residential jobs.
- Sets an interest rate on past due balances. The best choice is the highest rate permitted by your state law.
- Gives the contractor the right to collect final payment if completion is delayed by the owner.
How does your contract rate?
A passing grade is seven out of ten. But in my opinion, anything less than 100% is a missed opportunity.
One other way that the final payment is different: Consumer protection law in nearly all states tilts the playing field in favor of owners when negotiating for construction services. But when the job is done, you hold all the cards. The law favors prompt payment of construction contractors.