We are about to start a fairly extensive ($100k+) home renovation and I am reviewing our contractor's contract. He is someone that we know and I have talked to current customers and visited several job sites, so I am pretty comfortable with his integrity, but I do have a question about the payment schedule. Does it seem sufficient to pay in 15% draws and the final 5% after completion? The schedule and key points are below. Also, are there any other common things that I should try to add to the contract? Thanks!

I should add that any change orders are supposed to be paid in full at the next draw according to the contract.

Is this the bluet ape you're getting?

It looks okay except the "initial payment" where it looks like you are giving him a 15% deposit up front. I wouldnt pay for work until it is done.

Make sure contract is clear on his mark up for change orders and how those will be paid.

It's a contractors market, I would be surprised if you find anyone who will work without deposit. 15% seems reasonable and they will have that covered in week one. The other 15% categories seem reasonable to me, you may even be ahead of the money at most points.

And its typical change orders are as incurred, but I would hold back a percentage and pay when work is completed, not contemplated. If there are big material purchases, like appliances, cabinets, countertops, offer to make that purchase on your credit / payment and he can get his profit on the labor.

Sasappis said:

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If you are in Texas you are required to withhold 10% of the contract amount for 30 days after contract completion, termination or abandonment. If you are using a blender they should require this retainage

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Thanks, there is a retainage statement above the draw schedule that indicates 10%. Maybe I'm reading the schedule wrong but those two things seem to be in conflict with each other.

Sasappis said:

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Also, who approves the draw requests? The owner or an architect?

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That is a good question. I believe the contractor is going to specify way points in our contract (above is just his example contract, doesn't include project specifics) and we'll just go based on those waypoints being met. Am I incorrect in that assumption?

why does it say +-15%?

Vernada said:

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why does it say +-15%?

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I see this as an estimate of the amount to be expected not exactly 15% of the total contract amount. There could be periods a lot get's done or periods of delay for weather and the bill may be lower.

OP: If the 'Initial Payment' is actually a deposit, I would make sure he applies that to the first invoice. From then on stay behind him on payments as best you can. I've seen many occasions where the contractor got money up front then work on the project slowed as the contractor focused on other projects where he needed to get the work done to get the money. Worst case he walks off or goes under and you're left with 30% of the work done when you've paid for 50%.

Agree with the above about 10% retainage. Have that clarified.

Make sure you both know how quickly you are expected to get him a payment after he submits an invoice. You should have a little time to review what he's said he's done, but not so long before he gets nervous and shuts down.

Most lenders will require retainage be waived.

Only pay change orders on the next draw if the work has been completed or you can verify the material has been ordered or is available to view.

Sign off and payment upon completion only and get signed lien waivers. Be stubborn.

Thanks all.

Met with the contractor and clarified a few things today.

-Draw specifics and waypoints will be determined once we finalize the scope and contract.
-Change orders will be paid at the next regular draw after work has started or finished

CapCity12thMan said:

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Sign off and payment upon completion only and get signed lien waivers. Be stubborn.

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10% retainage protects from down stream liens.

mechanic's liens? how

You hold back 10% to cover the drywall subcontractor coming to you and saying the GC never paid him and he is going to lien your house.

Note that the lien notice period will extend beyond any typical retainage period, so this is a protection measure not absolute protection.

Sasappis said:

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CapCity12thMan said:

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mechanic's liens? how

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An owners liability is capped at 10% retainage and any trapped funds under chapter 53.

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This is not my understanding of the process, though I am not a lawyer specializing in texas residential construction.

My understanding of the retainage requirement is that the owner should be withholding 10% in order to fund claims by subcontractors, but I do not believe it would provide absolute protection against those claims if the subcontractor otherwise followed the proper notices. In other words, this gets complex and expensive if you were going to solely rely on retainage as your protection against a contractor not paying his subs.

If the concern is liens by subs (i.e. the contractor not paying his subs), the lien waiver is the most effective way to handle. You would want from the general contractor and his subcontractor at time of progress payments. "Here is your payment, and here is your lien waiver you need to sign. I also need lien waivers from your subcontractors who performed work associated with this payment."

Again, in this market you are going to find hard resistance against a retainage, but never hurts to try. Lien waivers are a good practice.

Contractors do walk away from jobs. And many times when they do, they also walk away from their obligations to their subs and suppliers.

I would ask him for a schedule of values and what he expects those activities to cost. It's more of a commercial practice, but it helps keep him from overbilling. Basically, you don't want to pay him more than he's spent, so if he walks of the job or goes tango uniform, you don't have work in place less valued less than what you've paid out. Pay based on that if you can get it.

after going through a mechanics lien process, I don't see how the 10% retainage had anything to do with it. They still filed a lien, followed all the rules, so it went on my property. A year term passed, nothing happened so the lien was dead. We got the lien released.

I'm gonna need that in plain english - I just don't understand it, sorry.

In my situation, the GC did some shoddy work and presented me with a draw request, I refused to pay it until the work was corrected. At that point there were still more work to be done and two more draws to go. Rather than correcting the work, they walked and in addition to that, then filed a lien for the FULL CONTRACT AMOUNT (for the remaining monies for the additional work they had't even started). Hence, why I don't see how some retainage amount had anything to do with this.

As a sub doing commercial work, we had to submit a conditional lien release that said "If you pay us this amount, we will use it to pay our suppliers and subs and will give up our right to file a lien." That would get them to cut the check.

Then in order to pick up the check we had to give them an unconditional lien release that reiterates that we're going to use the money to pay suppliers and subs, and that we have received the payment and give up our right to file a lien...

It was a pain... but understandable...

I have the final payment schedule and the 15% is up front, although they went ahead and performed all of the demo without it because we were still waiting on final drawings and final contract amount.

I will be "ahead" on payments, but for what its worth I trust the contractor and have a good relationship with his brother, we have met at weddings, etc., and I know several other people who have used him. I am comforatable with the payment schedule.

The only thing that I don't like is the retainage statement. In this post people have refered to 10% of the contract amount, but in this contract it states "10% of remaining balance" which is obviously less than the contract amount by the end of the project.

I'll request that it be 10% of the contract amount, is this reasonable?

Sasappis seems fairly knowledgeable on this and may chime back in. Getting a residential contractor to agree to retainage on payments is not something I have seen often. I am specifically referring to a homeowner : general contractor scenario not a major builder : contractor situation.

You are required under Texas law to withhold a retainage and any trapped funds in order to cover claims of subcontractors. If you do not, you open yourself up to a situation where you paid the GC but the bricklayer shows up, says he didn't get paid. You either pay him as well or get a lien on your property. If you properly did the retainage and trapped any funds as required, your liability would be limited to the amount of remaining retainage.

Proper retainage means withholding 10% of each payment or 10% of work performed through that payment point. Trapped funds would be an amount equal to any notice or claim you have received from a subcontractor that they had not been paid. Believe this needs to be in addition to the 10%. So if you get a notice from the bricklayer that he is owed $1000, you must "trap" those funds and withhold from any remaining payments to the GC.

BTW - If you get even a hint that your GC is not paying his bills, you are almost certainly headed for a bad outcome. Proceed accordingly.

Other BTW - The post above about the contractor doing shoddy work, you withhold payment, and they lien for full contract is another tricky scenario, They can only lien for work performed and not paid for. Any additional amount should be deemed invalid. Whether or not the work was crap is something that will handled in one of a few ways a) you work it out, they fix it and you either move forward or change horses; b) you refuse to pay them, they lien your house and you ultimately wind up in court to get a final outcome; c) you just pay them, kick your cat for a frustrating situation and get someone to fix their work at your costs and move on.

Thanks. So if I he provides a lien waiver from subs at each draw I will be protected from future liens then, correct? Then I make the last 10% split in two payments, one when work is completed and second when blue tape touch ups are completed.

Is that reasonable?