The Elusive Final Payment Revisited

In my October 2008 column (pg. 10), “The elusive final payment,” I reviewed strategies for getting your final payment when doing custom building on a client’s lot. Readers from Wisconsin, Utah, Florida and Maryland wrote to me to share their methods of ensuring they get their final payment. I have highlighted a selection of their recommendations which I hope will help you obtain the sometimes elusive final payment.

But, first a brief summary of the key points from my October column:

  1. Try not to let your client get ahead of you when you are in the final stages of completing their project.
  2. Review your construction agreement and consider including some or all of the following language within it:
    • Require two initial payments: The first is a deposit that is held to be applied to the final payment; the second is to fund the client’s operating account.
    • Obtain the right to request funding of the operating account every 14 days and require a minimum balance in the account that is approximately 10 percent of the total projected job cost.
    • Maintain the right to stop the job when a funding request is delinquent.
    • Consider adding the following clause into your contract: “No funds shall be held back for issues related to quality or completeness of the construction in place.”
  1. My draw schedules are milestone draw schedules which call for payments on items started or delivered and never 100 percent complete. I explain what a milestone draw schedule is up front and have never had an argument about a draw being due since instituting it in 1995. Even the banks accept it. I also have a clause in my contract tying draw authorization to the bank inspection if they’re bank financing. My final draw is always submitted only after there is only 1 percent of the job left. This is all that is ever at risk for me.
  2. The other method I use to keep from getting stuck near the end is to simply not pay any of the finished trades until I’m funded. If the owner balks at the end — and that’s normally when they’ll go for the kill if that’s their agenda — then what they’ve really done is screwed the subs on the final. When they realize the contractor has [received] his money but the carpet company, driveway contractor, landscape contractor, etc., haven’t been paid and have the right to lien the job, it adds a fresh perspective to how their “screw the builder” plan is working out for them. Since I’ve been using these methods, I’ve had better customers and been a wiser builder. I really believe I have avoided quite a few arguments about what is due and when it is due.

Christina Speiden, director of R&D for Pro-Built Construction from Highland, Md., adds a few good ideas:

Consider charging a “late payment” fee that is taken out of their security deposit. For example, let’s say that we invoice the customer for draw No. 3. In the contract, it states that they have five days from the date of the invoice to review and pay, or a late payment fee of $25 per day after the five-day mark is applied. The late payments are then deducted from the security deposit. And, the security deposit must always be more than the final payment so that the homeowners “want” their money back. Banks charge late payments … why can’t we?!

We are in a challenging economy. It is prudent that you expect the unexpected and be prepared even more now than in prior markets, because your clients are not immune to the economic conditions prevalent everywhere today. An ounce of prevention is still worth a pound of cure! So, be proactive. Stay on top of funding requests. Stay in close contact with your clients and their funding obligations to your company — especially as the job winds to a close. Good luck!