Collect Progress Payments Your Way

I got a good question from a contractor a few weeks ago. I didn’t have an answer. There may not be an answer. But there are good choices and bad choices. Here’s the question:

“I’ve got a good payment schedule in my contract. But the lender won’t pay on my schedule. They have their own schedule. What should I do?”

Background

Any fixed price job that requires weeks of work needs a payment schedule. When are payments due and how much? Most contracts for larger residential jobs specify an initial payment plus progress payments based on completion of job phases. For example:

• 10% when Breaking Ground
• 10% when Foundation is Complete
• 15% when Rough Framing is Complete
• 10% when Rough Plumbing is Complete
• 10% when Doors and Windows are Installed
• 10% when Exterior Wall Finish is Installed
• 10% when Cabinets and Counters are Installed
• 10% when Mechanical and Electrical Pass Inspection
• 10% when Interior Finish is Complete
• 5% when passing Final Inspection

Contractors commonly front load payments – bigger payments during early job phases and smaller payments as the job nears completion. That bumps up working capital during construction. Lenders are leery of front loading. For obvious reasons, some lenders prefer their own back loaded payment schedule -- giving the contractor an incentive to finish work.

Black letter law: Lenders don’t have to pay on your contract schedule. That leaves owners caught in the middle – eager to see the job completed but with little leverage to pry money out of the lender.

So, what’s the answer?

Everyone involved in a construction project wants to see work completed successfully. No lender wants to torpedo a job. So the answer is early disclosure and cooperation. Once work starts, it’s too late to quibble over payment dates and amounts. 

If you have any contact with the proposed lender, ask about release of progress payments. Disclose to the lender your payment terms in the contract. Ask if there’s going to be a problem. Many lenders use fund control by a third party. Others rely on an architect or designer to authorize payments. Get clarity on when payments are due and who has authority to draw down loan proceeds. Don’t rely on the owner to settle payment issues. That’s the least of an owner’s worries.

Anticipate problems

Lenders don’t sign construction contracts. But you can put an owner on notice to resolve progress payment issues before work starts. If the lender has their own payment schedule, get a copy. Can you live with that schedule? An owner who won’t raise payment issues with a lender isn’t a good prospect.

If you use Construction Contract Writer, it’s easy to drop a payment schedule and the following into your agreement:

Progress payments are due as each phase of the Work is completed. Owner will advise any lender for this project of the progress payment schedule in this contract. Before work begins, owner will advise the contractor if a lender is unwilling or unable to release funds in compliance with the progress payment schedule in this agreement.

Is that language enforceable in a court of law? Probably not. But it’s going to head off the worst payment problems.