For the fourth part of our series of articles covering the Top 10 Considerations for Construction Contracts, we are discussing how to create a fair draw schedule. (Previous posts have covered What’s First When Creating a Construction Contract, Defining Your Scope of Work in a Construction Contract and What Type of Contract is Best for You.)
A draw schedule is a payment plan for a construction contract which details when – and how much – a contractor will be paid for their work. It should be clear and agreed upon by both parties as well as provide you adequate assurance that you will have the funds necessary to complete the project. Getting this right means less friction with your client - and a smoother build for you. Along these lines, here are some important considerations for your draw provision:
Initial draw: Many owners’ reluctance to front any payments has caused contractors not to ask for them. That puts contractors behind from the outset. In many other professions (such as legal) it is common to obtain an advance on work performed. Therefore, if having an up front draw is necessary or advantageous, it doesn’t hurt to ask for – or even require – one.
Timing of draws: What triggers the payment of draws? Think about whether you need/prefer set dates for draws, or whether the draws should be tied to percentage completion. If they are tied to completion, then who decides on the completion progress? If the project is being financed by a construction loan, then the bank will determine progress. Even if it’s not a construction loan, it may be advantageous to build into your pricing the cost of hiring a 3rd party inspector to conduct inspections to verify percentage completion – this way, the owner doesn’t just have to rely on you (or vice versa). This will also help if there are any disagreements about the work that has been completed and may help cultivate a more positive relationship with the client.
Retainage: How much should be withheld pending completion of the punch list? It’s common for the owner (or lender) to withhold a certain amount at the end of the project until after the punch list is completed. But there is no set standard on the amount that should be withheld. As a contractor, you should try to negotiate retainage out of the contract altogether, or at least negotiate down the percentage amount that is withheld.
Manner of payment: How should payments be made? The goal is to get paid as quickly and effortlessly as possible, and wire or bank transfers are best for this purpose. If the owner or bank wishes to pay by check, make sure there is a clear deadline in your contract for when the check must be delivered to you. For instance, you could include a provision that the check should be delivered to you within three business days of the benchmark (completion %) being met.
The big takeaway here is that you need to know for certain when and how you are getting paid so you have the funds you need to allocate to the project. If a payment deadline is missed, you need to know about it as soon as possible so you can stop work if necessary to ensure you will not be out additional time and money.
If you need help creating a draw schedule for your contract, contact us right away! When and how you will get paid should be clearly defined, understood and signed off on by all parties before any work is started. Should you find yourself in a contractual dispute during a construction project, Downs Law has the expertise to help you resolve the conflict. Contact us today and get the help you need!