Deposits, Payment Schedules, and Working for Builders

Here's a long discussion kicked off by the question of how to handle a builder who balks at the cabintmaker's payment schedule and terms. May 20, 2009

I'm a small one man shop and have a large job coming up. I require 50%-40%-10% payment schedule in my contract. The GC wants to know what guarantee he has if paying a 50% deposit and I get injured or die during the project. How do you guys handle this? I can understand his point, just never been asked this before.

Forum Responses
(Business and Management Forum)
From contributor Z:
The same guarantee that you will get paid if something happens to him. He's already distrustful? Be careful. Do you really need this job?

From contributor U:
Be wary. If your client is a GC, he knows there is always a deposit involved. A majority of your deposit should be money for materials, so unless you intend on financing this job for him, stand firm. He's just seeing how far you will go. When times get tough, GC's always lean on their subs. if you budge at all, be prepared for excuses for not getting your 40% and final 10%.

Guys here will tell you they end up offering discounts and incentives to GC's and builders for simply paying on time. I get no such sweetener from anyone billing me every month. I'm a one man shop too and this is why I avoid builders like the plague and focus on residential homeowners. My last waste of time (meeting) with a builder, he admitted on the first meeting that they are consistently late on payouts. At least he was up-front and honest.

From contributor S:
If the GC doesn't like your 50%-40%-10% payment schedule, tell him he can choose the other payment schedule you offer which is a 100% deposit. Make sure you have a late payment clause in your contract. You're a woodworker not a bank. Do not finance anyone’s project without charging interest.

From the original questioner:
The problem really isn't the money. I've worked with this GC before and had no problems. It's just that this is a much higher priced job which requires a bigger deposit. He is more worried about the job not getting done and the materials and money are tied up with a trustee in case of death.

From contributor A:
This issue never comes up.
What on earth was the motivating factor behind his thoughts? It is complete nonsense. Tell him the likely hood that he will screw you out of your final 10% payment just for the hell of it is a million times more likely than you "dying" on the job and his 50% deposit getting tied up in legalities. I know times are tough, but dealing with idiots is just not fair. Throw the ball back in his court. What pay schedule would make him comfortable? Also the total price goes up to cover your credit line and materials. Remind him that your relationship is built on a matter of trust. He is close to breaking the trust. What are the numbers of the project?

From contributor M:
My payment terms are generally same as yours. On larger jobs, it is entirely appropriate to work on a draw basis according to the job progress. At least that is how I handle it. No draws, no progress. Seems like an equitable solution to me.

From contributor F:
You should be able to get an insurance policy that names him the beneficiary on your death or disability, it should be cheap and he should pay for it. It’s done all the time on loans. He probably has insurance in place to continue his business if he dies or is disabled.

From contributor O:
Exchange life insurance policies - one for each. If he dies you get the proceeds of the policy and his estate may recover any amount you got over what was due you under the contract. In return you give him one and specify that your estate has a claim for any excess he receives, over the amount it costs him to get the cabinet contract finished by someone else. That way both sides get fast money if the other dies, and the excess gets straightened out by the probate court later.

You can get the same sort of insurance to cover fraud, or if either of you grabs the cash and runs. That is usually handled by bonding. It all costs something and these policies have value to both of you inversely proportional to how much you trust each other and directly related to how likely you or he would be seriously damaged by the failure of the other to perform. Go see an insurance agent who knows construct and I am sure he will explain all the ways he can sell you both policies to cover nonperformance. Even though these issue can be real, my bet is with those who think he is just jerking you around.

From contributor H:
I have asked several people here in AZ lately about how the economy is impacting vendors. They said their GC’s are worried about how many cabinet shops are closing the doors and filing bankrupcy. They do not want to lose the deposits if that happens. One told me that the shops are offering to buy a surety bond which is expensive but the GC has to agree to pay that cost when the job is complete. Some are doing that. My bet is he is not as concerned with your health as he is with vendor financial conditions.

From contributor J:
Deposit 50% - show invoices for product. Second payment - 50% for GC's - to be paid at delivery and that is also the start of the install. I would not do a 50-40-10 with a GC.

From contributor T:
If he's hesitant to give you a 40% -50% deposit he has no intention of paying you period. I would get a contract made up that states the following: "all material finished or unfinished are property of your company until the final payment is made. Should there be any defects in workmanship they will be taken care of before completion.” Similar contracts are used by large furniture manufacturers. Personally I do not even look at starting a job unless the deposit in my hands. Your chances of dying on the project are just as likely as him dying before he completes payment.

From contributor O:
Your clause would have limited, or no, value to cabinet builders. Prior to delivery you clause has no effect and after installation it is in most places unenforceable. Furniture is not attached to real property and cabinetry is, for that reason your right to repossess is exchanged for a right to lien.

You have an absolute right to tell the GC “I don't like your attitude”, and refuse to work for him. That has been discussed here as a possibility, and I want you to know that I stick up for your right to refuse any job you don't like the smell of. You are lucky to be in a financial status that allows you to dictate terms unilaterally, however the other side is presuming that if someone wants or needs to get that job, how can the performance/payment issue raised be dealt with in a satisfactory and mutually fair way.

We have discussed ideas involving third party insurance or performance bonding (itself a form of insurance) which can be structured to provide both sides with whatever level of mutual protection required, or at least countering with that approach, as an invitation to the GC to rethink his position, which some, including myself, think was taken for reasons other than those stated by the GC.

From contributor T:
I use that clause in my contracts all the time it most definitely applies as long as it you who does the installation and not the GC. Secondly it has nothing to do with financial status. There will be other jobs and other GC's. I would rather not take a job than lose thousands of dollars by working for nothing. There are risks involved in business, but we can limit them is we filter out possible negative. A project is like a marriage. If there are bad feelings from the start then end it. It will damage your pocket as well as your health. It's simply not worth it. The GC or any client should show good faith by giving the deposit. Too many of our clients get away with murder simply because we allow it to happen.

From contributor Q:
My contract states that I get a 40% deposit to commence the project. When the cabinets are fully built to the point where only the installation is left I get another 50% followed by the remaining 10% after they are installed. I only risk losing 10% of the job. Installation does not alter the quality of the work. The client can see the quality of the cabinets in my shop and then pay me the 50% of which I will install in the following 48 hours, which is also stated in my contract.