There are always two sides to every story. It’s no different when it comes to payment schedules in a building contract. Customers (and their lenders) generally prefer to pay for work after it has been supplied. On the other hand, many builders would like to get a bit out in front, to help with cashflow and as a kind of insurance in case something turns pear shaped down the line. Getting it right is a balancing act and will often depend on the size and length of the job and the type of contract being used.
With 20 years experience providing guarantees for building projects we’ve seen all kinds, from the customer who paid a 50% deposit on an $800,000 build, to the builder who worked for free because their client kept making excuses for not paying. So, what is the right approach?
Ultimately, the way you structure your payments is between you and your customer (and probably also their mortgage lender). If you need to provide them with Builtin’s 10 Year Guarantee then we also have some requirements. These are designed to manage the underwriter’s exposure, so that if they have to step in to complete a build there isn’t a big financial hole where half a house should have been. As a rule, if the schedule isn’t close to ours we’ll be unable to issue a guarantee. There are always exceptions to the rule, and more frequent smaller payments are generally better (and work for cashflow too) for everyone involved than fewer large ones. If the job is shorter less payments may be needed, and if there is a high initial cost, such as ordering kitset components, this can also be accounted for. Cost plus with a fortnightly or monthly payment schedule is also a good approach.
There are also builders who turn this into a benefit in their sales pitch, making a virtue out of only taking payment for work done at each stage.
What About Deposits?
On most new residential builds a 5% deposit should be sufficient. This is a sign of commitment from the customer and not typically a payment towards project costs. An additional 5% may be taken once the consent has been issued and before work starts on site. Larger up-front payments may be justified if components need to be ordered and manufactured, but these should be itemised as a separate staged payment.
In an ideal world builders would be paid for pricing up a build even before signing the building contract. Many business coaches recommend qualifying customers by asking to be paid for quotes, but I appreciate this is not easy in the market we have here in NZ.
But Where is My Protection in All of This?
A good building business should have sufficient working capital and credit terms with suppliers to ensure that taking too much money in advance from customers isn’t a habit they need to rely on.
So, while it may be tempting to structure payments in your favour it is not good practice and there are other ways to ensure your customers have the means to pay. One way is to require proof of this, perhaps a mortgage agreement/approval or bank guarantee.
Lawyers also offer escrow services, holding money in an independent trust account that is only released with the approval of both parties. If there is a dispute an independent adjudication process determines the outcome.
Builtin’s Best Practice Payment Schedule – New Residential Construction
- On Building Contract being signed (5%)
- Consent issued and ready for release (5%)
- Foundations & floor complete (10%)
- Wall & roof framing complete and ready for roof (15%)
- Roof and fascia on (10%)
- House enclosed, doors & windows installed & interior protected from the elements (15%)
- Exterior wall linings complete, Including veneers, decoration and coatings (5%)
- All internal linings complete (10%)
- Kitchen & bathroom installation (10%)
- Other payment (10%)
- On completion of the work the balance of the contract price without deduction is payable before possession (5%)
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In a Nutshell
A good payment schedule should reflect the work done at each stage of the job. While tempting, taking a too big deposit or getting too far ahead of work done may not meet bank or guarantee provider requirements and is not good industry practice. There are other ways to reduce your exposure to a customer being unable to pay, such as sighting their mortgage approval, requiring a bank guarantee or using an escrow system.