At a recent finance and legal seminar I co-presented with Trina Lincoln (construction law specialist) one of the key topics of discussion and frustration by the builders present was securing the final payment on a project. Several builders recounted past issues of being strung out by owners at the end of a project, being asked to fix a never-ending list of finishing issues or simply not being able to collect it at all. The decision then becomes, do you go down the legal track and spend a large percentage of the final payment amount in legal fees, or just walk away grumbling and vow never to be caught again?
So what can you do to avoid this situation occurring in the first place? Sometimes, no matter what you do, it is unavoidable. One story discussed at the seminar was when a husband and wife went through a marriage split during the project and the final stages became embroiled in argument and counter argument. It was a mess and the innocent builder was caught in the middle. Such unusual events aside, here are a few ideas discussed that will help you build that fence at the top of the cliff, rather than relying on a good (and expensive) lawyer at the bottom.
Use a Contract
If you a member of an industry group that provides contract templates to its members, then use that as a starting point. They are typically written to slightly favour the contractor and will be supported by the authoring organization, should you need it. It is important to make sure the contract works for the specific facts of the project and i can recommend a hood cost effective lawyer who can tweak as necessary. If your client refuses to use the industry provided contract, which they are quite entitled to do, then look at using another format, either from NZ Standards or a private organisation like Buildsafe. Also, ensure that whatever form you use, it includes the provisions of the Construction Contracts Act and you follow the payment claim process laid out in the Act.
Regular Budget Meetings
A common problem with residential projects is that the owners run out of money and so they try to delay or evade the last payment. Usually it is because they have over-spent earlier in the project and then somehow try to have the contractor help out by forgiving the last payment. Regular meetings with the client, looking at the project budget and talking about where the project is going over budget will help get things back on track.
As hard as it may be to talk openly about money issues… It’s better to be up front!
Invoice Regularly, Including all Variations
Try to make the last payment as small as possible. Do this by invoicing regularly and making sure that any variations are invoiced AND PAID FOR with the next progress payment. As above, ensure you use the provisions of the CCA; it has been written for your benefit.
Set Your Standards Early and Stick To Them
Start as you mean to go on. By setting clear expectations around payment with your client at the start of a project and then sticking to them, you will avoid some of the issues around slow payments at the end. Not all unfortunately, but taking a firm but polite approach is a good way. It is business after all and you should not be embarrassed in projecting a professional, business-like approach.
Do not be reluctant to suspend work on a project if payment is not forthcoming. There is a correct process to follow here regarding giving written notice and the correct time for the client to respond, but as long as you follow a couple of simple steps, you are quite within your rights under section 72 of the Construction Contracts Act to walk off the site until the matter is resolved. This assumes here that you have already followed the correct payment claim process laid out in the Act. You can’t have one without the other. I suggest double-checking any suspension with a lawyer before you walk off site.
Last Payment in Trust
Another option mentioned was putting the final payment into an independent trust account, which is then released on project completion. By completion, I mean when the client can move in, typically CCC. You will still need to attend to any listed warrantee issues, but at least the client won’t be able to keep dragging you back to fix a never-ending list and delay handing over the entire last payment. This can be done through most lawyers, or use a specialist private service such as Buildsafe. Buildsafe will not only manage the final payment issue, but also has a full range of documents for builders and clients to use to set out and manage the project.
The final payment in a project may represent the entire profit, or in some instances even more. Assuming you have met your side of the bargain, by providing what you were contracted to do, to the quality required and in a timely manner, you are entitled to be Properly paid for your work. By putting a bit of work in BEFORE the project starts, when goodwill is usually at its highest, you are less likely to have issues at the end of the project, when goodwill on both sides is wearing thin.
NB. This article is not a substitute for independent legal advice
The Trades Coach