It’s critical to carefully manage contractor payments on your construction project. Whether it’s a new home or a large remodel, failing to do this can expose Minnesota homeowners to significant risk. Understanding a few simple concepts can assist homeowners in greatly reducing this risk.
Follow a Payment Schedule. Most homeowners hire a general contractor to complete their construction project. Payments are made to the general contractor based on requests for payment. Among other important provisions, the contract should specify the frequency of payments, which are usually based on project milestones. If the project is funded by a construction loan from a bank, in addition to any prerequisites for payment called for in the contract, the bank will typically have its own requirements before issuing payment. Importantly, as much as possible, payments should only be made for work that has been performed.
Verify the Work. Before making a payment, inspect the work to independently verify that it has been completed. With construction loans, banks and title companies will often provide this inspection as part of their loan services. In projects involving architects, the architect may verify work and recommend payment. In addition to these inspections, or in cases where there is no other identified inspector, homeowners may want to consider hiring an independent party to perform periodic inspections.
Obtain Lien Waivers. Obtain mechanic’s lien waivers from anyone receiving payments for your project. General contractors sometimes utilize their own labor and skill to complete projects, but typically hire subcontractors as well. General contractors, subcontractors, and suppliers typically have a statutory right to a mechanic’s lien on your real estate if they are not paid for their labor or materials and if they follow certain statutory requirements. To protect against mechanic’s liens, a homeowner should insist on trading payment for mechanic’s lien waivers.
Use Written Change Orders. The original scope of work often changes during construction projects. What started as a kitchen remodel may suddenly include replacing windows or adding a guest bathroom. No matter what the change is, and even if it does not change the total contract price, a homeowner is best advised to obtain a written change order from the contractor before the change occurs.
Use Retainage. Consider adding retainage to your contract. Retainage is a small amount of money that is withheld from each payment, and payable only when the project is complete. By law, it cannot exceed five percent of the total contract price. The retainage provides the owner with security to ensure that all contract work is completed, particularly with respect to relatively minor issues identified at the end of the project (typically referred to as “punch list items”).
While simple, these concepts are fundamental to protecting against payment and other contract disputes. If you are starting a construction project, contact a construction law attorney at TTLO Law to review your contract and further discuss the ways to best protect your interests during the project.