Negotiating Your Construction Contract: the Payment Schedule Part 1 of 2

By Roger Greenwald, AIA, Architecture Serving Hartford County, and the State of Connecticut

In our previous blogs, we’ve been discussing the essential elements of the construction contract.  Today we will focus on negotiating the Payment Schedule.  It’s a 2-blog discussion, so stay tuned for Part 2, coming in late February, 2024. 

A note on contract negotiation, including the negotiation of the Payment Schedule: Negotiating a contract is not fun, but it’s necessary.  Here at Greenwald Architects, we are often retained to assist with the contract negotiations.  You can do it yourself if you have the time and don’t mind pushing back against strong resistance.  Just arm yourself with information!

My first point of advice may seem obvious:  Don’t put your trust in a single bidder.  Take the time. (I know…no one has time.  But take the time anyway!) Develop three bidders. 

Let’s state from the outset the obvious tensions in this negotiation: whoever holds the money holds the power!  Never forget: This is your house.  This is your money.  The builder’s agenda is to collect as much money as possible before the work is actually done and approved by you and your architect.  Then he can resist your objections to poor quality work, and he can resist your objections to delays for his convenience.  You, on the other hand, want to keep the builder incentivized to complete and to complete to your and your architect’s reasonable standards of timeliness and quality.  With that in mind, you and your architect are negotiating toward the following tactical objectives:

1.      Limit the initial deposit to 10% or less.  There’s simply no need for a large deposit.  Every reputable builder pays his suppliers and subcontractors 30 days after materials are delivered to the job, and 30 days after the subcontractors complete each phase.  If he has payroll, those men are not paid in advance!  Individual special cases which require upfront deposits can be negotiated, such as the standard 1/3 deposit for certain window packages and cabinet orders.  But they come later in the job. 

2.      Tether intermediate draws to specific milestones of construction.  Your architect will advise you here.  Typical draw milestones are:

a.      Foundation poured and inspected & approved

b.      Framing complete and inspected & approved

c.       Doors, windows, siding substantially complete, inspected, & approved

d.      Drywall hung and taped, inspected & approved (this draw implies successful inspection of plumbing, hvac, and electrical rough-ins).

e.       Interior finishes substantially complete, inspected and approved

f.        Substantial completion certified by architect and building inspector, and final punchlist signed.  We will discuss substantial completion and the punchlist in our next blog.

g.      Release of punchlist retainer

3.      The Substantial Completion Draw must be adequate.  The Substantial Completion draw is the money that you have held back until you and your architect have determined that the project is “substantially complete” and in conformance with the contract documents and industry standards as determined by your architect. At Roger Greenwald Architect, PLLC, I state on the plans that the work must be “performed in a skilled and workmanlike manner”, and I make the Architect the arbitor of that standard (subject to appeal to arbitration, of course). The rule of thumb that we use at Greenwald Architects is that the substantial completion draw should be no less than 100% of the remaining costs of construction at that point plus 75% of the assumed profit for the job.  In other words, you will have paid the contractor for his costs and a small portion of his profit as the work proceeds.  But he doesn’t get his real personal paycheck until you and your architect have inspected and approved the job.  This keeps the builder incentivized.  Most importantly, the draw schedule must define “Substantial Completion” and the “punchlist” quite clearly, and tie them to the approval of the architect.  Don’t let the builder define what substantially complete means, and you must actually go beyond the strict legal definition of substantial completion, which would allow for slipshod work.  We’ll discuss the key elements of “substantial completion” and “punchlist” in our next blog.

Roger Greenwald, AIA is a licensed Connecticut architect serving Hartford and surrounding counties, Guilford and the coastal towns, and Manchester and surrounding towns.