A chronic problem faced by many homeowners involves contractor payments. The League office receives calls on a regular basis from homeowners that involves advance payments to contractors who suddenly fail to reappear for work and even take extended leaves of absence from the job site. Meanwhile, the homeowner has to live with part of the house torn up and cannot get a return phone call from their contractor. Here is when the contractor has taken the homeowner's money and goes off to finish or even start another job without making arrangements with their client. This is highly unprofessional and unfortunately, it happens far to frequently. Here are a few rules to help you out:

Down Payment:

In California, the state limits advance payment at the time of contract signing to 10% of the total estimated job cost or $1,000, whichever amount is lower! All payments thereafter are supposed to be made for work performed or for materials delivered to the job site. What this means is that the contractor is required to have good credit sufficient to buy materials and hire subcontractors. Not just in California, but in any state, if you agree to pay a contractor everything up front, you've made a major mistake.

Progress Payment Schedules:

Contractors do not have to wait for the entire job to end before being paid. A "schedule of progress payments" should be included as part of the contract to insure that the contractor - while fronting the materials and labor - is not strung out financially. Never sign a contract that does not have a detailed progress payment schedule.

It should be noted that in California the progress payment schedule must show actual dollars and cents in the contract - not percentages! Specifying dollars and cents avoids disputes about "guesstimating" what the owed amount is supposed to be! Also, California allows that the homeowner may withhold 10% of each payment in the schedule to be used as "final payment" when all the work is completed. Finally, be sure to include a clause in your contract that stipulates that when final payment is made, you will receive signed waivers or "lien releases" for all materials and labor. The California requirement can be included in any contract for work performed anywhere in the United States, so don't feel that just because your project is in Alabama you can't require such a provision in your home improvement contract.

How Does the Contractor Buy Materials?

Always remember: Good contractors have good credit. It is just as important for the homeowner to hire a contractor with a good credit history as it is to hire one who is licensed and has general liability and workers compensation insurance. The contractor without a credit line may either be very new to the business (thus less experienced), or he may have had some serious financial problems in the past which should signal caution on the part of the homeowner.

Always ask the contractor for a few credit references (such as a lumber or hardware supplier) as well as customer references. It is always good to learn upon checking that your contractor has a credit line with a local hardware or lumber supplier. This tells you that the contractor is in the habit of paying his bills in a timely manner, and thus he knows how to operate a small business.

What Assurance Does the Contractor Have for Being Paid?

Every state in the U.S. has a set of laws for protecting contractors from people who try to avoid payment. These laws are referred to as "Mechanics' Lien Law." What these laws afford the contractor is the ability to file a property lien on the holder of land (the home & lot) who has failed to pay them for work performed. This insures that if a contractor is unfairly denied payment, he can avoid any loss. Because this law exists, the contractor can operate under a "work first, then get paid basis." If you as a homeowner try to "stiff" the contractor, you could end up loosing your house in the process. In fairness to the contractor, we suggest that he take a look at the homeowner's credit before he signs the contract. If the homeowner has secured a home improvement loan then the contractor has had his work done for him. But the contractor should ask to see the loan doc so he is sure.

Payment Tips:

To insure that your contractor is paying suppliers and subs, you can make your checks out to dual parties, that would include both the contractor and the material supplier, or sub contractor, whichever the case may be. You should also insist on lien releases and receipts for all items when making payment. You may also want to consider using a "fund control" company. Normally, such companies are licensed escrow operations that have the capability to inspect work, insure that the contract is fairly written and make payments and disbursements for you. When using a fund control company you always want the contract to cover you in the event of a mechanics lien, as that problem should become the fund controllers concern not yours!

Only in California!

Speaking of licensing and payment, here is something unusual: Did you know that you do not have to pay an unlicensed contractor in California? That's right! Business and Professions Code 7031 allows a homeowner who hires an unlicensed contractor to avoid payment. This law holds true even with a signed contract between the homeowner and contractor, as well as when the homeowner has advanced knowledge that the contractor was unlicensed. In either case, the homeowner is not compelled to pay anything to an unlicensed contractor. The intent of the law is to force contractors to become licensed in California. Licensing is important because construction can be very technical and costly and there are several public safety concerns.

Caution: There is a draw back in that a homeowner who does not pay an unlicensed contractor could be made the employer, thus you would be required to make employee tax payments and be confronted with another set of problems. Therefore, one must never attempt to hire an unlicensed contractor for the purpose of avoiding payment despite this law.

Additional information about contractor payment can be found by contacting the League office by email (lchome@homeowners.org). Or by phone at (800) 692-4663. You can also contact your local branch office of the Contractors State License Board.

Note:Homeowners who join The League of California Homeowners receive a free copy of our "Home Improvement Contract" which provides a progress payment schedule built in plus several other consumer protection provisions. The contract can be used as your primary contract document, or as a learning device that will inform you of what issues to consider before signing any contract. If you and your contractor wish to alter the document before signing, we would urge you to call our office in advance to insure that you do not give up an important consumer right.

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How to Make Contractor Payments