Building? Here’s how you should pay your contractor
There is no user manual for all aspects of homeownership, from moving, to taking occupation and to maintaining and understanding common and uncommon defects. Albert van Wyk has more than 38 years’ worth of building experience and has put all he has learned into a concise, easy-to-use reference book entitled, The Proud Home Owner. He has granted HomeTimes exclusive access to republish portions of his book to help homeowners make better decisions around buying and selling, as well as maintaining their properties.
One of the duties of a supervising architect is to issue payment certificates. He will calculate the amount of work completed and issue a payment certificate to you for payment to the contractor.
- A bank official will do a valuation of the completed work and authorise payment to the contractor from your bond account, with your permission. This amount is normally not negotiable because the valuator is held accountable to always have sufficient funds available to complete the contract. The contractor will always want more and you will always think the amount is too high.
- The bank officials will do valuations and authorise payments even when you are not using a bond but your own funds. Payments will be released on the basis that there are enough funds available to complete the project. The valuator will calculate the amount which is required to complete the project and retain that amount. In other words, the bank will always retain enough money for the house to be completed. The bank official will apply the following method to calculate the payments.
As an example:
The contract value is R1,000,000 and 65% of the work is completed which equals R650,000.
A payment of R350,000 has been made to the contractor previously and you might think the contractor will be paid:
R650,000 – R350,000 = R300,000, BUT interest of R35,000 has been debited since the first payment has been made to the contractor.
The payment is calculated as follows:
Bond amount: R1,000,000
Less payment: R350,000
Less interest: R35,000
Left in bond for payment: R615,000
Amount needed to complete the contract: R350,000
Therefore, the payment to the contractor is calculated as follows:
R265,000 paid to contractor
The contractor will not be happy and that is why you have to keep interest payments up to date while you build your home.
You can appoint a quantity surveyor to issue payment certificates.
- You and the contractor can decide together on the value of the work done and pay that amount. However, this is very risky and can lead to many arguments.
- You can download a payment schedule from www.gautenginspect.co.za. This payment schedule can form part of the contract documents.
The contractor will require payments as the work progresses.
An official “Request for progress payment” form must be submitted to the bank. This form must be signed by the bond holder (the person in whose name the bond is) and the contractor.
In some cases, also by an engineer.
A valuator from the bank will assess the work completed and the work still to be done, in order to determine the amount due to the contractor.
The funds will not be paid to a third party but only to the contractor or to the owner.
No payments will be made for materials on site.
The bank will debit your account monthly with the interest on the progress payments made to the contractor. It is advisable to pay that amount monthly (the banks call it “to service the interest on the bond”).
You will be required to provide equity (own funds) for the project, which will first have to be paid into the account, before the bank will make any payments from the bond. I suggest that you pay your funds into the bond account from where all payments will be made and recorded, rather than pay the money directly to the builder.
The deposits which you have to pay on prime cost (PC) items could affect your cash flow. You might have to pay a large deposit for the kitchen units, but will only be refunded after the installation. The same can happen with tiles and sanitary ware.
The contractor must compile a construction programme for the contract because your cash flow must be in line with the progress of the project.
A construction programme will show the timing and the sequence of the entire project from which you can determine what amounts are required and when.
Download an example from www.gautenginspect.co.za
I would like to present my views on this aspect. However, the final decision will be yours. Let us use an example in order to clarify it better.
The contract sum is R200,000 and it will take the contractor four months to complete the project.
The contractor asks for 50% deposit before he will start and you decide to pay it. You are out of pocket of R100,000, and you have nothing to show for it.
He will have to progress at R50,000 per month with the project in order to have it finished on time. You have paid him in advance for two months’ production and he will again ask for more money during the second month, which will make your position even worse. He will always have been given more money than he has done work.
You will pick up problems during the last month when the work is not completed and he has asked for more money. He will hold you ransom to pay the last amount in order for him to finish “next” week.
There are one of two reasons why he requested such a large deposit:
- He does not have money to buy material and to pay his staff.
- He does not trust you to pay him after the work has been done.
If it is because of the first reason, then do not use him, as you cannot be sure when or if he will walk away. He has nothing to lose!
If you think that it is because of the second reason, then why should you trust him to do the work after he was paid?
Pay him about 10% deposit (R20,000). Thereafter pay him an amount every fortnight. Calculate this amount as follows:
Contract sum R200,000, less deposit of R20,000 = R180,000 balance.
The balance due of R180,000 divided by 16 fortnights (the number payments) which is about R11,250 per payment.
This will give him a positive cash flow, and give you peace of mind, provided that he makes good progress in order to be finished on time.
Adjust the payments (in agreement with him) if he is falling behind schedule with progress.
Get a quote from him for all extra work before it is done.
Keep a record of all payments and give him a statement with every payment.
Never pay the contractor in cash. Rather deposit the money into his account in order to have a record of the payments. Alternatively, pay for material for which you can get an invoice.
Do not pay any deposit for materials to the contractor, but rather pay the supplier directly and get a receipt.
All of the above might seem trivial and far-fetched to you, but trust me, I have been involved enough times trying to resolve more than one of these disputes between owners and builders.
Next time: What are prime costs and provisional sums?