It is bad business and one of the reasons is contractors that run off with your money.
In commercial construction, the standard is AIA (american institute of architects) percentage of completion method, AIA payment requisitions have been an industry standard for years and for a reason.
Materials must be delivered on site, and be 100% acceptable prior to payment. I could never represent an owner and recommend payment up front for materials until they are received, inspected and quantities checked. Even in the smaller industries, if they are setting a precedent for forward, or up front payment, it sets a bad example, to me its unacceptable.
On the contracting side, if the contractor cannot maintain a line of credit with his suppliers, or is not financially sound, I do not want them on my job, and I most certainly under no circumstances will pay them for any work or materials up front, nor would I ever recommend an owner to do so! Sure, there are situations where its done, but its bad practice, it has risk and when you represent an owner, part of that representation is to minimize risk. How many customers have been taken by contractors that took the money and ran, or they did a terrible job, no contract, no other leverage or means for the customer to recover??? Its bad practice from start to finish, never pay up front until you have something tangible done, material delivery or acceptable work in place.
Percentage of completion method of payment, using monthly or progress payment requisitions also must have retainage, usually 10% or potentially more is deducted from each progress payment and withheld until the job is 100% complete, all punch list work done and all other work complete and ACCEPTABLE. At such time the retainage will be released and only under those circumstances. Some jobs its held one year, during initial warranty, it gives the owner strong leverage on large jobs, because its a significant amount, much of it profit, so if there is a problem, the owner has leverage use on a non performing contractor. I've been on both sides of this and know it inside and out.
Scale it down to farm buildings, receive the materials, even if you bought it erected, as long as the materials are ALL acceptable, full payment can be released for that, though I would still hold 10% until the job is done, to insure they are handled carefully and have something in case of damage. As the job progresses, and these are much shorter in duration, I would release progressive payments upon acceptance of the work until completion, no different than a large commercial job. The owners best interest is being protected by doing this.
A contractor that is paid up front is not motivated like one that knows they must perform to receive payment. A contractor that knows there is retainage withheld knows they must do acceptable work to get paid. The simple philosophy is to get the work, perform the work, have it accepted, finish the job, get paid and move onto the next one.
Some may balk at this, well we do it this way or that, but the bottom line is that its bad practice for a customer or owner to have to pay up front. A customer has a finite budget, they are at risk until that building is complete, so if a contractor has their money, blows a hole in the labor budget or has some problems with their supplier, etc. etc. the owner takes all the risk. As a contractor, I know I have a finite amount of labor hours contained within the bid, I have to get a certain amount of work done in a specified time, if I go over that, I lose money on the job. That same contractor will know they need to perform their work, and have it accepted to get paid. They should be motivated to do the job correctly within the specified time.
This post was edited by Billy NY at 06:57:35 08/20/15.
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