If this is your first time dealing with a construction project, you may be unsure how to pay contractors. Common sense dictates that you pay a contractor the way you would pay any bill – with a check or credit card. Contractors may even entice you with lower fees if you pay cash under the table. Before proceeding with any payment plan, it is crucial to protect yourself above all cost-saving promises.
To begin, let’s analyze the way in which contractors invoice. Some builders have accounting departments that mail typical statements to their customers. They may accept cash, checks, or credit cards. This type of billing is the most straight-forward to pay.
The second type of payment schedule involves a contractor (smaller in nature) who supplies a hand-written bill. Typically, they will only accept checks or cash. In this scenario, you have to rely on the contractor to keep accurate records so there are no discrepancies when/if you paid them. More often than not, this type of transaction operates smoothly. But there are specific instances where it can backfire to produce serious issues.
If a contractor is not paid for work (or worse, claims they were never paid), they can lien your property. This is referred to as a Mechanic’s Lien, and its rules vary by state. In essence, this means the contractor has not been paid in full and is claiming a right in your property.
Not only will this lien halt any financing options, but it must be paid in full prior to selling or refinancing. Because of this, it is crucial that when you pay a contractor, they sign a lien waiver. There are two types of waivers: conditional and unconditional.
A conditional waiver means that upon receipt of payment, the contractor waives their lien rights in full. This is most commonly used in construction loans where loan funds are paying the contractor directly. The second type of waiver is unconditional and should be used when paying any contractor.
As you hand them the check or cash with one hand, they should be putting the unconditional waiver in the other. This type of waiver means the contractor unconditionally waives all rights to lien your property. While it may seem tedious to have builders sign these waivers, you will thank yourself if a lien is ever filed against your property.
Another key component of disbursing funds is keeping accurate records. Make copies of checks and/or credit card transactions. If you pay a contractor in cash, use a receipt, and make sure to receive a signed unconditional waiver. Being diligent in your record keeping will allow you to quickly resolve any billing disputes with a builder. Regardless of the scope of your project, treat every transaction in a business-like manner. The risks of not doing so can bring your project to a halt and cost thousands of dollars in litigation fees.