How to Negotiate Contracts and Payment Terms with Your Contractor
When hiring a contractor for a project, whether it’s a home renovation or a business-related service, or even a full new-home build, navigating contract and payment terms can be a daunting task. However, a well-negotiated agreement ensures that both parties are on the same page and helps protect your investment. Here’s a step-by-step guide to effectively negotiate contracts and payment terms with your contractor.
1. Do Your Homework
Before entering negotiations, research contractors in your area to understand standard rates, terms, and expectations. Read reviews, ask for references, and check their credentials. This knowledge will give you a baseline for what’s reasonable and fair in your agreement.
2. Clearly Define the Scope of Work
Ambiguity in a contract can lead to misunderstandings and unexpected costs. Make sure the scope of work is detailed, including:
A description of the project.
Specific materials and products to be used.
Project timeline and milestones.
Deliverables at each stage of the project.
If your project is big enough, consider paying for professional plans. Clear and thorough plans can help specify and clarify the scope.
Being clear about your expectations will help avoid disputes down the line.
3. Request a Written Proposal
Ask the contractor to provide a written proposal before drafting the final contract. This proposal should outline the total cost, payment schedule, timeline, and any other relevant details. Use this as a starting point for negotiations.
4. Negotiate the Payment Schedule
A fair payment schedule protects both you and the contractor. Consider these guidelines:
Down Payment: Avoid paying more than 10-15% upfront. This is enough to show your commitment while minimizing your risk.
Material Payment: Sometimes material costs can be quite large, and some materials need to be ordered well before construction begins. If your contractor asks for the price of materials up front (this is a reasonable ask), make sure you get documentation proving they have purchased the materials. Some lumber yards and materials suppliers will lien your house if the contractor fails to pay them.
Milestone Payments: Tie payments to specific project milestones. For example, you might release 25% of the total cost when framing is completed and inspected.
Final Payment: Retain at least 10-15% until the project is fully completed and meets your expectations.
5. Include Contingencies and Change Orders
Projects don’t always go as planned. Ensure the contract addresses how changes to the scope of work will be handled. Agree on how change orders will be documented, approved, and billed to avoid surprises. We like to put a minimum price for change orders that triggers paperwork, and do smaller items verbally (although even these are good to put in writing via email or text message). For example, changes totaling over $1,000 on a larger project are to be made according to a pre-planned formal process.
6. Ensure Proper Licensing and Insurance
Verify that the contractor holds the necessary licenses for your project and carries liability and workers’ compensation insurance. Include clauses in the contract requiring proof of these documents to protect yourself legally and financially. If the contractor hires sub-contractors, they should be properly licensed and insured as well, including any worker’s compensation policies necessary. Do your research and learn what is required in your area.
7. Discuss Dispute Resolution
While no one likes to think about conflicts, having a plan in place is essential. Specify how disputes will be handled, whether through mediation, arbitration, or legal action.
8. Get Everything in Writing
A verbal agreement isn’t enough. Ensure the contract includes:
Contractor’s name, address, and contact information.
Detailed project description and scope.
Start and completion dates.
Payment terms and schedule.
Warranty or guarantee information.
Signatures from both parties.
9. Negotiate Reasonably and Respectfully
Negotiation doesn’t have to be confrontational. Approach the conversation with an open mind and aim for a win-win outcome. If you’re unsure about legal or technical terms, consider hiring a lawyer or consultant to review the contract. We try hard to engage only in agreements where both parties feel like it’s a win-win.
Contractors are in business to make money, and clients hire us to receive great service and quality products. The purpose of negotiation is to make sure both parties are satisfying their interests while aiming at the same ends. If you think you are misaligned with a contractor, or can’t seem to make sense of the expectations, consider looking elsewhere before you enter an agreement.
10. Establish a Communication Plan
Agree on how and when you’ll communicate with your contractor throughout the project. Regular updates can help you track progress and address issues before they escalate. Be candid, be honest, and communicate frustrations early on, before they grow.
Final Thoughts
Negotiating contracts and payment terms with a contractor can seem intimidating, but it’s a crucial step to ensure your project’s success. By being informed, clear, and respectful, you can create an agreement that protects both you and your contractor, setting the stage for a smooth and successful collaboration.
A good and experienced contractor should be able to lead you through the negotiation, planning, and contracting process.
