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Hypothetical situation regarding draw payments

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Forum topic by exterminate posted 03-31-2014 01:11 PM 770 views 0 times favorited 11 replies Add to Favorites Watch
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exterminate

121 posts in 718 days


03-31-2014 01:11 PM

Topic tags/keywords: question hypothetical contract failure to pay draw discussion

What would you do in the following situation:

You are hired by someone to build something. You tell them it will be $x up front, with a draw of $x, with the balance due upon completion. You have a contract signed by the customer agreeing to this, with a clause that says something along the lines of if you fail to pay, you lose your deposit, and the job is scraped.
The customer pays the initial payment, but when it comes time for the draw, they tell you they’ve run into some kind of trouble, and won’t be able to make the second payment for say, another month.

The project is taking up space in your shop that you could be using for another paying project, but the customer seems like a stand up person, so you give them some extra time. At the end of the month, they tell you they still don’t have the money, but they say another month or so and they’ll be back on track.

At what point do you scrap the project? At the first sign of failure to pay? The second? And what do you do to minimize the fallout? By fallout, I guess I mean the loss you have to absorb, what to do with the materials / partially completed project, and your reputation as a business.

Thanks for indulging me, and have a great day!
David

-- Albert Einstein - "I'd rather be an optimist and a fool than a pessimist and right."


11 replies so far

View The Box Whisperer's profile

The Box Whisperer

672 posts in 761 days


#1 posted 03-31-2014 01:36 PM

If it were me, I’d do the extra month for a stand up guy or a repeat customer, and after that Id scrap the project. Id call the guy and have a talk, to let him know that’s the plan. With the reality of money loss and no product for him he may find a way to come up with the cash. I would not sit on a project for months on end, taking up space in my shop. As for the project, the way I bill, I could finish the project with nothing out of pocket except my time. Id then sell the completed project, at a discount because the materials have already been paid for, and the customer doesn’t get to customize it, they buy it as is. This may seem harsh, but that’s business and being nice doesn’t put food on the table. During my apprentice years I did plenty of free work, work at a loss, work at cost, but those days are done. This is not a hobby for me, this is a living. Like I said though, a candid talk with him along the lines of “Im really sorry but Im going to have to drop your project” his timeline of another month or so may turn into 24-48 hours. If it did Id give him that and not an hour more.

Not sure if this will help, it’s just my stubborn ol’ views. I’m sure I could do better as I still have a lot to learn, but I do ok.

-- "despite you best efforts and your confidence that your smarter and faster than a saw blade at 10k rpm…. your not …." - Charles Neil

View exterminate's profile

exterminate

121 posts in 718 days


#2 posted 03-31-2014 03:26 PM

Thanks for your answer box whisperer. The number one thing I take away from your reply is to require enough up front to cover the total cost of materials required to complete the project, rather than breaking it up into two or more installments + the final. That way, you are covered no matter what. Second take away is good communication with the customer as to your intent.

-- Albert Einstein - "I'd rather be an optimist and a fool than a pessimist and right."

View huff's profile

huff

2804 posts in 1976 days


#3 posted 03-31-2014 03:44 PM

exterminate,

I’m not sure how much money is involved, but usually when I have a project the requires a draw before completion, then I would do a 1/3 deposit to start (to order materials and begin work), a 1/3 deposit (draw) at what I called “preview”, this is when the project is built and ready to finish.

I always tell the customer this is the time we can make final decisions on the finish, hardware, etc….....if there is a problem with getting the draw, then all work stops until payment is made. “I” try to set the time limit and you have to handle your customer with respect and understanding, but they also need to realize this is your lively hood and you have bills to pay like anyone else.

I’ve found that once they see their project pretty much built except for finish, they get excited about getting it done and find a way to get the money.

If you can tactfully explain to your customer that this is putting you in a bind also, most of the time a little guilt trip will help.

After 30 years in business, I’ve never had a problem with someone backing out, but it can sure screw up cash flow for a small business when you can’t get a draw you where expecting.

Good luck and hope he comes through for you in the near future.

-- John @ http://www.thehuffordfurnituregroup.com

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The Box Whisperer

672 posts in 761 days


#4 posted 03-31-2014 06:03 PM

No problem my friend, and to answer your questions, yes initial payment is at least materials. no exceptions to this. Other factors might make it more but I wont lose money on materials. Also, communication is key for sure. I am super nice and friendly the whole time, but also up front. A customer has every chance to pay up with me, and truth be told I haven’t run into your particular problem too often, and never on a huge job.

-- "despite you best efforts and your confidence that your smarter and faster than a saw blade at 10k rpm…. your not …." - Charles Neil

View Shawn Masterson's profile

Shawn Masterson

1262 posts in 639 days


#5 posted 03-31-2014 07:46 PM

I have been spot on with what BOX does. Since my first commissioned project a deposit (enough to cover materials) is paid at the signing of contract. Most of my projects are done in my shop (26×30), so I take on one at a time. Any of the case work I have done only requires deposit and final payment. Now the additions, kitchens, and baths I have done are done with a draw schedule with a performance schedule figured in. At the first sign of trouble a sitdown happens, and depending on the outcome of that determines whether work continues. I have only been written a bad check once. It was a new builder I never worked for he tried to stiff me on the final payment($1500). He knowing wrote me a bad check. I tried to reach him 3 times a week for 2 weeks, with no answer. Finally I left him a message to let him know I was repossessing the case work today if I hadn’t heard from him. All the sudden my phone was ringing, He said to wait he would bring me the money to the house. When he got there I had my tools in the great room. He tried to pay me in a check again, I made him go get cash, while I put my tools away. Needless to say he never called me again. Business is business, there is no room for nice when it comes to matters of money and a small business. Also watch out some contractors make you wait to get payed. I have been told this could be anywhere from a week to 90 days. I don’t deal with those kind of people. I do jobs where I am paid when the job is done.

View Monte Pittman's profile

Monte Pittman

14610 posts in 1029 days


#6 posted 03-31-2014 08:09 PM

I get 50% down. That normally covers my expenses. If they bail, I finish the item and sell it to someone else (been lucky to find buyers).

-- Mother Nature created it, I just assemble it.

View thetinman's profile

thetinman

237 posts in 229 days


#7 posted 03-31-2014 08:48 PM

I was a licensed residential and commercial builder years ago. I only built 3 houses. There was more money in renovations/improvements (especially kitchens and baths) without expanding risks. I sold the company and banked that money to put me through college and buy a new home upon graduation.

I used to do 3-draws. The 1st (initial payment) covered all materials, building permits, plans: basically my costs till the 2nd draw. The 2nd draw (rough in complete) covered my costs till the 3rd draw: materials/labor, inspections, etc. The 3rd draw got the buyer a piece of paper releasing him of all potential mechanics liens and the final inspection/certificate of occupancy.

If the customer wanted me to restart after a shutdown the contract was amended and my costs of shutdown and restart was due immediately.

The 3rd draw included my profit. If I got stiffed I could lien his home, etc. But I never lost money along the way. Anything not installed at the time of being stiffed became my property ready to be sold to another job. His home was his – in whatever shape I left it. Life can be tough. But I won’t make someone else’s easier by making mine harder. My problems are just as big as his are – actually bigger – the customer usually works for a company and has the next paycheck marked on the calendar. Self-employed people do not have that guarantee.

Talk with the customer clearly, politely but firmly. Tell him of your shutdown date and the ramifications. Don’t restart the job without compensation up front.

-- Life is what happens to you while you are planning better things -Mark Twain

View The Box Whisperer's profile

The Box Whisperer

672 posts in 761 days


#8 posted 03-31-2014 08:57 PM

Sound advice from thetinman.

-- "despite you best efforts and your confidence that your smarter and faster than a saw blade at 10k rpm…. your not …." - Charles Neil

View bbandu's profile

bbandu

79 posts in 235 days


#9 posted 03-31-2014 09:24 PM

I have built several custom fish tank stands/canopys and I always require two payments, initial payment covers all material expense. The customer signs a contract that if they do not provide final payment upon completion the stand becomes my properity and is then sold. I have had a couple customers over the last few years that will give me some story about not being able to pay and usually having a sit down with them and explaining that they will be out not only the money that they have already put up for the material but the stand/canopy as well they usually find a way to come up with the money.

Being nice and upfront with the customers is the best policy in my opinion.

View DrDirt's profile

DrDirt

2500 posts in 2433 days


#10 posted 03-31-2014 09:29 PM

Send a letter, certified, and state that at the end of 30 days, per the contract dated XXX, the project will be scrapped/sold off for non-payment.

If it is a general project, that you can recoup losses by selling the finished product, get what you can and move on. So maybe you still finish it, if selling it at a discount, puts you ahead of trashing it and eating the materials cost.

you mentioned the project is taking up space… but is it preventing you from working on other projects?
Can you just move it to a corner and store it until you want to finish it?

Or is it really unique and you will truly junk the piece?

-- "If we did all the things we are capable of doing, we would literally astonish ourselves." Edison

View exterminate's profile

exterminate

121 posts in 718 days


#11 posted 04-01-2014 12:08 PM

Thanks for all the replies everyone. All sound advice. My question is more hypothetical in nature, though it has happened to me once in the past. It was three months waiting for the second draw of a project, and I many times wanted to scrap it and cut my losses. It all worked out in the end, but I don’t want to go through it again if I can avoid it.

-- Albert Einstein - "I'd rather be an optimist and a fool than a pessimist and right."

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