How much deposit should I pay to a contractor?
December 14, 2008
QUESTION FROM A HOMEOWNER
I am renovating kitchen, two washrooms and installing hardwood floor in the dining room. How much should I pay as a deposit to my contractor or renovator when I sign the renovation contract and before the contractor starts working?
ANSWER BY OUR EDITOR
The answer to this question is not straightforward. The deposit the contractor or renovator is asking for is serving several purposes:
- Commitment money – the renovator needs to make sure that the homeowner is serious about his home renovation project and that he is not going to change his mind later.
- Trust money – the contractor want to make sure that the homeowner has the money to pay for the kitchen and bathroom renovation and that he is going to pay him in full upon completion of the job.
- Protection against loss – the renovator want to make sure that if he buys custom material specifically for this homeowner’s renovation project, he is not going to get stuck with the material if the homeowner changes his mind about the project, or about the selection of the materials.
- Working capital – the contractor needs money to get started on the project, especially if it involves the purchase of large amount of construction material up front.
As you can see, all these reasons are for the benefit of the contractor. The homeowner is naturally motivated to pay as little as possible, or nothing, at the start of the home improvement project. Some homeowners believe that there is an “industry standard”, or “usual” deposit that is charged by contractors and renovators. That is strictly speaking not correct. The amount of the deposit needs to be negotiated as part of the home improvement contract, just as the total cost is negotiated. It boils down to the question of thrust. If the homeowner and contractor trust each other they will settle for low, or no deposit. If the contractor doubts the homeowner’s trustworthiness, or ability to pay, he will insist on large deposit. Conversely, if the homeowner does not trust the contractor, he will be reluctant to pay large deposit. However, if the homeowner does not thrust the renovator, perhaps he should reconsider hiring him in the first place.
Answer provided by Ivan Koval, President, ReliableConnections.com
How to Choose the Right Bid For Your Project
November 14, 2008
ENTRY BY A BLOG READER:
How should I choose from among multiple bids for the same job? Is price the best criteria?
REPLY BY MODERATOR:
An unusually low estimate for your home project should serve as a warning sign. When the price seems too good to be true, it usually is. Here is a true story, a case of a mismanaged home renovation project, which should serve as a reminder to think twice when offered a surprisingly low estimate.
An interior decorator received an unusually low estimate for painting and a few other small renovations in a client’s large house, a price that was several thousand dollars below other quotes she had received. By way of explanation, the contractor said that he had a well supervised but low-paid crew of 3 workers and he was simply passing on his savings to her to build goodwill for future jobs. She accepted the quote.
Shortly after the work started, the contractor’s crew received a better offer from another employer and quit. The contractor admitted to the decorator that he was unable to finish the job by the deadline for the quoted price, and he asked for more money in order to complete it on time. However, the decorator had already received her budget and time schedule from the homeowner on the basis of the original estimate. She decided to shop around for price that would be closer to the contractor’s original low quote. Three new estimates just for paining, not including the other renovations, each came in at over one and a half times the entire original estimate. She was now in a very awkward position; she was forced to ask the owner for a significant increase in the budget and forgo her profit on this decorating project.
What is the lesson for the decorator and homeowner here? The decorator (or the homeowner) should not have accepted the low estimate, however tempting it was; she should have hired a contractor whose quote was closer to the usual rate for the project. Then the budget established for the project would have been set at the higher price, or the job would have been scaled down to be within the available budget. There would have been no unpleasant surprises, and the aggravation, ill will and damaged decorator’s reputation could have been avoided.
In fact, a quote that seems lower than expected demands as much scrutiny as a quote that seems unreasonably high. A homeowner often loses more money by accepting a quote that is too low than by accepting a quote that is too high. Generally, with an unreasonably low quote, the contractor will be unable to finish a project as initially planned and will asks for more money or will finish late, or both. In the worst case scenario, the contractor may just walk away from the job to cut his losses, often after receiving a deposit for the job, and the homeowner will be forced to look for another contractor who can finish the job, always at much higher cost.
Powder Room Repairs Gone Wrong
November 10, 2008
One customer described this problem.
I have hired a handyman George to modify an existing powder room on the main floor of a house and also build connections for washer and dryer in the same powder room. This was a relatively small project; George gave a fixed price estimate of $2500 and promised to finish the job in one week. This price was the final result of my negotiation, I have promised to do some work items myself to keep the cost down. I was to supply all materials.
I have simultaneously done some other work in the house. I have removed the existing washer and dryer in the kitchen and made it available for installation in the new location. I have also hired another contractor to throughout the main floor of the house. The floor installation was done while George was working in the powder room on the same floor of the house. I have also helped George by demolishing part of the wall in the powder room to enlarge it.
When the job was essentially completed, I was very unhappy; here are some of the reasons:
- The floor was not exactly leveled. The left side, near the wall was out of level by about 2/3 of an inch.
- The toilet was too far (6 inches) from the wall behind it.
- The pedestal sink did not sit properly.
- The washroom was only primed by George; Chris himself had to do the final painting.
- The job took three weeks, not just one week as promised.
- There was too much dust in my living room, all over my possessions, including a vintage stereo system.
Do you have any suggestions?
MODERATOR REPLY:
What is the lesson of this situation? This project violated many principles of sound project management. Here are some of the main items that were not done properly:
- The project plan was not properly documented; drawings were not made on advance.
- The job proposal was not detailed enough and was not signed by both parties.
- The contractor failed to survey the site properly prior the start of the project. He did not check if the subfloor is level, for example.
- The parties did not clearly discuss and document the cost and schedule impact of project changes, such as the owner removing a wall and enlarging the powder room.
- The division of responsibility between the homeowner doing some of the work himself and the hired contractor was not clearly documented. For example responsibility for cleanup was left open.
If we were asked to arbitrate and recommend a solution to the contractor and home owner, this would be our recommendation:
The arbitrator refused to get involved in the details of the dispute. Most of the points in disagreement were not documented in the original job contract. He recommended that the homeowner allows George repair some of the problems in exchange for his promise to pay the balance of the contract cost when George completes the following items:
- Rip out part of the new floor, move the toilet flange to relocate the toilet closer to the new wall. Repair the ceramic floor. Additional ceramic tiles required for the repair will be provided by homeowner.
- Improve the installation of the pedestal sink.
This work should address the main quality problems for the home owner. The contractor would have to do some rework and accept a financial loss on this project. Both parties should use the situation as learning experience. By adopting the project management ideas described earlier this type of problem can be avoided in future projects.
This project is just a small example of issues that can arise when a project is not properly managed. In the Greater Toronto Area (GTA), ReliableConnections.com offers project management advice service free of charge to homeowners that have work done by contractors referred by ReliableConnections.com. This service is also available for a fee to anyone else. Details of this service are outlined on this web page: Project Management Advice Service.