When there is doubt as to the financial strength of a contractor, he should be required to furnish a bond covering the faithful performance of the contract and the payment of all obligations.
Then, too, it is customary to set forth cash allowances in the specifications to cover certain items, like plumbing fixtures, hardware, and electric light fixtures. The contractor should be made to declare that the contract sum includes these cash allowances.
Careful understanding with the contractor should be arranged as to the method by which he will be paid. Generally, as was previously stated, the financing institution has control over the schedule of payments, and, once this is agreeable to the contractor, he should be required to submit to the architect an application for each payment, with receipts and other vouchers, showing his payments for materials and labor, including payments to subcontractors, at least ten days before each payment falls due. It is the duty of the architect to determine the accuracy of each one of these applications for payment before he issues the certificate of payment for such amount as he decides is properly due. There are some architects who make it a practice to hold back a certain percentage of the first payment, and continue this with every later payment, until the last, in order to have a club over the head of the contractor and also a factor of safety, lest the builder has rendered an application for payment in excess of the amount of labor and material delivered. This, of course, will cause hard feelings sometimes, and create friction between architect and contractor, a thing studiously to be avoided, and for this cause such procedure should be dropped when the architect knows the character of the contractor.
The architect should always reserve the right to withhold part or all of the certificate of payment when defective work is not remedied, or when any claims are filed, or there is reasonable evidence that claims will be filed, or when the contractor fails to make payments to subcontractors, or to dealers for materials, or when there is a reasonable doubt that the contract can be completed for the balance unpaid, or when any damage involving liabilities has been done by one contractor to another. The architect should also hold back the final payment, if there are any liens existing against the building, until they are removed.
In order to avoid many of the trivial and annoying expenses which occur in a building operation, the contractor should be required to pay for all permits and licenses (but not permanent easements) which are necessary according to local laws. The contractor should also be made to pay all royalties on patents, if there are any, and all license fees.
But, probably, the most difficult part of the building operation to finance are the extras. When something is found to have been omitted from the plans and specifications, and the contractor did not cover it in his bid, or when the owner changes his mind and requires an alteration, then this extra work must be paid for at a high rate, for nearly all contractors look upon such extras as good pickings. In fact, there are some contractors who deliberately go over the plans and specifications to note what extras may be needed, and then counting upon their profits from these extras, they put in a low bid, so that they can beat their competitors, secure the job, and then proceed to make up their losses with bills which they put in for the extras. Likewise, a contractor who is honest, if he finds himself losing money on any building operation, will try to ease his losses and gain profit with the extras.
There must, therefore, be some basis upon which estimates for these extras will be determined. The values for these extras or changes in the work may be determined by a submitted estimate and acceptance in a lump sum, by a unit price named in the contract or subsequently agreed upon, or by the cost and percentage, or by the fixed-fee method. If the contractor claims that any instructions, by drawings or otherwise, involve extra cost under his contract, he should be required to give the architect written notice of it before proceeding to do the work, within two weeks after receiving such instructions.
A final problem of financing should be considered, and that is the emergency which might arise should the contractor neglect to prosecute the work properly or fail to perform any provision of his contract. If such is the case, the owner should reserve the right in the contract, that after three days’ written notice to the contractor he may make good such deficiencies and deduct the cost from the payment due the contractor at that time. Of course every contract should provide for the owner’s right to terminate the contract should the contractor fail to do his work, or prove bankrupt, or persistently disregard laws, or continually violate the provisions of the contract.
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