Some builders are going to hate me for saying this...
I work with many investors and developers, a few of whom are early in their career, and they fall victim to this the most.
Whether they are full-time building to sell, growing a portfolio, or they are growing an income-producing asset base as a side hustle, the value-added construction element of their operation regularly causes headaches and, in particular, the formative years of their career.
One of the most significant issues is the payment terms that some builders insist upon.Stage payments on a time schedule is an absolute NO! You must not pay your builders on a time basis EVER! What happens all too often is that the builder takes money every Friday (or whatever the agreed timeframe), uses the funds elsewhere for cash flow and runs out of funds when it comes to paying for materials and labour on your job.
Even if the builder has good intentions from the outset, when things go against their plans, the temptation is all too strong to use those funds for anything other than your project.The only way to pay your builder is for works completed in arrears. This avoids any issues of delays, out-of-control overspends and, worst of all, builders going bust having yet to complete the work.Furthermore, lenders will not consider costs spent to date on a finish and exit product when you show them payments to builders but the builder has not completed the works on site.I see this problem happen too frequently.
One of the reasons investors/developers give when agreeing to unacceptable time-based payment terms is “the builder is really good and will not accept any other payment terms”. The simple answer to that is, “I don’t care how good the builder is; find another one that will accept the correct way of payment”.
I hope this raises some awareness to avoid getting caught out by rogue builders. Something that can be avoided if approached in the right way.
This article was written by Saam Lowni, Merryoaks Managing Director.