Hello folks,
I need some advice on retainer fees. I have a contract on my biggest project to date. We are anxious to get started but we’re waiting on finalization of plans and permits. The business end of this is newer to me than the woodwork. Do you guys ever charge retainer fees that go back into the budget when the job gets started. Kinda like earnest money I guess. Any comments will be welcomed.
Thanks.
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Replies
I don't know if my experience applies, but I always ask for a deposit (maybe 10% of the total) on accepting the job, even if it isn't going to start for a while. I guess it depends on whatever is generally accepted in your line of work, though.
John
CCR,
I do smaller jobs (just signed my largest to date of 35k) so this may or may not apply. I charge 10% non refundable (but applied to the job) just to hold the date. When I first started I found some folks would wait till about a week or two from the start date and cancel as they decided to buy a new car or something. So I started the 10% deal and that cured it. I also charge more if I have any long lead special order items, enough to cover them and the 10%. I also figure if they do cancel I will at least have something if I can't back something into that week. DanT
Thanks guys.
10% sounds fair to me. It will definitely cure peoples tendency to kick tires and waste my time.
What you are describing, I would call a deposit.
In my understanding, a retainer is slightly different. I have two retainers on account now.
One is a customer who likes to have me on call so he is always at top of my list. Wants me to be able to get somebody on it right away when he dreams up a nightmare of a job. I hold three thousand dollars of his monery on account as a retainer for that. I still bill him for the work and it is time and a half or double time when situation warrants it. He has never complained and keeps calling. The retainer is in effect, keeping me in his employ.
I also do consulting with regard to property management and ordinances because I have ten years of experience on the local planning board, having since retired from it. I did some research and wrote a report for one gentleman and invoiced him for the time and some wise advice. There is reason to believe his neighbor might also want some of my services on the same issue, over which they may potentially be at odds. The first gentleman has paid me a retainer of an additional $200 on account against possible future need of services to keep me in his employ. This way, it is improper and unethical for me to provide similar services to his neighbor.
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Excellence is its own reward!
I know my boss has taken a retainer on projects that can't or won't start for a while down the line, in some instances the final plans or details may not even be ironed out, just an agreement for X type of project to start at roughly Y date. The money ensures the people of the decided upon time slot but if they choose to cancel they loose the money, at least in theory, I don't know that it has happened.
Would that circumstance be considered a retainer or a deposit, or maybe even a non-refundable deposit.
A little hard to say for that one. bob Walker should have some insight on retainage fees since they are common in legal work.
What you are describing here seems to me as a payment for holding a spot open in the schedule rather than a deposit. seems like retainer would be an appropriate use of the word for it..
Excellence is its own reward!
I'm guessing a laywer would be needed for a truly legally accurate title, and I'm sure there is one. Don't think it really matters though one way or the other in the way you title.
To many lawyers, so little time.
I take deposits on larger jobs where advance work is necessary or special materials must be ordered. In another lifetime, I also required a 1/3 deposit just to put someone on my list to schedule becauise I was so busy. The only time that was ewver a problem was when one guy gave me a deposit to roof a restaurant and then sold the place before I re-roofed it. He had told the new owner that he had already paid me for doing the work! Even without this "mis-understanding" the new guy was not the kind of person I would want to work for anyway.
So I returned the deposit money to the original owner and let him settle things with the new guy..
Excellence is its own reward!
I collect for Permits, fees and my time to process them which is about 6% of the cost of the job. ($1700. on my last job)
I collect 40% upon delivery of materials, 40% when 80% complete, and 20% at the end.
Works for me but the decks I do only run about $10,000.-$30,000.
"Rather be a hammer than a nail"
Bob
Thanks guys.
So my first draw on this job will be $20k. Its a high-end small addition with lots of custom work. I've got 20-30 hours in design, permits, scheduling, etc. If this job goes well, the customer will make my career. I'm not trying to maximize my take on this first job, but don't want to give my time away either. So say I already had a deposit of 10%. When we get the go ahead, pay myself for that work that's already done? Fair enough? More tomorrow, I can't keep my eyes open.
I haven't worked in the residential world in decades, but I would recommend taking a look at AIA documents for contracts between owner and builder. If you don't intend to execute an AIA contract, but would like to know what it says, you should be able to find a copy in your local library.
Working as an architect on larger projects ($100mm+), we are accustomed to actually requiring a deposit from the contractor, after having been convinced that the contractor is financially sound. Then, the contractor is paid in any number of ways. One that is most popular is to pay monthly full price for materials delivered and stored AT THE SITE, plus for all labor expended that month, plus overhead and profit, less a 10% witholding amount on the labor. The 10% withholding is paid in full upon owner's acceptance of the work.
That you guys get a deposit from the home owner is amazing. I understand about ordering materials in advance of starting the work, and risking that the owner could change his mind. That is usually handled by a re-stocking or cancellation fee that the owner pays.
As many lawyers as people would like to see at the bottom of the sea, it is a good idea to retain one to help you with iron clad contracts.
That is usually handled by a re-stocking or cancellation fee that the owner pays. Unless you get the money up front, the HO who cancels a project is not likely to pay for restocking. It's easier and more reliable for the contractor to refund money than it is to collect unpaid debts.
Do it right, or do it twice.
On $100MM++ job I see why it would be a good idea to find a financially solvent builder who can demonstrate his stability by a deposit to the owner and who can afford to have 10% withheld.
But in the long run guess how he got to be that financially secure to do without that money, and guess why he can afford to have 10% withheld.
It all got figured into the job cost.
I occasionally do whole job firm bids where I don't get any of the money 'till the job is finished. You can bet the risk factor and the finance chares are added in to the total the customer pays. PPaying me an advance deposit shows me the customer is serious about the project and it lowers my risk. Less risk means I can afford to get by with less profit. That translates to less cost for the customer.
Remember the old adage, the risk takers are the money makers? What you are advocating means you want the client to spend more money..
Excellence is its own reward!
Piffin, you are absolutely right in your message. I failed to point out that the AIA documents go a long way toward protecting the owner. The architect and contractor are also protected via the use of fully executed contracts.
Even in the world of residential contracting you must be aware of unscrupulous contractors who would take that deposit and leave town. Regardless of the number of honest, hardworking contractors out there, it only takes one bad apple to spoil it for the whole bushel.
I have had experiences with local contractors for small jobs at home, and I never had a contract. All the workmen I used came highly recommended, and performed their jobs well. I did have some issues with one contractor, but he kept up with job until it was completed to my satisfaction. He probably lost money on that job because of the amount of time expended and the amount of rework to be done. This was an issue of the quality and capabilities of the individual workman, rather than the owner of the company.
For the 10% witholding, that would typically represent overhead and profit, so that should not affect the contractor's ability to meet payroll and vendors' billings.
So, I can see work being done without contracts and saving money for the owners. It just needs all the honest contractors out ther to help to police and eliminate the dishonest ones.
Chuck,
If you think that 10% of sales covers the OH&P of a full service remodeling contractor, you are waaaaaaaaaay off the mark.
I own a small company in the DC area, and for me, the figure is closer to 30%. New home builders may get by with lower OH&P, but not remodelers.
Mike
Yes, I've known of a few 'contractors' who take the deposit and leave town or even stay in town and delay the start indefinitely. I have always lived and worked in small towns so it is easier perhaps for the buyer to check out the reputation and history of the man or company they are dealing with.
I also agree with the previous that a remo company cannot hope to work on ten percent markup for O&P in your contract example. Walt Steppleworth recommends 40% after a lifetime of study on this sort of thing.
Advance deposits reduce risk and financing costs and can help reduce that figure. I am a small operation and my overhead runs 6% but is growing rapidly. I do it all. A sec/bookeeper/office assistant would easily more than double that overhead. A showroom or estimator/salesman would again increase it. I need no sales staff only because referalls bring customers to me.
But if I had 10% withheld with no advance deposit, I would have no choice but to bid the job so as to be at least breaking even without it.
Every company is different so the 10% assumption is always going to wrong - that is unless in those multimillion contracts it is a standard....Hmmmm, i wonder if it is driven by that contract that requires a 10% witholding.....
Excellence is its own reward!
Yes, my 10% number is low for overhead and profit, but a 10% witholding would come out of the profit, not out of the direct costs. I had a friend in the homebuilding business several years ago, and he told me he figured on 10% profit and 10% overhead. It was a father-son operation, and they had a few office people, putting up over $1mm worth of homes a year when a $100,000 home was unheard of, except for doctors and lawyers.
Those figures sound resonable for new building but still far low for remo work..
Excellence is its own reward!