Many jobs go without a hitch, and small problems are usually resolved peacefully through negotiation. However, if unresolved problems remain at the end of the job, final payment can become a contentious issue. It is important to have some financial leverage at the end of job to help motivate the contractor to take care of any loose ends, and to do it promptly. In fact some contracts have a liquidated damages clause specifying financial penalties for missing the contracted completion date.
Most contracts require full payment for the job, minus any money held back for punch list items, at substantial completion or at the issuance of a Certificate of Occupancy (CO). Substantial completion means that the project is complete and usable, except for a few minor loose ends. When the job has reached the point of substantial completion, but before the final check is cut, the owner and contractor do a formal “walk-through” of the project. Together, they compile a punch list, noting any loose ends that need to be resolved before the owner accepts the work as complete.
I would recommend that you tie your last big payment to both substantial completion and to the owner receiving a certificate of occupancy (CO). Substantial completion has a legal definition. It means that the project is complete enough that it can be used as intended. That still leaves room for disagreement, but if all parties are reasonable, there should not be a problem. And having the certificate of occupancy is required to legally move in, so you want that nailed down before releasing payment. In general the CO is issued to the builder or entity that applied for the building permit. Before you agree to hand over the last big check, make sure that the hold-back is enough to cover any unfinished work, which should be documented on a written punch list that both parties agree to.
If you are working with a bank or an architect (using an AIA contract), there will be language holding back 5% to 10% of the cost of the job until it is “substantially complete.” This amount, called retainage gives you leverage toward the end of the job, when the contractor may be more focused on starting the next job than finishing yours. At substantial completion, you should still retain an amount equal to twice the cost of completing the punch list.
Whatever amount of retainage is agreed to is deducted proportionately from each draw. For example, for a 5% retainage, each draw would be reduced by 5%. If a fixed retainage of $5,000 is agreed to, and the job has five draws, then $1,000 (or an apportioned amount) would be deducted from each draw to total $5,000. In the sample custom home draw schedule, the retainage has already been built into the payment schedule.
If the contract does not specify any retainage, make sure that the last check is not due until substantial completion, and that you reserve the right to retain funds (hold-back) to cover all punch list items. Regardless of the specific contract language, if the job is nearly done and the contractor is anxious to get the final check, you should negotiate a partial payment, making it clear that you will pay the rest when the punch list items are completed. The standard hold-back amount is about twice the value of the punch list items.
How much retainage? Retainage is typically in the 5% to 10% range, although some contractors will negotiate for a fixed fee or limit. It’s hard to generalize, but in my opinion, 10% works well on smaller jobs up to, say $100,000, while 5% is probably adequate on larger jobs. It’s important to have a little leverage at the end of the job when the contractor’s focus is usually on the next job and it’s easy to let things drag on. Once you release the final large payment, you should still retain a small “hold-back” of at least twice the value of any remaining punch list work — enough to get another contractor to complete the job if necessary.
Upon substantial completion, but before you release the final large check (or retainage, if specified in the contract), you and the contractor should do a walk-through to identify any loose ends that need to be tied up. The final walk-though and “punch list” procedure should be spelled out in the contract.
It’s a rare job that has no loose ends: a special-order fixture that has not arrived, a missing molding, a gap in the woodwork, a cracked tile, torn screen, sticking window or door, and so on. All these items are noted on a written punch list jointly developed by the contractor and owner (or owner’s representative).
A checklist, like the one below, is useful to make sure you don’t overlook any important details:
| Residential Construction Walk-Through Checklist
For new homes, additions, renovations, and K&B remodels
When the final check (or retainage, if any) is paid to the contractor at substantial completion, the owner should withhold at least two times the value of the punch list items – this is the industry standard and should be specified in the contract. The amount is negotiable – for small items, some people hold back as much as 10 times the assigned value to provide a greater incentive for the contractor to take care of these small, but often annoying, items – annoying to both the contractor and the owner.
While it’s not common, I think it’s very reasonable to ask the contractor for an estimated completion date in writing. If the work cannot be completed until next spring — due to winter weather, for example — the deadline for that item would need to be extended. Assigning deadlines helps focus attention on your project and also puts you in a better position to hire others to finish the job is the deadlines are ignored.
SAMPLE PUNCH LIST FORM
|Item no.||Description||Value||Completion date||Approved by Owner|
|1||Dimmer switch in dining room hums loudly||$20|
|2||Scalding water at shower/tub spigot||$25|
|3||Tub drain plug will not hold water||$25|
|4||Gap between back of window trim and walls.||$200|
|5||Touch-up paint window sills, as needed.||$100|
|6||Basement window screens broken, need replacement||$175|
|7||Windows in office and master BR much to tight – difficult to open||$200|
|8||Vanity doors need adjusting, Master Bath||$25|
|9||Garage door opener runs rough, out of alighment||$50|
|10||Cracked tiles at entry||$150|
|Total Due Upon Completion (2X)||$1950|
The dollar values of the punch list items are assigned by the contractor. If you’re not happy with some, particularly for big items like painting the exterior of the house, then, then you may need to get the opinion of another building professional and negotiate for a more realistic hold-back amount. You should only release this money when all the work is completed to your satisfaction. It’s your only leverage at this point. If some of the work is not completed in the time frame agreed to, and you are unable to agree on new terms, then you should pay for the work completed and retain enough money to hire someone else to complete the job (after checking with your contract and/or lawyer, as needed).
Punch list tips: It’s best for you and the contractor to do separate walk-throughs and compile separate lists before the final joint walk-though. The contractor may notice things that you would have missed. Conversely, you are likely to notice things that the contractor overlooked. I recommend that you do your private walk-through with your spouse or friend, and take the time to scrutinize the job at your leisure. Open and close doors and windows. Try fans, lights, etc., to make sure everything is working as it should. Finally, do a walk-through together with the contractor to combine your lists and discuss any outstanding items. If you go unprepared on a quick walk-through with the contractor and his clipboard, you may overlook things that shouldn’t be overlooked. At this point the contractor is anxious to get the final check and move on to the next job, so you may need to be the one push for legitimate punch list items. Be reasonable, but don’t be a pushover – the job is not right until its right!
Quality standards. There may be some disagreement as to what belongs on the punch list. For example, a visible lump in the drywall, bubbles in the polyurethane, an uneven gap around a cabinet door, a rattling exhaust vent, and so on, may fall within the contractor’s quality standards, but not your own. If you have an architect or construction manager involved at this point, he or she can help by citing accepted industry standards. Ideally, the answer is in the specifications – yet another reason to have really clear specifications. If the drywall specs say “ All joint compound shall be smooth and free of tool marks and ridges” then you shouldn’t see any ridges.
A set of minimal quality standards such as the Residential Construction Performance Guidelines from the builders organization NAHB can offer some guidance, but many of these standards are below what most customers expect of a custom home or remodel. Regardless of the specific standard applied, hopefully everyone is still getting along well enough at this point to come to a mutually acceptable resolution.
Punch list or warranty issue? The contractor may say that some items, like a sticking window, are really warranty items that should be taken up with the manufacturer. Whether it’s a manufacturing problem or due to improper installation is often not clear. In any event, if the job is not complete and you have not accepted the work, it’s the contractor’s job to make it right, not your job to deal with manufacturers’ reps who, in my experience, are often not very helpful.
Time limit. Once you and the contractor agree on what belongs on the punch list, ask the contractor for a time commitment (one to two weeks?) to complete the work. At that time, you make a final inspection and, assuming everything is OK, make the final payment.
If, despite your best efforts to resolve things peacefully, the contractor refuses or is unable to complete the work properly in the allotted time, then you should hold back enough money from the final payment to pay someone else to complete the job. These are not minor punch-list items but significant portions of the work.
Once you know the cost to complete the job, you can make a partial payment to the original contractor, deducting for the remaining work. Most state laws allow the owner to hold back a limited amount –usually 150% of the reasonable cost to complete or repair the contested work. If, at this point, you have completely given up on your current contractor, add a notation to the check that states, “This check constitutes full and final payment for [job description].”
In taking this action, you are in essence terminating the contract. Playing hardball like this is a last resort, but may be your only recourse other than paying for the job twice. Before taking this step, it’s wise to talk to a lawyer about the best way to protect yourself against mechanics’ liens or other legal action by the contractor.
See also: Contract language for Substantial Completion and Final Payment