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How to pay a contractor

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How to pay a contractor

You know what you want to do, you have set a budget and now it is time to decide on a payment scheme before looking for a contractor.

There are two ways to pay a contractor; time and materials and/or fixed price. Some contractors will only work under a fixed cost basis and may refuse to discuss their hourly rate, also refusing to be fully transparent as to costs. However, contractors’ rates vary as they have different skills and experience, and not all work at the same pace and dedication. 

The hourly approach is often called time and materials. The contract is paid for the time he/she spent on the job along with any materials that were necessary to complete the job.

The contractor can also propose a fixed price for all work to be done. Many contractors prefer to work on a fixed cost basis; many homeowners state that they don’t care what the hourly rate is as long as the job gets done without fully understanding how difficult it is to describe the full extent of any renovation job.

There are pros and cons to both forms of payment.

Time and material

Pros:

  • Better visibility in terms of costs.
  • Greater flexibility for changes to the work agreed. This enables you can stop the work at any time.

Cons:

  • Difficult to establish cost certainty.
  • A contractor can work at a slower pace. For example, if they drag their heels for a hour or so.
  • Other non-job related activities during the time can be charged for. This could include chatting to family and friends (as we all do during our work day), along with fielding calls from clients (to fix past work) and prospects (looking for new work). 

Fixed price

 Pros:

  • There is cost certainty. The price to be paid is understood by both parties.

 Cons:

  • The work to be done, for example the what and the how, can be manipulated.
  • Extras, such as unknown costs, can cause major issues.
  • The contractor may suggest that the job is much tougher than it really is. 

 The reality is that it is very difficult to give an accurate estimate for work to be done. If a contractor has given a low estimate either by mistake or to win the job, he/she may be tempted to take shortcuts to preserve profitability or try and negotiate the terms of reference. Neither is a good work outcome. Alternatively, if the estimate is high, the homeowner is paying a premium – possibly overpaying – for that cost certainty. Many homeowners don’t mind paying that premium as long as there are no shortages in delivery.

The other reality is that all contractors are delivering services, and all services are calculated and cost in some shape or form on an hourly basis. If an employee, the firm pays a salary for a work week that is usually 40 hours. If the contractor is an individual, he/she also knows what their time is worth, and knows consequently what the hourly rate is. 

At minimum, the homeowner should always have a clear understanding of work effort. This should be measured in days or hours and never in duration (weeks or months) as that confirms an understanding of the extent of the work. When receiving competitive bids from contractors, the work effort should be, more or less, in the same ballpark.

More often than not, the discussion boils down to who takes the risk on inaccurate estimates that can be too high or too low?

By Alex Beraskow 

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