18/10/2015
Here is an example of a typical building contract between two parties and what role Secure Contracting Escrow can play in it. Your contract might have more detail or less detail. It all depends on the project and what has to be accomplished by the end of it. You might have only one milestone or you may have many.
Building contractor Philip is going to add an en suite bathroom to Mr Hill’s house. Mr Hill had plans drawn up by an architect and they were approved by the city. Mr Hill got 3 quotes and decided to use Philip’s contracting business. The total for this contract came to R100 000. Since Philip and Mr Hill do not know each other, they decided to use Secure Contracting Escrow as an escrow service to protect both of them. Philip divided the whole job into milestones, as set out below:
Milestone 1: Mark out new foundation and dig out 300mm. Insert re-enforcement steel bars and pour concrete into foundation. Let set for 2 days. R20 000. Duration: 4 days
Milestone 2: Build walls to roof height, including spaces for door and windows. R10 000. Duration: 5 days.
Milestones 3: Install trusses, roof tiles, ceiling and window. Break out the hole for the door to the room. R10 000. Duration: 4 days.
Milestone 4: Plumber to install all copper pipes and drainage pipes. Plumber installs bath, shower, toilet, wash basin and geyser. R10 000. Duration: 3 days.
Milestone 5: Walls get plastered, inside and out. R10 000. Duration: 2 days.
Milestone 6: Tile the bathroom walls and shower. Install carpet. R20 000. Duration: 3 days.
Milestone 7: Paint outside walls and ceiling. R5000. Duration: 1 day
Milestone 8: Electrician installs the lights and connects the geyser and issues a COC for work that was done. R5000. Duration: 1 day.
Milestone 9: Install taps. Clean yard. R10 000. Duration: 1 day.
(All amounts and times are fictional and are just for the purpose of explaining how to break down jobs into milestones and add a timeline to it.)
Mr Hill agrees to the milestones and the time each will take. Philip emails the milestones to Secure Contracting Escrow to be amended to the contract. Secure Contracting Escrow sends out the contract to be signed. Philip and Mr Hill both sign the contract and send the contract back to Secure Contracting Escrow. Mr Hill pays the R100 000 into Secure Contracting Escrow’s account. After the money reflects in Secure Contracting Escrow’s account, the signed contract and Milestone Certificates are sent out to both parties and the project is ready to start.
Philip knows that the money is available to pay him if he does a good job. Mr Hill did not give a deposit, but he knows that the work will get done properly before he agrees to let Secure Contracting Escrow pay out the milestones.
Philip starts the project. After every milestone he completes, he calls Mr Hill to come and inspect his work. Mr Hill is very satisfied and signs the Milestone Certificates. Philip scans and emails the certificates to Secure Contracting Escrow for payment. Mr Hill gets an SMS from Secure Contracting Escrow to confirm that he has signed the certificates. After Mr Hill replies to the SMS, as confirmation, the money is paid directly into Philip’s bank account.
Philip can have several milestones completed at the same time; some later milestones can even be completed before earlier ones. The chronological order does not matter, as long as Mr Hill is happy and signs off on the milestone.
Mr Hill’s wife decided that she does not want carpet in the bathroom, but rather tiles. Philip explains that this is going to cost more and take more time than what he initially quoted. Philip works out how much more it will cost to tile rather than to put carpet down. He comes up with an amount of R5000. Mr Hill and his lovely wife agree that they will pay the extra money and are happy to wait a little longer for their bathroom. Philip creates a “change order” and he and Mr Hill sign it to confirm their agreement. Philip scans and emails the change order to Secure Contracting Escrow. Mr Hill transfers R5000 into Secure Contracting Escrow’s account. Philip waits for Secure Contracting Escrow to contact him and let him know that the money has cleared, before he continues with the tile work.
Change Order and Milestone Certificates are provided with the signing of a contract.
After all the milestones and change order are complete, the transaction looks like this:
Contract: R100 000
Change Order: +R5000
Total: R105 000
Total Amount that was paid out to Philip: R102 375.
Secure Contracting Escrow Fee R2625 or 2.5% of the contract fee plus any change order.
Philip essentially paid 2.5% of the contracting fee to make sure he gets the other 97.5%. It is essentially insurance against non-payers. If you have R500 000 in bad debt, would you not give R12 500 (2.5%) to get all your money back? With Secure Contracting Escrow you just prevent the bad debt scenario all together.
By giving a deposit, there will always be one party that feels vulnerable. If the buyer gives 50% deposit he feels vulnerable until the contractor shows up and actually does the job. The contractor still has to pay the labour costs out of his pocket and other extras like petrol. When the project is completed he has no guarantee that he will get the rest of the money and in turn, he feels vulnerable and at the mercy of his customer to pay him. By breaking the job into small milestones Philip does not have very big expenses all at once and gets his money often and in smaller increments, that way his cash flow does not dry up and his expenses are not catching up with him. We agree that in some circumstances there will be a deposit necessary for some reason, but they will be fewer using this system.
So, it makes perfect sense that both parties agree to have an escrow service hold the money while the project is completed. No money can be taken out until both parties agree. The contractor is now forced to do a good job so he can be paid and in turn knows that the whole contract amount is paid by his customer. His customer cannot get the money back out unless he agrees to it, so there is no chance of him not getting paid.
This is only an example of how Secure Contracting Escrow can provide you with assurance of good service and assurance of getting paid. Any business that offers a service or sells a product can use Secure Contracting Escrow to make sure that all invoices gets paid and stop having bad debt.
Secure Contracting Escrow does not inspect people’s work or give building, legal or other advice. We do not determine whether something was done right or wrong, we are solely an escrow company which safely holds the money and pays it out as instructed by our clients. We cannot write your milestones or change orders for you, we do not know the whole situation and we will stand impartial to all clients but only fulfill our contractual obligation to everyone.
