The one and only time I have ever had problems with a bounced check taught me some valuable lessons that I later incorporated into my contract and my company’s operating policies.
In the early winter of 1988 I received a telephone inquiry about a custom home in a newly developed, multi-acre-lot subdivision. The potential client left a message that he and his wife were looking for a quality-minded home builder to work with them and their architect in a team effort to design and eventually to build their home.
I set up an interview with the clients and architect, and the meeting went so well that my company was awarded the consulting contract. I would be paid for my time and expertise during the planning phase. If that went well, my company would be in an excellent position to be awarded the construction contract.
The design process was successful, and my company entered into a fixed-price construction contract with the owners. The contract called for a 13-month construction schedule and a contract price just over $900,000, to be paid in five equal construction draws. This was at the direction of the bank that financed the project. At the time, $180,000 every nine weeks didn’t sound bad, but I quickly learned lesson No. 1 of this job: The elongated payment schedule changed my company’s cash flow requirements forever. I won’t ever agree to do another project with payments that are not scheduled at least once a month.
The lender also stipulated that each construction draw was to be authorized in writing by the bank inspector, the architect, and the owners.
The project was going smoothly until framing was about 75 percent complete. The owners and architect had inspected the project and scheduled an on-site meeting with me. They wanted to add some windows. That was no problem. “What do you think this will cost?” they inquired. “Let me get back to my office, and I’ll price it out with a change order.” I called the owner and the architect the next day with a price. “OK, get going,” was the response from each.
We rapidly completed the change, and I presented the change order invoice to the owners. “We need you to get the architect’s signature first,” they responded. I contacted the architect. “Sure, no problem,” he said and signed the change order. I then presented the “approved” change order and invoice for signature and payment to the owner. Now the clients took the position that I should submit the invoice to the bank with the next draw request. This change order scenario was repeated several times during the nine-week period before the next scheduled draw.
When I submitted the next payment request of 20 percent of the contract amount I added the quoted prices for the changes that the clients had requested and that had been approved by both them and architect. Now it was the bank’s turn at denial. The construction loan officer pointed out to me that the agreement between the bank and the owners did not allow for the bank to fund any change orders, and that the loan document also stated that any changes to the project would be paid directly by the owners. Change orders were outside the control and concern of the bank.
I consulted my attorney, who contacted the bank, the owners, and the architect to discuss payment for legitimate changes made to the project. The owners were of the opinion that “these changes were for items that had been communicated to the architect during the design process and that he had either elected to omit or forgotten to incorporate into the plans.” The changes were sanctioned and authorized by the owner and architect, but the owners felt it was not their responsibility to pay for them.
When my attorney communicated this information to me I was befuddled. However, he also bore the glad tidings that the architect had agree to pay for all of the requested changes but wanted to wait until he received his final design payment from the owners at the conclusion of the project. My attorney insisted that the architect sign an agreement to pay for the designated changes at that time. The amount of money owed my company was just under $8,000.
