Updated: Sep 22, 2020
One of the questions homeowners often ask us is if we can provide any advice as to how people usually raise the money to pay for their building work and then, once they have it, what sort of payment terms they should expect to agree to with their builder. Perhaps unsurprisingly the very first thing we make clear in response is that we offer no financial advice whatsoever... to anyone... ever! We're not qualified to do it and it's not an area we want to get involved with. That said this is what we think most people end up doing:
1. Raising Money
Borrowed money tends to come from either a secured loan or by remortgaging. In both cases it is wise to secure a little more money than would cover the initial quote from the builder in case something extra comes up as the job progresses. Usually loans are applied for after the builders have quoted so you know how much to borrow. Builders/tradespeople do not normally accept credit card payments although you can of course use them to finance the purchase of the bathroom suite, kitchens, carpets, new furniture etc.
2. Paying for the Building Work
Paying for the building work is normally a bit of a compromise between your interests and the builders. Of course you would probably like to pay nothing until the job is finished and then settle a complete bill once you are 100% satisfied with all the work. Likewise your builder would probably quite like it if you paid him or her all the money up front at the beginning. Hardly ever will either of these situations occur. In most cases you will agree a payment schedule with your builder that goes something like this:
Initial Deposit Payment - This covers the cost of erecting a scaffolding and getting a bulk delivery of materials on site. This payment is normally a fairly substantial chunk of money and you pay it before anything happens on site at all. It's a bit of a leap of faith but you can take out insurance to protect this payment if you wish. You can find numerous third parties offering insurance if you do some research.
Stage Payments - A whole bunch of payments are agreed particular to the project. So for example you will agree to pay a set figure on the day the steel beams are fitted to support the new floor, another on the day the new stairs go in, another on the day the plastering is done etc. If you agree a schedule you should be careful to stick to it. Don't pay ahead but don't fall behind either. Your builder is likely to become quite anxious if you do. For example he or she may well have booked in several different tradespeople to work one after the other or even at the same time. If you take a week to make a payment that you should have made within 24 hours then they may have to choose between re-organising the schedule whilst they wait for your payment or pressing ahead and paying out of their own pocket. Goodwill tends to suffer quite badly when this happens so don't be surprised if the schedule takes a hit every time you are late with a payment.
Final Payment - The very last payment is normally made at the point where both you and the builder agree that the job is 100% complete. It's normally a fairly small payment although one which is big enough to not be forgotten! Essentially the end of a building job normally sees you and the builder agree a "snagging list". This is a list of all the odds and ends which need to be done, or fixed, or tidied up etc in order for you to consider the job complete. You agree the list together with the builder. He or she deals with all the items on it and then you make the last payment. Some projects allow for you to retain some or all of this last payment for a fixed period beyond the completion of the snagging list in case any problems become apparent later on. It's known as 'retention' but to be frank it's not common practice on small projects like loft conversions.
There are no hard and fast rules about payment terms other than what you agree with your builder in the contract you both sign. So the only real solid advice we can give is to read everything carefully and make sure you are happy before you sign up!