Contractor Payment Plans

Co-op and condo boards are often strapped for cash for major capital projects, but you worked with a building that came up with an innovative solution to the problem. Can you tell us about it?

This was a several-hundred-unit condominium on the Upper East Side that was looking at a seven-figure contract for replacing their roof and doing some asbestos abatement. With these projects, you typically make monthly progress payments to the contractor that correspond to the work actually performed and completed for the specific period.

In other words, pay as you go.

Yes. And when the project is finally completed, the entire contract sum is due and payable. The condo was looking at about a five-month project, but the board needed the flexibility to make payments over roughly a 24-month period. They approached me with the idea of doing installment payments, but I was not expecting that this was something that a contractor would agree to.

Why is that?

In a progress payment plan structure, a contractor usually ceases work if the owner defaults on their payment obligations in order to mitigate potential losses. I advised the board that they needed to have backup plans in place, such as a line of credit, a common-interest realty association loan or even a short-term assessment. The first two would have entailed significant additional costs, specifically bank fees, closing costs, title fees and interest payments. And of course an assessment is never popular.

What happened next?

To my surprise, the contractor was amenable to the board’s proposal, so we originally structured it as a 24-month payment plan with equal monthly installments. But we had to make some tweaks along the way, and ultimately ended up with a plan where we gave them a 10 percent deposit up front upon signing and agreed to monthly progress payments that corresponded to the value of work completed that month. However, the aggregate of those monthly progress payments was capped at an amount equal to half of the total project cost. Once the project was completed, the balance was paid in 12 equal monthly installments.

So you thought outside the box and brokered a deal. What’s the takeaway here for other boards?

This was made possible because of the professionalism of the board, the managing agent and the contractor, who wasn’t being paid the full sum as they performed the work and had to front money on our behalf. You need a contractor of significant clout in order to have the financial flexibility to do that. But at the end of the day, this case shows that when you're working with the right parties, everything's negotiable. Just because a solution is out of the ordinary or hasn't been implemented before doesn’t mean it's not in the realm of possibility.