Why withholding a final payment from your contractor does not offer the leverage you think it does

You’ve heard the horror stories about contractors running off with five-figure sums and new kitchens being ripped out because they didn’t pass inspection. None of that will happen to you! You’ll take precautions!

Sometimes however, the things we do to avoid a certain outcome simply make that outcome more likely. Here is one thing you may be doing to avoid a renovation nightmare — that may well lead you straight into one: Withholding funds. It seems like a sound plan at first — you don’t have a guarantee that your contractor will finish the job once you’ve paid the balance, so you’ll hold onto something as a guarantee.

The Problem With Retention

Firstly, how much is retention?

The typical amount of retention is 5%. Given the average remodeling contractor is expecting to make a 5 to 10% net profit, a 5% represents at least 50% of their net profit. Also given they are almost certainly going to experience challenges during your project, they are very unlikely to agree to a retention sum higher than this as it risks eating into their overhead which adversely impacts their ability to deliver your project.

Secondly, is it effective?

In short, no.

A good contractor will not be incentivized to complete your project successfully simply because you hold a small sum of money over their head but will do so because they value their reputation and want your referral business.

A bad contractor on the other hand will simply walk from a problem project so as to commence another job (and secure another projects’ deposit) rather than honor their obligations, most of which have not been adequately documented via robust legalese or granular bid documents.

It is important to point out that most seasoned contractors have seen money weaponized against them on more than one occasion and it is a very common practice for them to simply price the retention amount into their bids (i.e. they add an additional 5% to their blended labor and material rates) so they lose nothing if the homeowner or architect decides not to pay them their final payment (typically via litigation or a war of attrition where the matter is dragged out until the contractor cuts their losses).

All being said, retention offers little tangible leverage over a contractor and is a poor instrument for ensuring they will successfully complete your project. 

A Real Solution

The Bolster Promise

Bolster does away with the need for homeowners to manage retention (effectively withhold a final payment) and replaces it with something reliable and effective:

A legally enforceable Promise that absorbs the financial costs of all risks on a homeowner’s project with the sole exception of acts of man (e.g. Strikes) or god (e.g. Hurricanes).

Traditional contractors provide long lists of exclusions (e.g. equipment failure, architect errors, latent building defects) with their bid documents that, if and when they occur, fall back on to the homeowner to pay for. This along with the challenges of managing their supply chains (often the result of poor financial management and the subcontractor’s perceived risk of not being paid) add significant cost and delay to their homeowner’s projects. 

With Bolster however, in return for offering our industry-leading guarantee, we simply ask that we are paid one milestone in advance so that we (and our subcontractors) can avoid the risk of not being paid. This in turn enables Bolster to marshal the full resources required to deliver the project successfully and optimize the performances of our subcontractors and vendors in ways that traditional contractors cannot.

Ultimately, unlike the traditional renovation process, the Bolster approach saves our homeowners around $150K* and 4 months, start to finish.

To quantify this, as of June 2019, Bolster has absorbed $651,000 on over $31M of major home renovations in honoring our Promise on behalf of our homeowners (with them paying $0 that they would have otherwise been expected to pay in the traditional model).

It is this elected ‘skin in the game’ that pushes Bolster to learn and continuously improve our products, processes and systems. We do this in an industry running in the opposite direction from risk because we are marching towards becoming a market leader in a new category of data-driven & risk-free renovation projects.

* Based upon our homeowner's average budget of $500K and timeline of 12 months for design & build.