When you, as a builder – professional or private – have purchased a service from a contractor, you must also pay for it.
There are basically three options for determining the price. A fixed price agreed in advance, payment according to the time and materials used on the work (invoice work), or a combination, for example where the majority of the work is carried out at a fixed price, while ongoing additional work is settled as invoice work.
Regardless of whether you are a consumer or a business owner, it is not recommended for the client to agree on an estimate, as you have no control whatsoever over the total costs of the construction. The only regulation regarding estimate is found in Section 5 of the Danish Sales Act, which states that the buyer (the client) must pay what the seller (the contractor) demands, unless it is unreasonable. The only option the client has to prove that the demand is unreasonable is to order an inspection and estimate, which is a costly affair.
How payment is to be made is usually determined in the contract. One of the following options is most often used. Payment for work performed in the last month, payment of a certain percentage of the contract price when a specific part of the building is completed according to a payment plan, or payment when the contract is completed and handed over to the client. A payment plan assumes that a fixed price has been agreed.
It is up to the client and contractor to agree on how payment is to be made when concluding the agreement. If no agreement is concluded, the contractor can generally demand payment for work performed once a month. Expenses for materials can also be demanded to be paid on an ongoing basis.
For the contractor, it is about avoiding the client being unable to pay when the invoice is sent. Therefore, the contractor is interested in invoicing frequently.
Ideally, a payment plan will be most advantageous for the contractor, as the payment plan is most often structured so that the contractor receives a relatively large share of the payment early, so that the client is effectively ahead of the payments.
However, this model is not necessarily in the interests of the client. The client, on the other hand, would prefer to keep as much money as possible – and ideally only pay when the contract is completed. If payments are made according to a payment plan and the contractor goes bankrupt during construction, the money that the client has paid in excess is lost, and the client must find a new contractor to complete the construction. Completion will usually entail increased costs, and the client will therefore suffer a loss.
The goal is therefore to find a balance. A balanced payment plan where you pay fairly accurately according to the value of the work performed will be the most reasonable, as the client can see that he has received a value corresponding to the payment, just as the contractor does not risk delivering a finished building, only to discover that the client cannot pay.
As additional security, a balanced payment plan can be supplemented with bank guarantees from the client's and the contractor's banks, respectively.
By mutually providing a bank guarantee that the client or contractor can fulfill their agreement, the parties have security if it later turns out that one party is unable to fulfill their part of the agreement. With the bank guarantee in hand, the client has the opportunity to complete the construction in the event of, for example, the contractor's bankruptcy, without incurring additional costs, while the contractor is assured of payment for work performed, even if the client were to go bankrupt.
There is a cost to providing a bank guarantee, as the bank must of course be paid for its work. But the cost is worth it, as the security of entering into the contract is that much greater. Furthermore, as a client or contractor, you should be extremely careful about entering into an agreement if it turns out that the bank refuses to provide a guarantee for the other party's obligations.
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