When to or when not to pay contractors
Fort Wayne, IN · Member since 2015 · 32 posts · 9 votes
When to or when not to pay contractors
Most Popular Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votesQuote from @Matthew Paul:
When hiring a contracting company the majority require a minimum of 1/3 deposit
Not only is this not smart, it is not even legal in most states. I never did this and no Contractors I knew would do this. You give some unscrupulous Contrs 1/3 up front and they'll just take off. On a $600k project, you're really going to write someone you don't know a check for $200k....?
Give no money up front. Your Contr should give you a payment schedule detailed in the contract. The fairest and safest way to do it is have the Contr submit an invoice at the beginning of each phase of work, i.e. framing or electrical, and ask you for small amount to help them pay for materials so they aren't financing your project. Then when that phase is complete - and inspected - you will get an invoice for the balance due on that phase.
So as each phase is complete, satisfactory and inspected, it is paid in full. Everybody is happy and the money is where it should be....nobody is shorted or holding back money.
If you need info on how to do this or the documents used, just PM me.
27 Replies
- 4yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
Quote from @Charles Bailey:
When should you pay a contractor? Should you pay them in increments, with a deposit in the beginning, again midway through the project and lastly once the project is complete? Or is there a better way to protect both parties?
Absolutely do not pay them up front. That is a great way to jam yourself up on a project. If they ask for half up front or a deposit, immediately be suspicious. The one caveat is for big jobs where they may need several thousands of dollars in materials. In that instance you can offer to buy and arrange delivery of the materials yourself.
For most jobs HVAC install, flooring, most plumbing, I pay either immediately upon completion (if they have given me an invoice in advance) or within that week that the job was done.
For longer jobs, lets say a brand new bath install; I might do thirds. One third for the rough in, one third for the top out, and one third after they finish setting everything.
If they are good, do what they say and show up when they say, you should strongly consider giving them a bonus. I will kick my contractors up to 10% extra in cash on a job well done. I want them to know that if they are taking care of me, then I will be making sure they get taken care of as well.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes4y
When hiring a contracting company the majority require a minimum of 1/3 deposit , this gets you on the schedule , covers permits , some materials , and other expenses to get the job started . It is also the consideration required to bind a contract . The second draw of 1/3 is generally required once the work on site starts . And the final payment upon completion .
Others will say " dont give deposits " , "You buy materials " , or " the contractor should use their accounts at suppliers for materials " WRONG , The contractor is NOT there to finance your improvement , thats the owners responsibility . Material cost can rise in a matter of 1 week , materials also need to be ordered and pre paid . The contractor will give you a contract with all the terms and conditions for you to sign .
Now if you are hiring a unlicensed contractor , anything goes
- Fort Wayne, IN · Member since 2015 · 32 posts · 9 votes4y
@Matthew Paul is it a good idea for you to buy the material or do you let the contractor buy the material with the deposit money you gave them?
- 4yJared HottleBusiness MemberReal Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
Best to have the agreement written out and agreed on before work begins. It is easy to say pay when work is completed and this may be possible for smaller jobs like plumbing work, or HVAC work but it is hard to ask a contractor to finance extensive rehab work. I think buying material and having it delivered and a small deposit to start is the best way and then when the bid is done, inspect the work and pay them. Probably best to have them split their work into a few logical bids you can easily inspect after each bid is completed if the work is very large. Another side note is a red flag is someone who needs all the money upfront. At the very least they are probably using your money to pay for the project they are working on now. They do not need to be hedge fund managers when it comes to money but you want them to at least have the financial responsibility that they do not absolutely need the money as this will lead to a less volatile relationship.
Jared Hottle Real Estate59 Reviews - 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Matthew Paul:
When hiring a contracting company the majority require a minimum of 1/3 deposit
Not only is this not smart, it is not even legal in most states. I never did this and no Contractors I knew would do this. You give some unscrupulous Contrs 1/3 up front and they'll just take off. On a $600k project, you're really going to write someone you don't know a check for $200k....?
Give no money up front. Your Contr should give you a payment schedule detailed in the contract. The fairest and safest way to do it is have the Contr submit an invoice at the beginning of each phase of work, i.e. framing or electrical, and ask you for small amount to help them pay for materials so they aren't financing your project. Then when that phase is complete - and inspected - you will get an invoice for the balance due on that phase.
So as each phase is complete, satisfactory and inspected, it is paid in full. Everybody is happy and the money is where it should be....nobody is shorted or holding back money.
If you need info on how to do this or the documents used, just PM me.
- 4yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Charles BaileyI have seen it quite a few ways. Some contractors here in Columbus OH either require half up front, then the rest is paid upon completion. I also have seen some that want to be paid at the end of each workday in the form of cash/check, or just plain old you can pay upon completion depending on the level of work being done. At the end of the day, it depends on the level of work and the relationship you have with that contractor.
- Fort Wayne, IN · Member since 2015 · 32 posts · 9 votes4y
@Malcomb Stapel I like the 10% extra idea it shows you appreciate their efforts.
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes4y
I’m with @Matthew Paul.
here’s how I roll- if I have to special order something like windows, I factor in a deposit enough to cover the cost of the windows (I pay for them when ordering, and im not eating the cost if you cancel)For my regular clients that have used me for years, I don’t need a deposit, when I give them invoices they pay me.
For new clients, I require 1/3 the day I start.
Guys like @Malcomb Stapel I won’t work for. Im not showing up with a van full of materials or start working on a project that’s longer than a day without some down money. Im my area, it’s illegal and criminal for me to take money and not do the job, but not illegal or criminal for me to do the job and get stiffed by the homeowner. Been there, had that happen. No recourse other than a mechanics Lien. Im not in business to work for free.
- 4yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
@Matt M. it's interesting reading through the posts above to see how things vary state to state. In my part of the Midwest, it's a huge red flag if a contractor asks for any money up front (minus an expensive up front materials bill). Also, wouldn't it be illegal and criminal in every state to take money and not do the job?
I'm fine if a contractor passes on my job because they prefer a deposit. I think both parties need to be comfortable with the arrangements or it just isn't a good fit and will most likely lead to more issues down the road. My folks know that they have the option to get paid the day that invoice is in my hand and the work is done. Most likely with a bonus.
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes4y
Quote from @Malcomb Stapel:
@Matt M. it's interesting reading through the posts above to see how things vary state to state. In my part of the Midwest, it's a huge red flag if a contractor asks for any money up front (minus an expensive up front materials bill). Also, wouldn't it be illegal and criminal in every state to take money and not do the job?
I'm fine if a contractor passes on my job because they prefer a deposit. I think both parties need to be comfortable with the arrangements or it just isn't a good fit and will most likely lead to more issues down the road. My folks know that they have the option to get paid the day that invoice is in my hand and the work is done. Most likely with a bonus.
I would hope every state it would be illegal for a contractor to stiff a homeowner, but it needs to go the other way also. To me, if you refused to give me a deposit, that’s a red flag also. If you aren’t willing to have some skin in the game in your property, I shouldn’t be expected to.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes4y
Quote from @Charles Bailey:
@Matthew Paul is it a good idea for you to buy the material or do you let the contractor buy the material with the deposit money you gave them?
The deposit is to get things started , it covers permits , administrative duties . Contracting is not a materials and labor job like service work , you are paying for a finished product .
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes4y
Quote from @Bruce Woodruff:
Quote from @Matthew Paul:
When hiring a contracting company the majority require a minimum of 1/3 deposit
Not only is this not smart, it is not even legal in most states. I never did this and no Contractors I knew would do this. You give some unscrupulous Contrs 1/3 up front and they'll just take off. On a $600k project, you're really going to write someone you don't know a check for $200k....?
Give no money up front. Your Contr should give you a payment schedule detailed in the contract. The fairest and safest way to do it is have the Contr submit an invoice at the beginning of each phase of work, i.e. framing or electrical, and ask you for small amount to help them pay for materials so they aren't financing your project. Then when that phase is complete - and inspected - you will get an invoice for the balance due on that phase.
So as each phase is complete, satisfactory and inspected, it is paid in full. Everybody is happy and the money is where it should be....nobody is shorted or holding back money.
If you need info on how to do this or the documents used, just PM me.
@Bruce Woodruff In Maryland , not only is it legal , its been law for over 40 years . Contractor can get 33% up front , and if the customer cancels , they lose the deposit . Contractor supplies the contract , and it must contain certain verbage by law .
I have been a contractor since 1982 , I never use company funds to do a customers project . Too much risk of not getting paid .
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Matthew Paul:
Quote from @Bruce Woodruff:
Quote from @Matthew Paul:
When hiring a contracting company the majority require a minimum of 1/3 deposit
Not only is this not smart, it is not even legal in most states. I never did this and no Contractors I knew would do this. You give some unscrupulous Contrs 1/3 up front and they'll just take off. On a $600k project, you're really going to write someone you don't know a check for $200k....?
Give no money up front. Your Contr should give you a payment schedule detailed in the contract. The fairest and safest way to do it is have the Contr submit an invoice at the beginning of each phase of work, i.e. framing or electrical, and ask you for small amount to help them pay for materials so they aren't financing your project. Then when that phase is complete - and inspected - you will get an invoice for the balance due on that phase.
So as each phase is complete, satisfactory and inspected, it is paid in full. Everybody is happy and the money is where it should be....nobody is shorted or holding back money.
If you need info on how to do this or the documents used, just PM me.
@Bruce Woodruff In Maryland , not only is it legal , its been law for over 40 years . Contractor can get 33% up front , and if the customer cancels , they lose the deposit . Contractor supplies the contract , and it must contain certain verbage by law .
I have been a contractor since 1982 , I never use company funds to do a customers project . Too much risk of not getting paid .
Well I figured that some states were different. Whatever works for you is great. My way of doing the payment doesn't have the Contractor using his money to fund the project. Everything is pay as you go. I don't think either the customer or the Contractor should be too far ahead or behind.....
I was first licensed in 1983 so we're both old farts, eh...? :-)
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes4y
@Bruce Woodruff Not old ................experienced
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Matthew Paul:
@Bruce Woodruff Not old ................experienced
Talk to my back about that......
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes4yGeez fellas, you guys are making me feel really young..
Quote from @Matthew Paul:
@Bruce Woodruff Not old ................experienced
- Real Estate Broker · Buffalo, NY · Member since 2019 · 11 posts · 10 votes4y
GC here - Nothing wrong with asking for a deposit to get on the schedule or to pay for materials. It's not the contractors job to front or fund the up front costs of your project. That being said the upfront cost should not be a huge amount especially if its the first time working with them. Biggest thing I would say is VET your contractors. Talk to a bunch and pick the one you feel most comfortable with. Don't just pick the lowest price or group that says they will be the quickest. If they have a website, reviews, pictures, that's a huge plus. Work with them to figure out what makes sense for draws and put it in writing in building contract. "When x is completed y will be paid out" and so on. Leave some money on the table at the end so its worth it for them to complete and get final inspection.
- 4yJosh C.Pro MemberProperty Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
Different areas have different laws I guess. Indiana doesn’t. We either get a big draw upfront or we don’t do the work. Every good contractor I know operates the same. We care about our rep and would never bail on a job. Homeowners/investors have no rep and might not pay therefore we need upfront money as insurance. Only desperate (likely bad) contractors will do anything but a small job without a draw in our area.
- Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes4y
If you're just starting to assemble your contractor/maintenance teams I recommend using the big box franchise companies or contractors refereed to you by friends. In these cases you're expected to provide an upfront deposit- 25% is normal with 50% 75% benchmarks before final payment. Make sure these are laid out in the contract. These referral contractors live of their reputation
Stay away from Angie's List and Home Advisors.
- 4yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
Perhaps it would help if we threw out some scenarios to help the original poster. It's appears that different states have different expectations. But I wonder if some of us are talking different money amounts. I'll throw out the last couple of contractor bills I've had. You'll notice these aren't big jobs. All the companies with the exception of the last one were big name contractors.
$6200 - full HVAC install (no money down, paid in full upon completion)
$2550 - plumbing, removal of cast iron stack, set tub and shower, misc (no money down, paid in full upon completion)
$2450 - upgrade fuse panel to breaker box (no money down, paid in full upon completion)
$5400 - set layouts, return to install sump pit, ejector pump, vent stack, return to rough in bath, return to finish install of onyx base and trim kit (3 day project set over roughly a month, paid in thirds upon each days completion of set tasks) the best part of this one, he never returned to finish the base and trim kit install, which would have been a one third payment. I wasn't out any money on that, but I was left holding the bag on completing it.
- Investor · Nutley, NJ · Member since 2017 · 72 posts · 56 votes4y
Do not give a deposit to a contractor that you don't know. Even if you know them, don't pay anymore than 10% deposit. I prefer no deposit and buy the materials yourself. Or they buy the materials and you can reimburse them once they are delivered to your property. Pay them as each part of the job in complete. Framing is complete......pay them for framing. Also, try to have bonus timelines in a signed contract with them. For example: if they pass rough inspections by 5/31, then get a bonus of $1,000. Then if they pass final inspections by 7/15, they get a bonus of $2,500. They need incentive to finish quickly, otherwise they'll start your job and then string it out while they work on other jobs. I learned this the hard way. "Smart people learn from their mistakes. Wise people learn from other people's mistakes"
Good luck
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Craig Clinton:
I prefer no deposit and buy the materials yourself.
This keeps being mentioned and thought I'd give you the seasoned GCs take on this. Neither I or any top notch Contractor I know will ever take on a project with these terms. It takes all control out of the GCs hands and leaves him open to liability.
The wrong products show up and need to be returned.....you lose 3 weeks and guess who gets the blame? The GC every time.
A product fails after the job is complete. Even though the Homeowner bought the product, guess who they call. Yep, the GC.
Materials show up at the jobsite. Homeowner wants GCs crew to meet the truck, unload, certify they are the correct products, and sign for the materials. For free, of course....
You end up in court over an issue with material/products that a Homeowner purchased and had delivered. The GC has absolutely no responsibility, wasn't there at any point in the process except the install. The Judge says "The GC should have known and advised the Homeowner, after all he is the expert on site and has 30 years experience."
So at an early meeting with a potential customer, as soon as they started talking about them buying materials, I would gather my notebook and head for the door. That almost always woke them up. The ones that didn't get it were not the people I wanted to be spending my next 6-9 months with anyway. Inevitably they were too controlling and micro-managing.
So - note to Homeowners - don't try this. Note to young Contractors - as soon as this topic comes up, just run.....you can thank me later...... - Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes4yThis is it right here^^^^
Quote from @Bruce Woodruff:
Quote from @Craig Clinton:
I prefer no deposit and buy the materials yourself.
This keeps being mentioned and thought I'd give you the seasoned GCs take on this. Neither I or any top notch Contractor I know will ever take on a project with these terms. It takes all control out of the GCs hands and leaves him open to liability.
The wrong products show up and need to be returned.....you lose 3 weeks and guess who gets the blame? The GC every time.
A product fails after the job is complete. Even though the Homeowner bought the product, guess who they call. Yep, the GC.
Materials show up at the jobsite. Homeowner wants GCs crew to meet the truck, unload, certify they are the correct products, and sign for the materials. For free, of course....
You end up in court over an issue with material/products that a Homeowner purchased and had delivered. The GC has absolutely no responsibility, wasn't there at any point in the process except the install. The Judge says "The GC should have known and advised the Homeowner, after all he is the expert on site and has 30 years experience."
So at an early meeting with a potential customer, as soon as they started talking about them buying materials, I would gather my notebook and head for the door. That almost always woke them up. The ones that didn't get it were not the people I wanted to be spending my next 6-9 months with anyway. Inevitably they were too controlling and micro-managing.
So - note to Homeowners - don't try this. Note to young Contractors - as soon as this topic comes up, just run.....you can thank me later......
I don’t typically allow homeowners for my jobs to get stuff themselves, unless it’s tile or a faucet or stuff like that. I don’t have time to show them 7363663 different tiles..
I won’t wait around waiting for people to go strap 2x4’s on top of their Toyota Corolla or get 20 sheets of drywall in their wife’s minivan.
you want to buy paint? Ok sure.. have at it but if it’s anything other than what I usually use you’re paying me more.
I know a flooring guy that was hired to install real 3/4” hardwood. Homeowner wanted it done the day it was delivered. Install guy said it needed to acclimate a week. Owner said no. He made her sign something that he was not responsible after install. Well, it buckled a bit and she sued. Despite having the signed document that installer wasn’t responsible due to not letting it acclimate, judge sided with homeowner since the contractor should have refused and knew better. - Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes4y
Quote from @Craig Clinton:
Do not give a deposit to a contractor that you don't know. Even if you know them, don't pay anymore than 10% deposit. I prefer no deposit and buy the materials yourself. Or they buy the materials and you can reimburse them once they are delivered to your property. Pay them as each part of the job in complete. Framing is complete......pay them for framing. Also, try to have bonus timelines in a signed contract with them. For example: if they pass rough inspections by 5/31, then get a bonus of $1,000. Then if they pass final inspections by 7/15, they get a bonus of $2,500. They need incentive to finish quickly, otherwise they'll start your job and then string it out while they work on other jobs. I learned this the hard way. "Smart people learn from their mistakes. Wise people learn from other people's mistakes"
Good luck
I don’t know how you guys get good solid contractors to work for you on your terms. That’s not how it rolls here, an hour from Nutley. No way would I do a $20,000 remodel with $2,000 down.
This is exactly why I’ve steered my business to investors and homeowners that respect what I do for them, they know my work is quality and done timely, and they don’t get screwed. When they need me, I’m there for them, and when I give them a bill they pay it. If I need money up front, they give it. I’m done playing games with people and their terms, and I’m not financing their projects. If I get weird vibes, I simply won’t work for them.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Matt M.:
I don’t typically allow homeowners for my jobs to get stuff themselves, unless it’s tile or a faucet or stuff like that. I don’t have time to show them 7363663 different tiles..
I won’t wait around waiting for people to go strap 2x4’s on top of their Toyota Corolla or get 20 sheets of drywall in their wife’s minivan.
you want to buy paint? Ok sure.. have at it but if it’s anything other than what I usually use you’re paying me more.
I know a flooring guy that was hired to install real 3/4” hardwood. Homeowner wanted it done the day it was delivered. Install guy said it needed to acclimate a week. Owner said no. He made her sign something that he was not responsible after install. Well, it buckled a bit and she sued. Despite having the signed document that installer wasn’t responsible due to not letting it acclimate, judge sided with homeowner since the contractor should have refused and knew better.You got it Matt! I got it to the point where the only thing a Homeowner could buy were the appliances (maybe) and their furnishings. Everything else went through me. I sent them to places like Ferguson's or Pirch so they could talk to a rep and pick out exactly what they wanted, then they paid me, and I paid the supplier and arranged for delivery. I knew the suppliers and their reps so delivery was nice and smooth.
If homeowners knew how much easier and (in the long run) cheaper it was to just find a good contractor and let them handle everything, they would all do it in a second.
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