I am starting to get bids from contractors on my first flip and wanted to get some advice on how to pay contractors. I know some people do it in quarters, some in the scope of work with a timeline that has to be met. Just wanted to get some perspective from investors and if possible contractors as well. Thank you...
The way I have done it in the pass I would buy and deliver all the materials. and pay half after half the work is done and balance when they finish the work.
@Joe Gore has it right. We have a few different contractors. Some we pay weekly, some only at the end of the project. However, you'll never want to pay a contractor for work not done. You'll always want to hold enough back that you can pay someone else to finish the job if your contractor decides to get up and walk away.
And we always buy the majority of our own materials. You can negotiate discounts with the places you shop, and it's easier to control your expenses. Some contractors will even mark up materials and/or charge you for going to get them.
I also buy all the materials but from the onset. I would look at the bid and draw lines between the stages to let them know how payment will be made.
Never cave in under pressure to pay more than what you think they have done as they always need motivation to return and finish the work.
Also when drawing subsections for payment in the bid, always think about how much it would cost for you to get the next guy in to finish the job if they decided onto walk to something better.
The way that i found has worked best for me is that I requests a very detailed quote from my contractors and then I pay them as per line item completed. This motivates them to finish the work fast because they get paid faster, sometimes as quickly as being paid everyday, and it motivates them to give me more detailed quotes. So instead of say a line item line "tile bathroom," the quote gets broken down to purchase floor tiles $x, lay hardee backer boards $x, level floor $x, lay tiles $x, grout $x, seal tiles $x, caulking $x etc
The thing I like about detailed quotes is that if the contractor isn't performing or leaves the job and disappears for days, I'm not out of pocket for anything, and the contractor can't come after me and say that he hasn't been paid either, so it's easy for both parties to just walk away in the event of a disagreement with no hard feelings.
Speaking from both sides of the equation: one who has paid contractors and been a contractor. I personally think it work best like this-
1) be sure to get all licensing info and insurance info upfront. Also, become additionally insured on their policy to be notified of any nonpayment and subsequent loss of coverage. Require copies of permits notification of when they were applied for.
2) set a scope up front in full/detailed as possible
3) pay draws from particular points within the scope and only at those points
4) supplying material can work in your favor $ if you have a good understanding of what you will need and I mean a really good understanding. This list can also come from your contractor but they usually make money on having the connections/relationships/fee reduction b/c of their volume/ etc. I wouldn't expect to have access to all of these relationships if your supplying the material unless you doing a good bit if volume with the GC.
I personally would leave it up to the contractor to supply material. This protects you in many ways. I can bore you with all of them if you want. If material gets damaged, lost, stolen, etc it would be on them to replace. Beside people take much better care if they laid out the funds for it and their is nothing worse then running around to get what was supposed to be on site b/c the owner supplied the material.
I believe you give up quite a bit more then $ if you don't let the contractor do what they do best.
Thank you everyone for your replies..... I very much appreciate the feed back, it will help me greatly... Thank you...
When the customer supplies materials its a pain in the a$$ , Wrong materials , not enough materials , all cost the contractor time . Something gets broken , who pays ? As a contractor , I make the same money whether I supply the materials or the customer does , when the customer does , they deal with the wrong items , or warranty issues . As far as paying the contractor , a good contractor has the payment terms already in their contract , in my area a licensed contractor is allowed 1/3 at contract signing , 1/3 when the job starts , and the final third upon completion .
On a $30k remodel, there's no way I would pay a contract $20k "when the job starts." If he quits, are you going to find someone to do your entire remodel for $10k?
As for the other issues, yes it can be a hassle to deal with warranty stuff, but that's rare. And material shortages are the fault of the contractor if the contractor is providing the material list.
As a General Contractor, we finance all our investors rehabs up to $20,000 per project. Sure it sounds crazy and expensive (for me), but it motivates my Project Managers to get the job done quickly so we can get paid! It shows two things in my opinion......1. We are a legit company that doesn't finance our previous project with your money.
2. It attracts investors simply on the idea that they can save the rehab cost for another project. Trust....Trust....Trust!!!!
Of course I have a private investor I pay 2-4% for financing, but that cost is typically rolled into the estimate.
Crazy or smart? We have been doing this for 4 years now.
Thank you for all of your insight. I greatly appreciate it...
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