How to properly pay a contractor?
Member since 2008 · 56 posts · 0 votes
When you're hiring a contractor, how do you handle payment. Will they want payment before? If so, it doesn't make much sense to pay until you're sure the work is complete, right?
It makes sense to me to pay half before and half at completion. Is that the way to do it? Also, who typically pays for materials, you or the contractor?
NEVER, NEVER, NEVER, pay anyone, for anything, up front!
If they tell you; "I need the money to purchase the materials", YOU DON'T WANT TO HIRE THEM. Anyone who's working that thin isn't someone to hang your hopes on. If the materials are a lot you can go purchase them yourself.
If it's a long term job, intermediate payments may be appropriate, he has a payroll he has to meet too!
Just as important as payment is INSURANCE. Don't ask him to show you a copy of insurance coverage, have his AGENT fax you a copy of a CURRENT, IN FORCE binder!
Your instincts are right on.
all cash
Im not sure how others do it but when my husband was hired to work for someone they would pay him 1/2 upfront and the rest when he finished.
He would purchase the materials and be reimbursed for them at the end of the project. Just make sure you tell the contractor you will need the reciepts for any materials if they want to be reimbursed for it. When they prepare an estimate for you it should include the cost of materials and the two of you can decide if you will purchase them or if they will and get reimbursed later.
If it is a large project that might take a while to complete some people will pay in thirds, 1/3 up front the other in the middle and the rest at the end. But everything is usually negotiable just ask how they prefer things done.
Brent, your instincts are good here. I'd never pay a contractor in full up front. I think that would guarantee you extensive delays. Partial payments up front and at completion is what I prefer. As for other ideas - a good one is to offer incentives to the contractor for hitting deadlines. Perhaps a bonus of some sort for early completion. I haven't tried the technique, but have heard that it is VERY effective.
NEVER, NEVER, NEVER, pay anyone, for anything, up front!
If they tell you; "I need the money to purchase the materials", YOU DON'T WANT TO HIRE THEM. Anyone who's working that thin isn't someone to hang your hopes on. If the materials are a lot you can go purchase them yourself.
If it's a long term job, intermediate payments may be appropriate, he has a payroll he has to meet too!
Just as important as payment is INSURANCE. Don't ask him to show you a copy of insurance coverage, have his AGENT fax you a copy of a CURRENT, IN FORCE binder!
Your instincts are right on.
all cash
Thanks all cash.. What you said makes a lot of sense. I will be take your advice for anything I'm doing in the future! I really appreciate it!
Great points, All Cash,
Never pay upfront for any portion? I may have misunderstood that part....but, most contractors will ask 50% down, 50% upon completion. Here in Houston on bigger jobs we have another catchy little device in these transactions.
50 down, 50 upon with 10% you hold on to until a negotiated point like 60 days or until scheduled closing date regardless of close...etc. This ensures that the roof doesn't fall off tomorrow, or the pipes bust after a week of install....etc.
I keep banging the gong, that smaller contractors can not afford to carry the cost of your job (depending on the size and value) And the ones that can will cost you more...that's how they get to be that big. They collect more of your money per job than the lean running guys.
But, always check your references before you up and hire a small contractor. You need to know where you stand in the leverage picture.
Good Luck!!!
Well brandx, I worked Houston for 25 years, not sure how many rehabs I did, but had 16 rentals plus my residence at one point, I've NEVER paid a nickel in advance! In fact I don't remember anyone asking for money in advance! Well, maybe one or two asked.
This is the only industry I can think of where the vendor wants part of their money up front, and one that is rife with rip-off artists and scammers. Particularly in TX where there is no such animal as a "licensed general contractor.
I'd suggest you get with your local club (RICH) and attend a few meetings and get some contacts among reputable contractors.
One other thing, in my 30 years of REI I've discovered that the more work you can do yourself the larger your profits and the more knowledgeable you'll be about what a contractor is talking about and trying to charge you!
all cash
I payed half upfront then the contractor got a bigger call for an apartment complex and didn't get back to mine for about a month then called said it was finished, I went to inspect the property and it wasn't near finished. Contractor finally finished I payed the rest and I will never ever see him again. Now i'm thinking of making a contract so if a contractor says he needs 1/2 upfront I will then present a contract that states he will be fined $100 dollars a day if work is not completed by such and such date. then maybe he won't need the up front cost if you tell him you can do away with that contract if he gets payed in full after the project is finished. to a point if its a $30,000 job then you might pay in quarters. Hope this helps i hope know one has to do this.
Thanks everyone for their helpful responses!
I am a general contractor and my advice is:
Do Not ... repeat ... do not .... pay any contractor or sub-contractor 1/2 of the full contract amount up front.
If he is unscrupulous - where do you think he'll head? ...... down the road.
Any contractor worth his salt can start a job with 10% down. Then you can pay in full at the end. Or pay in agreed upon "draws" during the job as each segment of that job is completed.
Please be careful.
Around here in my part of NY its usaully 1/3, 1/3 , 1/3 . Im having a roof done right now and the contractor didn't ask for a dime until the job is completed. Thats the second time I've had this happen to me . Once before an excavator did the same thing .
My husband is a hardwood flooring contractor in NJ and has a payment schedule for his new clients,. 1/3 upfront- not because he needs the cash, but because it has eliminated last minute cancellations, 1/3 after installation of the floors, 1/3 after final inspection at completion of the job.
Builders and developers he works with frequently and trusts, he uses a different payment schedule, usually net 30
This wasn't always the way he did business, but after getting beat on enough jobs from homeowners and GC's, he had to do something to minimize any potential loss, which included payment schedules and signing contracts.
Believe me, he and I would much rather do business with a smile and handshake!
A couple additional thoughts...
As to upfront money, depends on the size of the job, and the size of the contractor (small or large operation). Less than 5K, I rarely pay any upfront. Over 25K, and we schedule periodic draws, based on actual work completed.
Also, depending on your market conditions, you may want to insist on a penalty clause for missing a completion date. LOTS of contractors get too many jobs going at once, and leave you hanging for weeks!
In some markets there is a convention to hold back 10% for up to 30 days. That allows time for issues to surface and call back the contractor to get them sorted. The final 10% is released when the customer signs off that the work is done.
Enough to keep the contractor interested in dealing with any minor issues discovered but not enough to cause pain for the contractor during the waiting period.
John Corey
Another Calif. licensed general contractor here.
Depending on the size of the contract, time involved to do the work, and amount of materials determines what I will ask for in the contract in payment terms. Say I'm doing just a bathroom remodel for a customer, I ask for payment in full upon completion with no deposits, no term payments....just pay me when I'm done. 95% of my customers are referrals so I'm already just as much at ease as they are about getting the work completed and getting paid. My customers won't refer a deadbeat customer to me just as they won't refer a deadbeat contractor to their friends.
If it's a new customer that called me from my advertising (that 5%) I'll go by my gut feeling, and have on occasion asked for a deposit of 10% or $1000 whichever is lower as allowed by law.
If it's a lengthy rehab, I will typically ask for payment terms, specifying what portions of the contract are to be completed prior to payment being received and I typically make that specification based on percentages that allow the customer the most benefit. In other words, if I want 1/3 payment I will have already completed at least 1/3 of the labor plus the fact that I've already been purchasing materials as well.
I like being able to keep customers at ease concerning the work being completed on time and them knowing that they are either not paying me until the job is complete, or if making term payments that they are still paying me for less than I've already completed and spent in materials. I have never been burned, never burned a customer, never had to file a mechanics lien for non-payment. I have accepted payment out of escrow on rare occasions also, but usually for a little more than if they'd have paid me right after completion. I don't usually like to get paid after escrow since it involves at least the amount of time for closing and could be even longer should they not have a buyer in a timely manner. So basically for me to even think about getting paid out of escrow also means that it's pretty minor repairs, small job/contract, and only for a situation that passes my gut feeling as well. In other words, with the housing market like it is right now with some homes sitting for months/year/pulled back off market completely, I'm not very likely to even consider getting paid out of escrow unless there's also a clause that allows me to be paid directly anyway should they not find a buyer and open escrow within a month.
Already great recommendations posted above, just wanted to add my 2 cents as well.
Contractors should not need to ask for large deposits, payment schedules that don't reflect the amount of work ALREADY completed. I've seen plenty around here that do get paid too much up front and lose motivation to complete the job in a timely and/or acceptable manner. It kills me everytime I get a call to look at a job that someone else didn't complete, the quality of work that was completed was terrible, the customers wants me to fix the mistakes and complete the job, and I listen to how they have already paid this guy the complete price on the contract and the contractor in some cases was still asking for more money than that so he could complete the job. It happens, and when it does it's nearly always some unlicensed contractor that was hired to do the job so the customer doesn't even have the recourse of bonds, license board, arbitration.
Oh, and as for materials.....I usually prefer that I acquire the materials. Not so that I can mark up the costs and pad the job, but so that I have control over making sure that the materials are to specs. If the customer insists that they purchase the materials I make sure that they do it with my supervision so that I don't get partway into a project and end up with the wrong materials that may postpone the job completion waiting on the right ones. Ever tried to put a 36" vanity into a 35" wall to wall situation, I've even had people call me after they've bought all the materials for a project prior to contacting anyone, and be stuck with special order materials that just won't work. A decent contractor will be more than happy to assist with the materials even if the customer is paying for them just to insure those materials are going to work for that project.
Make sure any contract presented by a contractor has a start and finish date. A contract without dates is toothless; it could theoretically extend for years.
what is the best way to pay contractors
How much should a contractor be paid? Is it a percent of a total project? A fee? and how much then for subcontractors? Does the Contractor pay the subcontractors out of the fee he charges per total project?
it's is good business to collect a deposit for both parties. On the homeowner side I wouldn't pay any money until I have a signed agreement with scope of work, schedule, and verified his liscense. On the contractors side I want to see my customer committed to moving forward, knowing details of what they want, and getting the work done. Anything over 1/3 upfront in the construction business is too much in my opinion. If the contractor has his sh$t together and his references check out I would have no problem giving him 1/3 upfront.
Old post, but it will benefit people inquiring the same questions.
Contractor in Ohio, This is how i tend to do business.
Jobs under $5,000 the contractor should be able to cover until final payment.
Jobs between $5,000 and $20,000 should be paid with 10%-20% up front and the remainder paid at the end.
Jobs over $20,000 should be paid in 1/3 payments.
I am a general contractor and my advice is:
Do Not ... repeat ... do not .... pay any contractor or sub-contractor 1/2 of the full contract amount up front.
If he is unscrupulous - where do you think he'll head? ...... down the road.
Any contractor worth his salt can start a job with 10% down. Then you can pay in full at the end. Or pay in agreed upon "draws" during the job as each segment of that job is completed.
Please be careful.
This is the route I usually go as well for jobs or rehabs I am farming out
I do have a question for the group: I have purchased a very good deal a few hours away and I have verbally hired a GC that I do not know that well (other than a few face to face meetings) who has agreed in principle to flip a home for me
He wants 50% of total project costs up front. I have told him that is a no-go, but let him know I am happy to doll out funds for supplies an around a 1/10th of total initially just to get things going ... that or I could meet with his electrician and plumbing sub face to face and pay them for their work
Usually I use guys I know for these jobs. This project is different ... any feedback appreciated on a long distance job like this
it's is good business to collect a deposit for both parties. On the homeowner side I wouldn't pay any money until I have a signed agreement with scope of work, schedule, and verified his liscense. On the contractors side I want to see my customer committed to moving forward, knowing details of what they want, and getting the work done. Anything over 1/3 upfront in the construction business is too much in my opinion. If the contractor has his sh$t together and his references check out I would have no problem giving him 1/3 upfront.
@kevin martin
Good stuff
Would you have a copy of the scope of work contract you could share with me?
i am facing the same problem, so much advises!!!!!!!
if there is any choice, i won't choose pay upfront.