Is it typical for a Contractor to request 20% or more upfront?

46 Replies

Our General Contractor is requesting a 28% downpayment upon signing the contract for rehab work, prior to any work being started and he claims that he has been doing this for decades and never had issues with that being a part of the contract.  That seems rather high.  What amount (if any) should typically be required from a General Contractor upfront?  If you are a rehabber, what was the most you had to pay upfront when a GC requires a deposit?

I have worked with a contractor for years and don't put anything down, I pay as he purchases materials or I buy the materials and then pay as he pays subs and completes work.  But that is a relationship I have built over many years and lots of trust.  We even partner on flips, so that is not likely a common situation.  

Jon,

I've had contractors request as much as 50% upfront! What I typically do if I am providing materials and they provide labor is I'll front the material cost. I make sure though I pay for the material and I am there when it is delivered. Then after the contractor has done A, B, C I have them submit me a draw. I will NEVER give a contractor money upfront. I made that costly mistake once before when I first started and the guy burnt me for almost $3k.  Now if the contractor requests money upfront and demands it... that tells me (could be wrong) he doesn't have a company that has enough cash flow to pay his workers before he gets paid.  Now if you can't front materials upfront and are relying on him to supply labor & materials then I'd find a well established company that does that regularly. From my experience most contractors can't afford to buy materials and pay their guys.  So if you can buy the materials and make them complete the labor part then get paid that's the way to go. I warn you to not give someone money before a projects started or complete.

I tell every contractor I work with, even if I am doing a rehab in all cash no bank involved, that I am required to submit a draw request to my bank before the funds are released. Make sure when you do pay the contractor they give you a Lien Release/Waiver form notarized and signed.  This way they can't come back on you in 3 months and put a lien on your property stating they were not paid.

If he is insisting on money upfront... I'd find someone else. I have turned and burned dozens of contractors because they all give you the same story.  "do you know how much I spend at xyz company or do you know how many houses I rehab... My favorite is the "I don't need your work, I am doing you a favor, I have so much work I'm overloaded." Now I have a great set of guys I can call on, no money up front and I pay them within 3 business days of completed work.  I require the work to be done and a few days to inspect it with out them breathing down your neck.  This has worked out great for me.  I'm in the process of a rehab currently... Just had roof installed, HVAC done, gutters & soffit, interior demo... I didn't pay a dime upfront. After work is completed and they have their lien release/waiver signed and a few days passed I pay them.

Good morning @Jon Mbu

It depends on where you live. I have property in MD and FL and both states (gov level in the statues) say the payments are in 1/3 of the total. I'm paraphrasing a little here...

Essentially, I would pay 1/3 up front as a deposit and then 1/3 mid-way and then the remaining 1/3 on final inspection. I have another project coming up next year and the contractor said he would likely do 4 draws rather than 3, which is fine with me.

I've had two previous projects, one was in 1/3 payments and the other was half up front and half upon completion. I was there every step of the way and everything went well. One contractor even came back after almost a year to put in the GFI they said they were doing and didn't do.

You can search your area or state laws to see what they dictate and govern to the contractors.

I will say recent experience with the big-box stores Home Depot and Lowes told me that I would have to pay in full. I contacted the license agencies and the people who interpret these laws and they said the "deposit" can't be in full at the time of singing the contract. BUT HD and Lowes could then still ask for full payment for the job before it begins. I had issue with this being such a large amount of money (kitchen and bath remodel with some flooring) up front and no work would have been started. They are the only ones who do this as I contacted other contractors/companies, they do the 1/3 payments.

Just wanted to share my experience with the big-box after seeking their help on my project to get quotes and processes like I would with any other contractor.

Hope this helps.

Have a great day.

I do some contractor work and always ask for materials plus 10% up front in writing. 

Coming from the other side of the coin, I've done jobs (and I do them well) where I fronted materials and got burned.   Once I was out the materials and time, I didn't have the money left to pursue a mechanic's lien because that is an expensive and timely process. With materials plus 10%, if I don't get paid in the end, at least I'm not out material money, just time. 

I'm getting away from doing that type of work and focusing on flipping myself now, but it's a road I've traveled.  Not all contractors are dirty crooks.  I've gotten several referrals from my work ethic and quality and I enjoy the work... But it's getting harder and harder to get material up front because of crooked contractors and skeptical investors.  

Ask your potential contractor for some referrals that he's not related to that took a chance with him. Talk to their past clients about their experience from start to finish.  Ask about the proposed time frame versus actual time frame, etc. 

There's always two sides to the coin and being a contractor is risky, hard, and the margins are slim.  I don't think it's unreasonable for a guy to ask for some money up front but be sure you vet the heck out of him. 

I agree with @Aaron Crow and@Justin Thompson on trying to establish a relationship with some contractors. I have two so far and they did great work for me. One is better at communication and shows up with his crew to give me estimates. They are more in the new-build and fixing of homes et al than the other company I've used. Looking aside from the bad office person for the other contractor, their work was very good and I am pleased.

Try and talk to several companies not just for their work but about their company and how long they have been in this business.

I'm looking for another contractor and I found when I called these companies, some were willing to give me more than the time of day and others just weren't interested and wanted to quote what they want up front. I narrowed my list to the people that invested time to talk to me. I told them upfront when I wanted to do my project and what it was. 

@Ryan Pemberton

When you say materials up front, do you mean the client has to provide all the materials?

@Daria B.

I make a list of material, go online to a big box store, fill a shopping cart, add 10% to whatever that comes to and request that amount...to the penny.  Once I get that check, I deposit it into my business account.  Once the check clears, I buy materials and confirm the start date.  That 10% gives me a cushion in case I use more hardware than anticipated or mis-cut some lumber.  It works for me and has worked for my clients. 

AND it beats the heck out of previous jobs that I fronted materials on a handshake with someone that had no intention of paying me from the start.  

@Jon Mbu

Unless you are very trusting of this contractor, there's no way I would give them anything up front, especially if you're buying materials. If you're not buying materials, I don't recommend you give the contractor the cost of materials UNTIL they're delivered in full on site. What control do you have it you give the contractor almost 30% up front before any work has begun. There is no shortage of horror stories on almost every investment site regarding those who paid a contractor upfront only to find the contractor never shows up on site afterward. DON'T DO IT!

ok I see.

@Ryan Pemberton

What if your client does provide all the materials? Do you determine your upfront payment in some other way?

@Daria B.

I wouldn't do the work.  I don't ask for upfront payment, per se.  I'm not profiting from the material cost.  The 10% is nominal and basically covers my time, fuel, and delivery of materials.  I've tried having the client provide materials and it seems they always get it wrong..which adds trips to Home Depot for nickel and dime purchases that KILL productivity. 

I guess if I went with them, it might work out but I don't want to waste my time while they try to talk me into 2" nails as opposed to 2-1/2" nails...or 1/2" drywall as opposed to 5/8" drywall...or digging through the $0.50 lumber bin trying to find a straight 2x4 to substitute a $2.50 fresh stud.  I go into the store, pick up materials, and leave the store.  I quote quality materials and if they want me to re-quote with thinner drywall or junk trim to save some money, so be it, but I'd rather be picking it up.  I've never tried that approach..

If someone is so stingy that they're not willing to front that cost, they're likely going to be a pain in the butt to work for.  I handle myself as a professional, I do professional work, and I expect professionalism from clients.  It's just how I do business.  It may not be the right way or the normal way, but it's what has worked for me and my clients.  

I'm not taking any new work right now because I'm shopping for a flip but that's been my approach in the past.

Originally posted by @Jon Mbu :

Our General Contractor is requesting a 28% downpayment upon signing the contract for rehab work, prior to any work being started and he claims that he has been doing this for decades and never had issues with that being a part of the contract.  That seems rather high.  What amount (if any) should typically be required from a General Contractor upfront?  If you are a rehabber, what was the most you had to pay upfront when a GC requires a deposit?

 I have a lady friend that was scammed out of $4 grand with a roofer who wanted $$ upfront. Does this ring the alarm bells or what? Move onto another contractor if he can't start with $$ down 

Interesting to hear both sides.

You definitely have to watch contractors like a hawk. I have seen them say they will buy XX materials and then use something cheaper on your project. I have seen them also even if you buy the materials for them they take your materials and use scraps from other projects or something cheaper and take your good stuff.

You need to define leftover materials. Some contractors or subs believe it's theirs for the taking even if you paid for it. 

You need to have the system set up just like a bank on a construction loan. There are draws at various stages of completion AFTER the work is approved and accepted. Once you spell out the process upfront the contractors who are running game will go elsewhere before they even start knowing they can't manipulate the systems in place.

Originally posted by @Joel Owens :

Interesting to hear both sides.

You definitely have to watch contractors like a hawk. I have seen them say they will buy XX materials and then use something cheaper on your project. I have seen them also even if you buy the materials for them they take your materials and use scraps from other projects or something cheaper and take your good stuff.

You need to define leftover materials. Some contractors or subs believe it's theirs for the taking even if you paid for it. 

You need to have the system set up just like a bank on a construction loan. There are draws at various stages of completion AFTER the work is approved and accepted. Once you spell out the process upfront the contractors who are running game will go elsewhere before they even start knowing they can't manipulate the systems in place.

 I agree.  Vetting the contractors is of monumental importance but defining expectations is equally crucial.  As long as everyone is on the same page and you both respect the definitive boundaries, you should be able to establish a strong, long lasting relationship.

My husband is a contractor in North Idaho and formerly a contractor in California. He was somewhat flexible on payment terms but either required the customer to purchase the materials directly and pay him 10% up front or he requires 25% up front. That being said, I can not over emphasize the importance of finding contractors that you can trust and sticking with them. If you are concerned that they will take advantage of you- do not work with them. My husband does not advertise his business and has more work than he can handle. 95% of his jobs are either from past clients or from referrals from past clients. Thankfully, he has never had a problem getting paid.

Thanks for all of the invaluable advice.  We are checking references and were able to get the contractor to come down on the upfront downpayment to 17%.  He insists on paying for materials because he doesn't want to disclose the wholesale pricing and sources he used so we won't be able to buy the materials ourselves or accompany him with purchasing the materials. So when we receive invoices for each draw it will just show is flat rate.  Is this common practice?

There is not a set in stone way that this is done.  I find that your past relationship or lack thereof with the contractor will largely dictate how much, if any advance payment % they will need.

The most have ever been charged is 25%.

Originally posted by @Jon Mbu :

Thanks for all of the invaluable advice.  We are checking references and were able to get the contractor to come down on the upfront downpayment to 17%.  He insists on paying for materials because he doesn't want to disclose the wholesale pricing and sources he used so we won't be able to buy the materials ourselves or accompany him with purchasing the materials. So when we receive invoices for each draw it will just show is flat rate.  Is this common practice?

 The fact that he does not want to disclose the pricing is a red flag to me and a sign that he may want to manipulate the situation to purchase less quality materials or pocket a significant amount of money that should have been used for materials purchase. I do not know whether or not this is common practice in other states but my husband always provides receipts to customers on materials he bought or gives them the option to buy. I think it is fair for contractors to add a 10% overhead to this but they should disclose the details of all materials purchased IMO.

@Jon Mbu

  you have a few types of contractors.. you have your down and dirty rehabber that does a little of everything and does it with his crews and might only sub out elec and plumbing.

these tend to be the rehab types and lesser capitalized.. IE they don't have net 30 accounts set up at their suppliers they are cash and carry etc.

then you have contractors that have established credit a team of very established subs.. but these guys will be higher priced and since rehabbing is about how cheap can I get it done if you go this route many times the numbers don't work but you get what I call true professional contractors.

So when we fund rehabs its pay as you go .. and its totally a relationship and trust issue. Having been a HML who has funded literally thousands of rehabs.. I know how easy it is to get fubared by undercapitalized contractors all the corners they try to cut.. relationships are the key @Jessie Huffey

 as Jessie says you find a great contractor you bring him a bottle of wine or a six pack or a gift certificate for dinner.. what ever it takes to keep him or her on your team they are invaluable.

When we do new construction its totally different. All subs have their own accounts. they get paid once a month and only for work done. We will buy the lumber pac direct as that is usually 20 to 40k per house.. but all other materials are bought by the sub paid for by the sub and provided to the job in their bid... It also tags in their Insurance in case of construction defect... IE big stuff or little stuff  like faucet is faulty its the sub that goes and replaces it not us .  Draw request in by the first  payment on the 10th or 15Th along with lien releases for each sub.. that's how its done in the new co world ... But your not getting the same pricing as you will from a do it all yourself rehabber.. if you had to go the sub contractor route your cost would go up considerably

Don't put any money down. Have the contractor provide an invoice for materials when they arrive and pay him for the materials plus an agreed upon markup worst case.

Mine typically wants something up front to be able to purchase the supplies to start the project, which I do not have a problem with. On average it usually comes out to about 10% of the total project. After that its a pay as we go kind of thing with a chunk held at the end that will be due at completion of project after inspection of work and I give the thumbs up. Hes done 5 projects for me this way and he is okay with how we work it out.

I will say this, finding a good contractor that is dependable, honest, does solid work and does not need to be baby sat is hard to find. If you find one you better hold on to him.

Originally posted by @Jon Mbu :

Thanks for all of the invaluable advice.  We are checking references and were able to get the contractor to come down on the upfront downpayment to 17%.  He insists on paying for materials because he doesn't want to disclose the wholesale pricing and sources he used so we won't be able to buy the materials ourselves or accompany him with purchasing the materials. So when we receive invoices for each draw it will just show is flat rate.  Is this common practice?

 This wholesale pricing bit throws a lot of red flags.   I'd make some more calls and find another contractor. That's my opinion. 

Originally posted by @Jon Mbu :

Thanks for all of the invaluable advice.  We are checking references and were able to get the contractor to come down on the upfront downpayment to 17%.  He insists on paying for materials because he doesn't want to disclose the wholesale pricing and sources he used so we won't be able to buy the materials ourselves or accompany him with purchasing the materials. So when we receive invoices for each draw it will just show is flat rate.  Is this common practice?

 Are you serious? I'm a contractor, and I do not mind client paying for materials, but I need a couple of hundred for consumable materials, blades, cleaning rags, equipment rents if any, etc. Who knows what he is ordering, and on what quality. I wouldn't go crazy over wholesale prices, just go somewhere like HD, ask for bid room prices, or some chinese run hardware place, you will get some discount on it, and probably match your contractors prices. If a client wants the list of materials, I would charge $500 for it, deductable to my contract (or to the consumables). Flat rates are not common in the level I work with, I could separate labor and materials in all of my bids down to the last cent.

I go with my contractor,  we pick out the material I pay for it all and it gets delivered.  It's what he wanted and he didn't have to front the money.

and no matter what there will be a hundred more trips to the store for things we run out of our forgot or I changed plans so new items or we broke something that we weren't planning to replace

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