Finding & Working with Contractors

10 Replies

I have been reading the posts about working with contractors and would like some additional information on:
- What are some key questions to ask a contractor you are considering for your project?
- What red flags do you look for in the contractor's responses?
- How do you validate a contractor's materials list to determine reasonable cost?
- How are surplus materials handled? Do you seek reimbursement from the draw request on the last payment?
- What should I expect to pay in advance? Material? Labor? Both?
- Is it standard practice to as your contractor to provide a draw request prior to material and labor payment?
- What process do you use for paying your contractor i.e. draw request on the 10th, payment on the 15th? Last payment 5d after completion?
- Do you ask your contractor for a lien release waiver prior to the last payment?

Thanks for your help, your experience is invaluable!

Mike & Nancy Allen
New Story Properties

Nancy I would lean on the experience of seasoning flippers like @J Scott.

Here are a few links from his website that might lead you in the right direction.

Payment schedule.

http://www.123flip.com/education/contracts-for-you...

Where to find good contractors...

http://www.123flip.com/3-more-ways-to-find-contrac...

1) Ask for trade license, insurance, references

2) Not providing any of the above, or license not in the contractor's name

3) You don't. Seek 3 bids for each job. A good, competent contractor is not going to react well to his building material prices being audited by someone who knows less about the business than he does. For finish items like faucets, lights, etc. you should get an itemized budget list. Our contract clearly spells out that we will only install products that we procure and supply.

4) The way we do it - we have a disclaimer in our contract that expressly spells out that we will sometimes over-order, and leftover materials belong to us. Our customers are billed per their original scope and contract. The issue is that sometimes in order to get the last 5sqft of tile or flooring, you have to order a whole extra box and so there's leftover. This leftover goes back to the supply house. 

5) We require deposits and regular draws. Deposit is between 10-15% of the total contract and then draws are based on city/county inspection schedules. When I pay my employees and subcontractors is exactly 0% my customer's business.

6) Yes. Otherwise the contractor is acting as a lender

7) Our invoices are due on receipt, late on day 11 (with penalties and fees), and we file a lien on day 16. In the great state of Georgia, contractors only have 30 days to file a lien after issuing an invoice.

8) We swap lien waivers for the final check.

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Edit to add (And this may spark a lively debate, which would be awesome)

The link to 123flip above with the schedule for contractor payment works pretty well on small jobs (say, $35-40k or less)

On large jobs, it's not very reasonable to expect a GC firm to carry 40% until the last nail is driven and 30% until the mid-point of a job.... unless they are charging you substantially for the carrying cost of their financing.

How about hearing from a Licensed GC in California, Me !

Here the law says no contractor can ask you for more than $1,000.00 at signing of contract and before any work or materials are on the job. Then what follows is your draw payments and I believe it is not exactly right that it is not the owner's business when and if the GC pays his or her employees and or sub contractors because any contractor or worker can file a lien on the property if they are not paid therefore the GC should provide proof everyone that has pay coming is paid on time. 

If you are contracting for 200 sq. ft of tile and you get 200 sq. ft of tile then whatever the contractor has left over is their's or their business. However if in your invoices you get charged for 240 sq. ft. of tile then the surplus belongs to you as the owner and payer of the 240 sq. ft. of tile. 

The contractor should sign a release of lien once they are paid in full. However the usual practice is to  hold back from 10% to 30% of the total contract amount as security against warranted items for an additional 30 to 90 days after the contract is finished. This way the contractor has a reason to come back and take care of any final punch list or defective items but even if all transactions are completed and paid for the owner will still have the warranty which in our state of California can be from 1 year  for general workmanship and materials to 10 years on structural items. 

As far as checking on a GC's list of materials and cost you most certainly have a right to have the architect or engineer on the job verify that for you that is what you pay them for and if the contractor does not like it then so be it. Certainly the architect that designed the job or engineer knows allot more or equally as much as the contractor since they deal with the construction of their designs all the time. 

It is simple to verify things with your local contractors license board. There are laws as to how much and when a contractor can demand deposits. If a contractor wants to claim he can charge you for finance carrying charges then take your contract to a construction contract attorney. This I would say you would want to do until you have built up a good working relationship with a reputable contractor. The contractor is looking out for his or her interest and so should the owner. 

I would say as an owner you should know your state contracting laws as well as the contractor knows them because what you are doing is a business transaction. Always expect the contractor to want to sway things in their favor and if you sign a contract that is worded to favor the contractor then that will be taken as applicable to law but make sure by using members of your team to watch out for your interest such as the architect, engineer or attorney. 

Originally posted by @Gilbert Dominguez :

How about hearing from a Licensed GC in California, Me !

Here the law says no contractor can ask you for more than $1,000.00 at signing of contract and before any work or materials are on the job. Then what follows is your draw payments and I believe it is not exactly right that it is not the owner's business when and if the GC pays his or her employees and or sub contractors because any contractor or worker can file a lien on the property if they are not paid therefore the GC should provide proof everyone that has pay coming is paid on time. 

If you are contracting for 200 sq. ft of tile and you get 200 sq. ft of tile then whatever the contractor has left over is their's or their business. However if in your invoices you get charged for 240 sq. ft. of tile then the surplus belongs to you as the owner and payer of the 240 sq. ft. of tile. 

The contractor should sign a release of lien once they are paid in full. However the usual practice is to  hold back from 10% to 30% of the total contract amount as security against warranted items for an additional 30 to 90 days after the contract is finished. This way the contractor has a reason to come back and take care of any final punch list or defective items but even if all transactions are completed and paid for the owner will still have the warranty which in our state of California can be from 1 year  for general workmanship and materials to 10 years on structural items. 

As far as checking on a GC's list of materials and cost you most certainly have a right to have the architect or engineer on the job verify that for you that is what you pay them for and if the contractor does not like it then so be it. Certainly the architect that designed the job or engineer knows allot more or equally as much as the contractor since they deal with the construction of their designs all the time. 

It is simple to verify things with your local contractors license board. There are laws as to how much and when a contractor can demand deposits. If a contractor wants to claim he can charge you for finance carrying charges then take your contract to a construction contract attorney. This I would say you would want to do until you have built up a good working relationship with a reputable contractor. The contractor is looking out for his or her interest and so should the owner. 

I would say as an owner you should know your state contracting laws as well as the contractor knows them because what you are doing is a business transaction. Always expect the contractor to want to sway things in their favor and if you sign a contract that is worded to favor the contractor then that will be taken as applicable to law but make sure by using members of your team to watch out for your interest such as the architect, engineer or attorney. 

 Interesting perspective. Certainly, the laws in CA are very different from GA!

How do design-build firms function with a maximum of $1k in initial draw? Our initial plan and design costs alone are typically $5-10k... plus permits which are typically a couple of thousand, and misc. other startup costs that are state and federally required prior to the point when we can even think about putting the first 2x4 on site (For example, sediment barriers, tree fences, etc.)

I'm also a bit surprised at a 10-30% holdback. I'd not be very receptive to the idea that I have to leave behind $10-$45k (or more) for 90 days past completion simply because a problem might come up.

In GA, the law says that if a problem arises within 1 year of completion, the customer has to provide us written notification and we have to do something about it within 3 days. Of course, things are often less formal than that but the jist is the same. 

I agree that having a third party engineer, architect, or inspector come out and verify materials is a valid idea... some shady contractors will use grade 3 lumber instead of grade 2, or simply build things wrong. 

What I object to is turning over receipts for materials. There is no good that can come of that, and no utility to anyone. Plus, it's a lot of extra book-keeping/document handling to give over receipts and cost summaries. Unless you're on a cost-plus contract, it ain't happening.

@Aaron McGinnis

I have never contracted out your way. However here if we check our state, county, and city records we can see that most liens against newly constructed projects are by material houses. 

Allot of contractors with credit accounts at material houses end up not paying for materials until such time as it is convenient for them and sometimes not at all especially on their last orders of materials. Clearly this is a problem for the owner/buyer. 

I do not know out your way but here most reputable contractors use professional computer automated construction accounting systems that can spit out a receipt in one second and most supply houses likewise have automated systems a contractor can simply tie into so there is no such a thing as duplicated accounting systems that would cost you extra time and money to produce a receipt for the client.

As far as design builds you are still acting in the capacity of a contractor to do the design work. The same rule applies to deposits. You can still break down your design work into draws. 

Now do people charge 50% deposit for design work, of course they do but I am simply referring to the contracting laws that have been put in place to protect the consumer. 

Contracting laws are put in place mostly to protect the consumer. Of course if you are a straight shooter then because of your relationship with a client you may actually work out what works out well for you as a contractor. The thing is that the laws were not written because of the practices of good contractors. They were written to control or eliminate opportunity for those that practice screwing the consumer and to encourage people to do business with financially well healed contractors rather than do business with contractors that operate being under capitalized which again creates motive and opportunity for a consumer to expose themselves to higher risks.

Now is it better for me as a contractor to make things more convenient for me  so I can operate more economically and efficiently while reducing my risks by making sure I get paid every step of the way and my time is used more effectively for me, of course. By now I have many years in the field and I have references my customers can use to verify my reputation and of course its much easier for me to operate more  comfortably. 

The problems arise with new contractors or shady contractors and if you think people do not have serious problems because of dealing with shady contractors just take the time to read allot of the posts on here because serious problems arise everywhere with contractors. 

I am simply playing advocate for both parts , the contractor and the consumer, that is only fair.

Now do contractors have problems with customers? of course they do. Have contractors met people that will not pay them or have problems with change orders? of course. Its our job as contractors to educate customers about managing, financing, and paying for work. Do I do business with anyone and everyone who wants to hire my contracting services? No , I do not for the very same reason of the experiences I have had with customers who have proven to be difficult or simply not pay on time. 

Are there laws to protect the contractor's interest ? Yes, there are.

Both the contractor and the consumer have to operate within the law. Should we subject ourselves to operate only within the law on every single contract? Honestly this can make things allot more difficult than ideal. Again the laws were written to protect consumers against shady or poor contractors and likewise protect the contractor from what the consumers do that is unfair, unjust or simply against the law as well.

Are there times when I have asked a customer to pay me a deposit higher than the law allows? Yes but I let my clients know my reasons for it and leave the ball in their court. Can a consumer pay a contractor higher deposits? Yes they can and often do but you should let them know what their rights are. 

Do I make sure as much as possible to get paid at the end of the work. Yes I do but again I let the consumer know what their right are and then of course I bend over backwards to make sure they are completely satisfied. 

I want to make consumers know there are laws they can use to protect themselves against contractors should the need arise. However, there is a balance in the legal system that protects contractors as well against shady consumers.

@Nancy Allen Great responses so far.  @Aaron McGinnis and @Gilbert Dominguez Dominguez Dominguez have made excellent points.  

- What are some key questions to ask a contractor you are considering for your project?- What red flags do you look for in the contractor's responses?

  • I'd ask what they do the most/least.  Not do at all.  What they're doing now.  Biggest projects, smallest projects.  
  • Best customers and worst customers.  When things went very badly, what did they do?
  • Basics like license, insurance, etc. How long? Why?  Highs and lows.

- How do you validate a contractor's materials list to determine reasonable cost?

  • Do your own estimate!  You should have a line item breakdown of labor and materials for items like insulation, sheetrock, flooring, etc.  If something's out of whack, then ask.  

- How are surplus materials handled? Do you seek reimbursement from the draw request on the last payment?

  • Great question.  You don't want fraud, but you don't want the scraps either.  Gilbert had a great response here.  Any 'gross' overages should be the consumers.  

@Aaron McGinnis I like to get the receipts for items that are warranted far beyond what the contractor would or should be responsible for. That way when they break I can get it replaced. I also like to get the manuals for everything; they have come in handy later on. Contractors are baffled by this for some reason.

30% of my funds held for final punch is ridiculous even my government contracts only hold 5-10% depending on the "complexity" of the job, and it is released 30 days after they give me the notice of completion.  Another point mentioned is it might be true to only get $1,000 max at SIGNING, but that doesn't mean you can't ask for an "advance" for materials the day after, although i usually wait 3 days after signing before doing anything as both parties could cancel the contract before the 3 day notice. My commercial contract says I will invoice them for materials on-site, or 50% of the contract line number if it's labor & material line. There is also nothing in the CA CSLB law that prohibits you from drawing for initial plans and drawings, permits are usually reimbursed also, sometimes I add trip and processing charge when it takes me more than 2 times going back and forth. There are loopholes in the law, it is your basic understanding, common sense, and legal skills to navigate through it. CA law is pro consumers/employees, contractors here need to know how to protect themselves against them, as the judicial parties tend to convict you until proven innocent.