"Real" Contractor Accepted Payment Terms

16 Replies

It seems every contractor wants at minimum 1/3rd, 1/3rd, 1/3rd (or more upfront), despite advice on here to not put more than 10% down.

I've scoured the General Contractor Payments in the forums and it seems the ones who have SOV contract clauses and itemized scope of work down to the penny with weekly payments (payments being 5% behind actual work done) are those with multifamily projects over 25+ units.

Are the rest of us single-family apt/homeowners stuck with less favorable contractor payment terms? There's a BP article from an ex Contractor advising against demanding an itemized list as that turns off most contractors who don't know how to appropriate general overhead expenses to these smaller projects.

The advice was to not ask for itemized cost list.

That seems contradictory to commentary advice, so there seems to be a gap between theoretical advice vs what's actually expected from contractors.

Anyone successful in paying behind work schedule for a SFH or single apartment? I've read about 10 contracts online and picked the upper middle one suited best for the Owner as the most detailed itemized ones freaked out all the contractors. Thanks

From the contractor's perspective, someone asking to pay behind work is a huge problem and red flag. 

1) You're turning the contractor into a lender

2) Liens are a bad way to get paid if things go wrong

3) No matter who you are or how big your war chest is, pay-behind-work is going to limit how much work you can take on at any given time.

We require a 5% deposit when we execute a construction contract, and generally 30-35% when the permit gets issued. The next draw is at foundation inspection, then mechanical rough inspections.

When we deal with reputable lenders (IE: A large or at least regional non-HML, non-private money lender), I typically see 10% down stroke at contract execution and then draws against completed work... so, surprise surprise, we look at doing 10 draws through the course of the project. (Working construction to perm loans through some place like Fidelity, Regions, Wells Fargo, etc.)

When we deal with HMLs or private money, I require my draw schedule to be adhered to. The terms of the draw between the investor and the lender are between the investor and the lender, and I'm not interested in what they are. The investor can get reimbursed by the bank however they want to work it out between themselves.

(I don't have a very bright view of the way most HMLs do business from the perspective of the contractor)

You want a detailed scope of work, period. The more detailed the better, to a point. What I tell my customers is that my bid is a summary of a summary of a summary. I've got line items broken out very well, for example -

"Frame house per architectural plans $xx,xxx"

"Drywall interior $xx,xxx"

"Plumb in 17 new fixtures $xx,xxx"

"Portapotty for 6 months $xx,xxx"

What doesn't need to be on the scope of work is that we're using 850ea 2x4x8 studs, 10 boxes of nails, 52ea 90 degree pipe fittings, etc... that level of detail is too distracting, byzantine, and just not helpful.  

I never run behind the money. as a contractor I am not in the business of lending money. If that is a requirement I would probably decline the work or charge significantly more. Second I have a detailed scope of work. I give my clients a we don't do favors speech. all my guys know that we are happy to perform almost any task. However, any request outside of the scope will receive an invoice the following week. Any delay in payment sets a project back . My team has completed two whole house renovations and 1 apartment reno in the last 5 weeks. We also are in the middle of 2 significant [$150k+] remodels. When payment is delayed we cant make purchases and schedule subs. so we bump the spot on the schedule and some back when we are ready. My contract is specific to payment terms.

Hey everyone,

I’m an investor and construction company as well. It’s always difficult to find a happy medium between the two, investor and contractor. I think it comes down a lot to relationship and track record. I will work with an investor on their payments and plans based on who their lender is. I will still do a deposit I sometimes will do demo first in order to get it. I also will take a smaller amount upfront as opposed to a bigger one because I know that some investors if they’re just getting started don’t have the cash to front anymore than I would. So the production might be based off of the draws coming in, but I work with them on size and amount to make it as smooth as possible. I also only work with investors I’m a little more suited for them then most contractors.

The 1/3 , 1/3 and final 1/3 is standard in the residential contracting industry . Everything  said above is true . The horror stories that you read about are generally from investors or homeowners hiring the cheapest contractors , unlicensed contractors or " Chuck in a Truck " 

Contracts should be detailed , payments , materials , scope of work every last detail .

Licensed Contractors are real businesses . Like restaurants , gas stations , grocery stores . You dont walk into the grocery store fill up a shopping cart and tell them I will pay you in 90 days . You dont bring your own steak to a restaurant and ask them to cook it so you save money . And when you go to a bar and pay $ 5.00 for a beer you know they are making money off that beer . 

Contractors are more likely to get screwed by a homeowner or investor than you think .The most  Common excuse is " I am waiting for a draw "  . Another  is  " I am over budget " .   If you want to stall a project  slow down the money  .  Contractors are not your bank , or your Hard Money Lender . 

Most good contractors dont bother with "Investor" work .    The guy that does 1 or 2 houses  is a royal PIA to work with generally . They want cheap prices , quality work done fast .  It never happens .  Professional contractors dont need that work , there is so much high paying work out there it isnt necessary to do investor work . 

I would also add that as for my business.  I work on my own projects, partner with other investors, do some retail remodeling, and consult on projects for investors.  I currently have enough work to keep me busy for months.  So it is very easy for me to say NO.  Beware of the contractor that can start tomorrow.  If you are flipping you should be able to inspect current projects and get a firm grasp of the kind of work they do

I have never hired a GC on my flips, I hire subs. With that said all of my subs were different.

My floor guy required 50% up front, 50% when done for refinishing HW.

My plumber required nothing until the job is 100% done, and even then sometimes seemed shocked when I paid him right away.

My electrician didn't ask for payment until the end.

My carpenter would charge for materials and a bit of labor up front. If he did any extra work, I paid that day sometimes, other times we tallied it up at the end. We usually kept a sheet going with our agreed to costs adds/deducts.

Larger masonry work was 50% upfront, 50% at the end.

Roofer didn't ask for money until the end, similar to my plumber, left it with, pay me when you can. I always paid on the spot (keep these guys happy).

That's all I can think off the top of my head.

I work in a different industry. So a 25+ unit is standard SOV and perform then bill it’s pretty standard - meaning you have a happy medium of commercial grade contracting where everyknows what next and what to expect. For small jobs, i’d say less than 50k, it is more informal, a one page contract should do it, single family or homeowner that wants a standard commercial grade contractor at a DIY price? Forget it. Just to emphasize, if that were the terms, 99% of it will be a decline the other 1% I will need to add $3k to the bill, that is my admin cost to just sign and perform the contract they way you want it to be - and $3k is cheap.

OK, contractors. How does a newer investor protect themselves from the contractor who steals the deposit and skips town? I know too many people who have put down the 30% deposit to get on the calendar, then they never see the guy or their money again.

I don’t hire GC only subs

Floor guy I pay for the floor I pay him when job is done

Electriction I pay when job is done

Carpenter I buy what he tells me to buy I pay him and whatever extras he  needed to buy when he is done 

Tile work I pay for major materials, he pays out of his pocket for extras, he gives me receipts at end of job and pay him then too

So basically I don’t pay any labor til it is done.  This is they way they stated it was done. 

I can see why GCs don’t like to work for investors.  I would not want to either when I can get a home owner to give me 33% upfront and earn much higher profit

Originally posted by @Mindy Jensen :

OK, contractors. How does a newer investor protect themselves from the contractor who steals the deposit and skips town? I know too many people who have put down the 30% deposit to get on the calendar, then they never see the guy or their money again.

No different than screening a tenant for a rental . First thing is you dont find contractors on craigs list . You check their state licence for complaints , check the court system for lawsuits . YOU DONT GO WITH THE CHEAPEST PRICE .  You use someone local , find where they live . 

@Mindy Jensen

When all's said and done, smaller investors are always going to get shafted by contractors unless they're willing to pay top dollar.  This reality is worse now than it was ten or twenty years ago. There are simply not enough capable, dependable people choosing the trades to make up the difference between demand and supply anymore. You put an ad on Craigslist to find a helper for $20/hour for general renovation work, you may get one laconic response in a week, 50% of the time from a foreigner with questionable work status. You put a similar ad asking for clean-hands administrative office work, and you'll get emailed fifteen nice-and-neat resumes with mission statements all stating, "I am a bright, highly motivated self-starter..."

This is one of the major weaknesses of hands-off renovation today I don't think this site pays enough attention to this changing economic reality in the rush to tell people the old story, that they too can make it in real estate without ever swinging a hammer or hanging a piece of drywall.

@Mindy Jensen

There are a couple ways I have found that investors can protect themselves to the best degree that they can.

1. Always ask around about the contractor. Look for referrals, talk to other investors, see if anyone has worked with the contractor before

2. Ask to see job sites that are currently under construction and make sure that the subs there know who the contractor is when you walking through. This way the contractor can’t show you someone else’s job site.

3. Always make the contractor sign a contract, and lean waivers. If they are unwilling to, do not work with them.

4. Be willing to go through volume. Don’t be afraid to go through multiple contractors in this interview/getting to know process.

5. Sometimes going with a business that you know has been working in a town for over 10 to 15 years is worth it in the beginning. They may be more expensive but they are less likely to run because they have an established business and name.

6. And lastly, remember that investing is a business and that finding a contractor is just one part of it. The more you can treat a contractor just as an expense and a piece of your business the less likely you are to go with whoever the cheapest is. Because you’re going to be looking for someone who will fit into your business and help you sustain a long running business. So whatever they cost is what your numbers for construction will be.

Anybody else have guidelines?

Thank you all; I wanted to reply individually but don't have as much time as I'd like...

We're veering off a little from my OP.  Please note I'm not disputing price, as great contractors deserve to get paid.. I'm just questioning the payment schedule of 10% down and weekly payments, which from the responses does NOT seem normal for investor/single fam owner, just multifam owners.

Hell, I'd be willing to pay the GC 10%-15% more in totality just to protect myself with smaller payments than the 1/3rd, 1/3rd, 1/3rd in the chance they run off.  Again price isn't so much the issue, just gauging payment terms in the real world (from both sides) vs theoretical advice on these forums and podcasts, thanks all for candid advice.

Problem with 10%  down is money rolls out fast in beginning of a job . Permits , ordering materials , dumpsters , materials and labor etc .  The first day a hammer is swung on site isnt the first day of work I may have 3 days already in on setting the job up .  10% wont cover the beginning of a job .  

@Mindy Jensen It goes both ways, we have clients that do not pay their dues during the day they promise to pay. Ran out of money, we need to do more to bill, delays from the bank, their check didn’t clear yet, their loan hasn’t gone through. How do we protect ourselves from clients like that? Liens does not get our bills paid, it might be an assurance that we will get paid at time of sell - which could be 30-50 years from now, but how about our payroll next week? I’m on one right now that I’m out 40k before I could see a dime, just because the representative of the owner needs a signed permit to honor my bill. Going back to “new” investors, i could ask this, what will happen if their “budget” was 20k on the rehab and realistically it is 30k? I guess the short answer to your question about protection is, to hire a more quality or qualified contractor ; The Man with truck and tools will always be an issue, if you really want reliable and you can go after, get someone with an actual office and not home based, or should i say “truck office” base.

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