Contractor payment structure?

Question

We have a fairly large remodeling/home expansion project in Bay Area (northern california). It involves a garage conversion, building a new single car garage, and adding 600 sq ft to the living room. So in total we are adding 900sq ft of living space including converted garage and the living room expansion. Additionally we are remodeling most of the house and adding a new bedroom and bathroom, entire house will be 2100 sq ft afterwards.

We received 5 detailed bids. We chose two to pursue. One is total of 400K and other is 330K (the difference is actually 60K given the bigger quote includes some finish material as well, but most of finish material is on us). We are choosing the more expensive quote because they are more experienced in larger jobs and are based close by.

The timeline given to us originally was 4-6mo across 3 of the contractors including these two. Now at the time of signing, our chosen one is increasing to "max of 6-7mo" and wants to put contract expiry at 8-12 months. We are worried the project will drag on.

This is the payment structure. Do you think it is front loaded too much? Anything else about the timeline seems strange to you? The cheaper option is still on the table and has <20months timeline.

14.25% prior to start ($57,000)
13.25% upon foundation inspection ($53,000)
15.30% upon framing inspection ($61,200)
5.20% upon plumbing inspection ($20,800)
9.75% upon electrical inspection ($39,000)
5.25% upon water proofing, drywall and insulation ($21,000)

7.25% upon roof inspection ($29,000)
8.0% upon stucco ($32,000)
9.25% upon flooring kitchen and bathrooms ($37,000)
12.5% upon final inspection and finish final touch ups ($50,000)

7.25% upon roof inspection ($29,000)8.0% upon stucco ($32,000)9.25% upon flooring kitchen and bathrooms ($37,000)12.5% upon final inspection and finish final touch ups ($50,000)

Matthew Paul · Answer

Sounds perfectly reasonable to me . The contractor hits milestones , he gets paid . Right now some materials are in short supply due to covid 19 , inspections by the government are behind so I can see an extended time frame .

Frank Hinck · Answer

@Yacine A.

One term: Liquidated Damages.   Have a hard schedule from them in a Gantt Chart format (google it, extremely common in commercial construction, residential ground up construction).    If they don’t hit dates they pay you LD’s for each day, $200-$500 whatever makes sense.   In the same way, you can incentivize finishing quicker with Liquidated Incentive.    Purpose is to incentivize ontime Milestones and minimize your holding costs.   Anytime you hit an unknown by that extends the schedule they should send you a Change Order not only for cost but also for Added a Time.   I’d ask for weekly progress onsite meetings to review progress, take notes, write up Action Items for you like selecting finishing or putting materials onsite, and for them like “3 days behind on drywall, makeup time by staffing up or working additional hours.”

David M. · Answer

@Yacine A.

A "good" contractor won't want to leave jobs unfinished.  Its just more "overhead" to their lives having to field that many more phone calls, etc.  If he wants to be productive and making money, any trade/business will want to get in, get out, and get paid.  Of course, not many are that way which is why you need payment schedules...

Also, think about it this way.  Is he subcontracting out the trades?  Even if they are employees, if he has the work done he has people to pay.  In coming up with payment schedules (assuming you need one to incentivise), its about making it just difficult enough so that he needs the payment.  Look at the partial payments linked by trade inspections.   Is there $61k in framing (labour and materials)?  Is there $21k in plumbing work?  Maybe those present 75% of the total cost and the other 25% is buried in the first $57k (I'm making up percentages here)...  So, there is enough in the first payment to cover starting the demo, foundation work, engineers, survey, etc plus some to cover materials for the other trades.  Don't forget it, it doesn't always work out that way for the trades, and normally there are rough and final inspections.  Depending on the work/trade, sometimes there is more work in the final stage than the roughing stage.

Make sense?  I hope this helps.

Yacine A. · Answer

Thanks for the reply David. Yes we are contracting him for the whole job. He does have good references and reviews and we checked his license and insurance etc., we aren't worried about him running off with the money, more whether he will care to finish quickly or drag it on for months, because he may not care about the small amounts of money left towards the end of the contract. From what you said it sounds like the payment structure is not too unusual at least.

David M. · Answer

@Yacine A.

I don't know if its too front loaded.  Depends on your market.  The risk is whether the contractor will run away with the partial payment.  Really, it depends on the breakdown of the costs.  Usually, I prefer to have a "cheaper" quote if I am paying more upfront since the contractor isn't floating as much cash.  It sounds like you have $107k for demo and foundation work.  Demo usually isn't that expensive, but the foundation work can be.  So, you've paid half of that upfront with the other half due passing inspection.  If half is okay in your market, or just how trustworthy is your contractor, thats fine.  I know a guy in the Carolina's who refused to work with a Contractor who wanted 50% up front because apparently in his market Contractors sometimes take the money and run.

Without really knowing the job and I don't know your labour market, it only seems like just the foundation is heavily paid upfront.  But, for the overall project, a 14.25% initial starting payment really doesn't sound that bad to me.  You are contracting him for the whole job, right?  Not piecemeal..

Just my two cents.  Good luck.