Best methods to pay contractors??
Rental Property Investor · Cleveland Heights · Member since 2019 · 74 posts · 35 votes
Best methods to pay contractors??
Most Popular Reply
Richmond, VA · Member since 2019 · 48 posts · 28 votes
7yA common theme I hear from pro's is to pay in 3-4 parts. Maybe an initial deposit to pull permits, then pay them after rough-in work is done, then a 2nd payment when they finish and finally, the last payment when it passes inspection. This keeps them obligated to complete the work correct the first time to get paid. If they are total scammers, you are only out permit pull money, but hopefully your due diligence beforehand will avoid those types.
68 Replies
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes7y
@Joe Splitrock
In regards to terms with suppliers... in order for us not to owe $ when people don’t pay us, it’s best to get a deposit and pay for materials right away. The last thing I want is to owe my suppliers when a customer doesn’t pay. It’s happened and it sucks.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Matt M.:
@Joe Splitrock
In regards to terms with suppliers... in order for us not to owe $ when people don’t pay us, it’s best to get a deposit and pay for materials right away. The last thing I want is to owe my suppliers when a customer doesn’t pay. It’s happened and it sucks.
If you are paying suppliers immediately, you are the exception. I have talked with many suppliers and the all tell me most contractors pay only when due or push it past even. I understand you still need the money for when the bill is due, but it is about trust, not about the bill being due immediately.
I have no trouble paying for supplies. That is actually something physical of value. It is when contractors are asking for payment on materials not delivered or labor not completed that I draw the line.
That is really how a bank does it too. They only allow draws based on work being completed.
I totally get where you are coming from. In a business you have to make sure you are getting paid. Most businesses are destroyed by poor accounting and poor collections on debt.
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes7y
@Joe Splitrock
I totally get what you are saying, but that’s when hiring reputable people is so important. I do have a few clients that I’ll work for, but when I hand them the bill whether it be $100 or $10,000, I get paid immediately. Anyone else, especially if I don’t know you, I want down money. Sure I’ll hang 100 sheets of drywall that you bought and had delivered, but I’ll be damned if come Friday you’ve “misplaced” your checkbook and then never return a phone call. Been there done that, and it’ll never happen again. To me, a client having skin in the game doesn’t count when it’s materials delivered to their house. I sure as hell aren’t going to steal your 100 sheets..
- Rental Property Investor · Baltimore, MD · Member since 2016 · 253 posts · 178 votes7y
Never over expose yourself when dealing with contractors. If they have to buy materials then I would probably front 1k to get started depending on the SOW. If its labor only then we negotiate because I understand that they have to pay their subs. Its business. But i never pay in full until all work is completed. 90% of the time if its a job more than 1k I get it in writing. Always protect yourself
- 7yElise Bickel TauberBusiness MemberReal Estate Agent · Cranberry Twp · Member since 2017 · 385 posts · 198 votes
@Anthony Porembski
I’ve been in Real Estate in Pittsburgh for over 15 years. I understand both sides as I’ve been on both. My fiancé owns a construction company and it doesn’t make sense for him to float all materials and labor on a job hoping the owner pays in a reasonable time when finished. At the same time as a real estate agent and property manager, when we’re using companies that we don’t have a long track record we are always cautious about paying anything out bc you never who may turn into a crook. With that being said, what I’ve seen across the board is 1/3-1/2 of the project cost upfront for small to medium renovations. 1/2 up front would constitute the other half upon completion. 1/3 upfront usually requires another 1/3 at the halfway point.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes7y
@Joe Splitrock I will have to say that @Matt M. is not the only exception , I too stroke a check when I get materials , paid in full . It works to my benefit , I have negotiated MUCH better pricing than those that run accounts or pay by credit card . When I want a delivery , they put me first on the list . Same with my subs , I carry my checkbook all the time . Subs get paid right away .Now when I call them , they jump , its cash in the bank .
I can do this because I ALWAYS get 1/3 when I sign a contract , 1/3 when we start the demo , and the final third in stages . And 90% of the time we are done ahead of schedule , because the money flows .
If the money stops so does the work . We never work ahead of the money .
- Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes7y
If a contractor needs upfront money then i'm not dealing with them. I only work with contractors that can afford to get paid when a phase of work is completed. To me, it shows that i'm working with someone who has stability and doesn't have their hand out looking for a few bucks every time they run to the store for a box of screws.
Its also a sense of confidence that they will show up on time and be on schedule because they want to get in, get out & get paid. Once someone has your money its already spent on the last job they say they lost money on.
I know people giving contractors 30% upfront cost and to me that's insane. I need to see a good work history and not the contractor that picks up a new crew everyday from the home depot parking lot.
- Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes7y
Originally posted by @Russell Brazil:
In Maryland its 1/3 up front, 1/3 when work starts and 1/3 when completed. Its set by law here.
Is this truly a Maryland law that specifies draw schedules and amounts, or is it more guidelines or rules about maximum deposits that contractors can collect? Additional details would be appreciated (extra credit for COMAR reference!).
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
Originally posted by @Joe Norman:
Originally posted by @Russell Brazil:
In Maryland its 1/3 up front, 1/3 when work starts and 1/3 when completed. Its set by law here.
Is this truly a Maryland law that specifies draw schedules and amounts, or is it more guidelines or rules about maximum deposits that contractors can collect? Additional details would be appreciated (extra credit for COMAR reference!).
Its not legislative, its regulatory. So it would appear in MHIC regulations and not in comar. 1/3 are maximums, contractor can accept less.
District Invest Group545 Reviews - Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes7y
Got it, thank you for clarifying!
- Contractor · Erie, CO · Member since 2019 · 4 posts · 2 votes7y
I think I would do it slightly different. I work both for a developer (I hire GC's on a weekly basis) and also have my GC License and do independent projects on a continual basis. For both operations I work with industry standardized documents. Primarily, I use the AIA document G702/703 (Pay application). This document simply spells out the schedule of values. It breaks it down very clearly so you can see how much your GC is trying to bill by percentage at any one given point for any one specific scope of work. Because of the percentage basis, I feel it's much easier for the average person to be able to observe the work in place and either generally agree with the pay application, or to not agree with it and highlight specific area's of dispute. I am very particular in seeing all expenses laid out, and I also want my clients to see everything clearly laid out...I don't like surprises in either circumstance. I focus on the clear communication, and a standardized document can be a great way to do so. I also NEVER pay a deposit or any draw without partial lien waivers. The waiver on interim pay applications may be only from your GC, or on a larger project, you may request that from the GC's subs as well. For the Final Pay application, I require a final lien waiver that basically states that upon cashing my check, you waive all rights to lien. On large projects, I require that from the subs as well.
As to frequency of pay applications, that depends on your specific project needs. I try to keep things on the 30 day basis. Aside from materials (which I purchase under commercial accounts with net 30 terms) all of my subcontractors are on net 30 as well. Sometimes I pay earlier if I have the ability to do so (paying early creates loyalty). Having the client provide a deposit from my position is just making sure that they have skin in the game, not necessarily to cover my initial costs.
Like many of the others have stated, make sure you vet your contractor...and that doesn't mean only ask for references from the contractor. If you ask me for references, of course I'm going to give you my best customers. Ask around...and don't just ask clients, ask subs as well.
Lastly, get it in writing...have a good contract, document every conversation you have by following it up in writing, whether by email, text, etc. If it's not in writing, the conversation never happened.
Hope this helps.
Good Luck!
- Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes6y
Could you expound a little on what you're doing between contract signing and demo and the value of those 2/3 payments? I know signing the contract itself is not where the 1/3 payment value is (eh, im a lawyer...i guess you could argue it is! LOL), but I'm just wanting a little context when I discuss with them. Thank you.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
@Shekeira Ward Sure , First its allowed by Maryland Law . A contract is only valid when there is consideration . Its the customers project , so I dont use my funds or credit to finance Their project . Change orders are paid for at the time of the order .
What am I doing in the time before hitting the first nail ? Working on the project . There is permits , engineering , ordering materials scheduling subs , buying supplies etc .
Where is the value ? The job moves faster , my subs KNOW they will be paid right away , when I call they are there . Licensed contractors are businesses , but we are not lenders , there is no reason for me to front a customer money interest free and hope to get paid . ( My funds are invested making ME money ) .
Lawyers get retainers up front , landlords get 1st month and security deposit up front , contractors (in Md) get 1/3 up front .
- Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes6y
@Matthew Paul awesome, thank you. I definitely understand consideration, I think some treat it flimsily (if that’s a word, lol) and make the consideration the conduct, like showing up on site day one and getting to work, taking overt acts to perform on the terms, but I think you’re rationale and practice of a payment with signing is more traceable and concrete—and what many courts want to see if there’s a fallout. Contracts by pure conduct may not always get the equal treatment folks think it deserves.
On another note...as an objective observation after reading through several threads and hundreds of comments on this age old debate, I think that (and believe contractors and investors can agree) while a phased percentage draw pay schedule itself may generally be a good standard practice, it’s the underlying trust and relationship built between the parties that drives the actual percentage paid on those phases.
I don’t think that the percentages can or should be standardized across the board in order to give a ‘newbie investor’ in the forums a ‘blueprint’ answer because someone’s ability earn another’s trust can’t be duplicated—it’s personal.
So when building a new relationship with a well-vetted contractor who also vets an investor well LOL, I think the parties should lay their desired terms out on the table, see where goals and interests align, and take the necessary time to actually negotiate the contract to writing that works for them and that deal. It ultimately comes back down to these basic building blocks, but unfortunately people don’t make the necessary time to talk things out. Assumptions get made, stuff that should have been addressed goes unspoken, and miraculously, contracts get breached!
My mentor always told me, if you’re an investor new to the game and you’re coming in guns blazing, firing away at grabbing a deal or focusing on how much money you’re gonna make instead of front loading some time (before you even shoot the trigger on offering on a property) to source and get a contractor, meet up for a showing/get a bid, and plan your contract and deal analysis accordingly, you may run the risk of the rehab blowing up your deal and the acquisition being all for not in the end. A good contractor knows and respects this and knows that piss poor planning makes for poor performance just as well as the opposite makes for a long-standing and rewarding relationship.
- Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes6y
I wanted to add to clarify, and not to go off topic, that i'm getting an initial bid before the offer, an independent inspection during the due diligence/option period that may, once shared with the contractor, work to revise the initial bid into a final bid to reflect reasonable adjustments in case we missed something during the showing, negotiating and going under contract with the contractor at or before closing, then the team is out on site soon after closing, weather permitting, pursuant to the projected start date in the contract. then im paying out in phases as work is inspected/completed.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
@Shekeira Ward Signing up a contractor before settlement isnt always a good thing . If the contractor gives you a start date and settlement is delayed too long , they may be on another job . And in my area finish times are automatically extended due to inspections being delayed ( which can add costs to the job ) . Some material deliveries are being delayed also , special order items are running behind .
- Attorney · Austin, TX · Member since 2015 · 40 posts · 5 votes6y
@Matthew Paul yes indeed, that is another point to discuss and add contingency plan/clause in the k. not every contractor will bite on that type of contract, but for a price, some will.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
@Shekeira Ward Dont expect a licensed contractor to sign a contract that you prepare . They have their own . And what ever you do dont tell them you are an attorney , they wont work for you .
Join the conversationCreate a free account to reply, vote on answers and follow this thread.