Contractors: If I Buy Materials, Do You Still Need a Downpayment?

65 Replies

I've seen so many forum posts advising NOT to give any money to contractors upfront - because so many people have been ripped off by contractors. 

I've seen many responses from contractors, saying they've got to buy materials, pay their workers, etc and if they don't know you, you should expect to pay a deposit.

I can see both sides of the problem.

Contractors, if I foot the bill for the materials, your risk is lessened.

How can I propose a fair solution to my contractors? I will happily foot the bill for supplies so they aren't out any money out of pocket, but with the prevalence of contractor-stole-my-money stories, it makes it hard to fork over an upfront fee.

@Mindy Jensen this is what I do until I've established a good relationship with them. 

Why should I give someone any money up front if they don't have to pay for materials? I understand if a contractor doesn't want to agree to it. But that's not a contractor I want to work with. 

With this scenario we both have skin in the game: His work and my materials.

@Mindy Jensen - great question and I'm interested to see what others say.   When one of my top contractors and I just started working together and we hadn't built up our current level of trust, we structured our first deal like this:

-I purchased all supplies.

-No money upfront but weekly payments to ensure quick cashflow for him so he's really only waiting a week for that first check.  I'd come to the property every Friday and he'd get a check on the spot for proportion of work completed (if 4 week project 1/4 of our total unless behind schedule).  He never fell behind paying his guys because he got a check every week, went to the bank and paid them out.  This was a little labor intensive but worked to get the relationship off the ground.  

-I had the benefit that he knew other contractors I had worked with so I told him he can talk to those guys to ensure I have always paid on time and treated them right.

At the end of the day, it doesn't hurt to remind him it's a competitive market and others have accepted these terms.  If he's not willing to accept or can't operate his business without having some form of a payment for at least a week (while you're buying supplies!) it's probably not going to work out. 

This is a great question and we've definitely seen this go both ways around the site. I think a lot of this depends on the contract between the GC and client, any applicable state laws and also the relationship you have with the GC. In MD for example, state law allows the contractor to be given up to 1/3 of the contract value as a deposit before any work begins. In the commercial construction world things run a little differently. As the contractor we are typically on the hook for work performed and then bill on a monthly basis for work completed to date. Materials can be bought, stored and billed for in a current month, but the contractors are required to have property insurance, with the client listed as an additional insured, on any material stored to ensure the client's risk is mitigated. Relationship wise, obviously you are much more willing to trust a repeat contractor versus someone you are using for the first time. I think the most important thing would be to have a strong contract in place and to have done thorough due diligence on the front end prior to signing up a contractor. A strong contract will scare away any shotty contractors, and also protect you in the event that the contractor disappears in the night. 

As a GC I'll still try to negotiate a DP, perhaps only 5-10% (maybe even less depending on contract value) in this arrangement, but it's def not a deal breaker if those terms aren't incorporated into the contract since the largest capital outlay is not part of my scope. As a business owner it's wise to hedge against cash flow and a potential non-paying customer. However, I must say that if I'm procuring the materials then definitely requiring a DP every time.

I never take any money upfront myself personally. Money is what gives them incentive to work. You can do payouts at certain points of completion. Some people say do 10% upfront but I wouldn't myself personally. I would never pay until I seen any work done for leverage if they are not doing what they are supposed to be.

@Mindy Jensen As a contractor myself I've personally experienced this many times over the course of my career. There has been times where I have subbed certain tasks out to other guys on my flips and times that I have done the work myself. 

First point is the relationship. As the relationship builds on both sides and trust is established than there is no issue so this question wouldn't pertain to a case like that. If I have a trust with someone I can be paid in advance and they know the job will get done or I can do the job and get the money in the future whenever it is convenient for my client. I just had a job where I paid all the materials out of pocket and began work before any payment was given to me. I received the check a few days later with no issues. That is because there was trust and I knew I would receive my payment.

What I usually like to do in any job is to have some type of down payment or payment structure even if materials are purchased. Some contractors may rip people off but flippers, investors, home owners, human being in general are all possible of ripping someone off in a form of no payment. So until that trust is established I usually like to get what is formally known as a "good faith payment" from my clients. As @Tom Shallcross said about a payment plan or schedule of some sort. I usually like to just get 20% after 20% of the work is completed just to keep everyone honest. After the job is completed and punch list is done and client approves then a check for the remaining 80% can be given for final payment.

In my experience I've learned that if you give someone too much, or make it to easy for them, then, they have nothing left to strive for. So yes I feel that some type of good faith payment is necessary but if materials are being purchased by you then you can pay a small percentage after that amount of work is done. If the job is large and timely you can establish a payment plan. If the contractor wont agree to that then that isn't someone I would work with. The contractor should have enough money to afford his payroll for at least a couple of weeks. If he doesn't then he is doing something wrong and I wouldn't use him unless he agrees to the terms stated above.

On a final note, I always like to leave a majority of payment for the end of the job which is why I like the 20/80 rule even for myself. If you have a contractor that you are asking to come back to do/fix stuff to finalize the job and you still owe him 80% of total balance its a pretty good chance that they will come finish everything to your standards even if they have to come back several times to do it. Now lets look at this way, say you've made several payments to this same contractor and he/she is only owed a small balance, now the chances of them skipping out on the tedious final work is much higher than if they are owed a majority of their balance. 

On small jobs 20/80, on longer job I might say 20/20/60 but I would never pay a down payment for a labor only job and I would never pay more than 50% until final payment.

@Mindy Jensen Thanks Mindy, I have been ripped-off by contractors even from referral sites (some my fault and some they just took advantage). I like the ideal of buying supplies instead of an upfront deposit; if the contractor skip town then at least you still have your supplies unless they stole them too. However, like @Kyle Jiron states MD allows contractors to get one third upfront at least on major rehab jobs (not on smaller jobs) and that's what at one these contractors insisted I give him as it was a major job. It's really tough finding a reliable and honest contractor who does quality work. I have come to realize I need to use a good and fair contract with a meeting of the minds.

@Mindy Jensen

It is my understanding that in some states buying materials for the worksite can allow you to be looked at as an employer rather than a property owner. Typically this would only matter if someone got hurt on the job site and they tried to recover damages from you. I'm not a lawyer but I know this has happened in Connecticut. I'd say double check with a lawyer in your area about the possible liability.

For bigger jobs I have went with the "Have it delivered and I will cut the money to the driver". It appears to be common in my area that an order is put in and the driver takes a check. It does nothing to change the end price so the contractor still gets their markup on materials. If the deal was $10K and I write a check for $2500 for materials, I still owe $7500. Weekly draws etc. 

It still leaves me enough power that if in 2 weeks they still haven't started I don't lose it all. By then they are usually dodging calls and would just as soon I forgot they existed. 

The stress involved in dropping a big deposit is such a PITA. There is always a "rain delay" or "the foremans truck didn't start" or "We called in the stake out, but they didn't do it yet" (Sorry they are big on stake outs and I have never had the towns/utilities be off when requested on time). Two weeks later, 5 bottles of Pepto 8 nights of no sleep. My last job I lost $2000 to a furnace guy and $2600 in siding materials. I'll meet at Lowes the day of, I'll pay on delivery. I don't just hand over money unless I have a good respect for the person. 

@Mindy Jensen I would say no. If I’m buying the materials I’ll pay you at the end of each week what’s owed. I prefer to buy my materials because of my discount and because I’m pretty savvy with finding solid deals on things.

I’ve been lucky enough I have t had any issues. Any contractor that has asked for money up front that I don’t have a previous relationship with I tell them no and they can either do it weekly or I’ll go find someone else.

I have a drywall guy that has me get all his drywall and mud and I pay him at end of job. This is all under what he does. Works out great and the job is done great!

@Mindy Jensen I’m a GC and if you’re buying materials we don’t require payment up front. However it is largely based off of relationships and working history. We are less worried about getting paid from owners we have a history with versus a new customer.

@Mindy Jensen - I’m a GC from California, specifically the SF Bay Area. California law in regards to deposits on residential projects is 10% of the total proposed project value or $1,000.00, whichever is less. On commercial projects it’s all over the map depending on the client and/or project specifics but typically we carry all of those costs until we’re 30 days into the project and invoice for work completed to date.

As many have said the status of the relationship between GC and owner will carry a lot of weight in terms payment terms. However, we do ask for the 10% deposit for new clients on residential projects or people we have don’t have a long term relationship with. The reason is we want the client to have “skin in the game” even with a contract in place. Many people on BP have talked about getting burned by GC’s, it goes the other way too. Many contractors get burned by property owners and getting paid through the lien process is no fun at all.

Another thing to think about with GC’s asking for a large deposit is their ability to be in it for the long haul and to potentially handle multiple projects simultaneously. Unfortunately, a lot GC’s out there are running their business week to week and month to month. Those guys may give you great pricing but they might be out of business in a few months because their pricing was too good.

My advice is to get proposals from several GC’s, compare their pricing, compare the detail of the proposals (make sure everyone is bidding the same scope of work) and ask around about how they have performed on other projects in the area. GC’s who have been around a long time are guys you can count on to build long term relationships with, they’re generally not the cheapest but they’ll get your projects done with the least amount of surprises/headaches.

I hate when customer buys materials. Too much wasted time. If you're buying materials, I'm adding 100 hours to the job. So far that has been the average amount of time lost on a 2 month remodel in those situations. 

That's because now I am going to be sitting at the cash register waiting for you to answer your phone. And 90% of the time I'm sitting there for at LEAST 15 minutes, sometimes up to an hour. That lost time adds up.

Whose buying the dumpster, porta John, etc...? All the non material things you still need at the beginning of the job. 

I like to pay my subs immediately on completion. The faster I pay, the higher priority I am made. Federal law makes banks put a 3 day hold on anything over $5k. So if your writing checks, your paying 5 days in advance to accommodate that. 

I am not a bank, I am a contractor. Could I finance a job? Sure, but everytime I have its backfired.

I am a contractor and landlord in Maryland . First I follow the law , it allows me 1/3 down . AND Its my contract the customer signs . I dont allow tenants to move in without first month rent and security deposit paid by cashier check . I dont start a job without a cashier check and contract . 

Customer supplies materials ?   NEVER . I am responsible for getting a job done .  Customers cant get materials to the job on time or the wrong materials show up . Now the customer is paying a crew to sit there ( that can get expensive) .

What @Bill Kramer says is true . Very true. My subs jump when I call because they have a check right away , and yes I give them upfront money for supplies . 

Sure I could float the entire job . But then I am taking risk , the contractor doesnt share in the reward . So if the customer needs financing we can provide that , but rates are as high as hard money .

Money is the fuel that keeps the machine moving , just like gas keeps my truck rolling . 

I am running 3 jobs right now , thats over $175K in expenses . NONE of my funds are invested in these Jobs . And all suppliers and subs are current as is the customer .  If Money stops so does work .

Now a lot of the posts say they have been ripped off by contractors and I know why . They are looking for the cheapest price . Rehabbers (fix and flip) and landlords cant or do not want to pay the good contractors , they think they will get the same quality work from the cheaper guys , that doesnt happen very often .

When I bid a job I know I will be either the highest or second highest bid . WHY ?   I am in the business to make money .Plain and simple . 

I am not a bank, I am a contractor. Could I finance a job? Sure, but everytime I have its backfired.

 I used to say this in the 80's when I was a framing contractor....The GC has two jobs....To manage and finance.  If I'm chasing you that means I'm financing and I want a much bigger cut.......

I won't even put you on my schedule until there is money in my hands. Too many who don't put a deposit down, cancel at the last second.

Sorry, the "I'm just so good you have to trust me..... write a check to my LLC" is BS. Everytime I've been burned they talk a great game up front. In reality my money is paying to finish the last guys work.

The real risk goes to the investor. A mechanics lein stops my sale if they actually do the work. If I hand over a 5k deposit and they quit answering I have nothing. Ive had to report a few to the attorney general. Guess how many I ever saw a penny on? None. Also LLCs cant use small claims court here. So unless im prepared to lawyer up 3k just to try and get some of it back the answer "just walk away from your deposits, im trustworthy" doesnt work for me.

I have prepaid for work from big names, Lowes installs etc. But to Fred Jones construction? Nope. You own one truck full of tools and if it gets stolen or breaks down, its now my problem? Just close out that LLC and start a new one. I dont haggle price, their price is theirs. But terms have to be doable. Just give me 8k for materials will never happen with me again.

Great discussion; thanks for opening up this topic Mindy. I've worked with the same general contractor for my last 3 flips. Before finding him, I had a few bad experiences with subcontractors when I was acting as my own general manager. In my opinion it comes down to finding the right fit and building the relationship. He's proven himself trustworthy and honest and I pay him on time and in full. Our arrangement is that I buy materials and have them delivered (or pick them up myself). He hires and manages the trades and all the labor. He brings ideas and solutions to issues that come up during the process. I have my own "go to" plumber and electrician as backups when/if something doesn't go as planned with his crew. I do pay him part of the contractor fee upfront (even though I'm buying the materials) because he has to pay his crew promptly and I want him to have the funds to do that so I'm not running to the bank. He gets the balance when the job is done. 

My whole thing is; do I want to hire somebody that doesn't even have enough money to buy materials up front, or pay their employees? What kind of business are they running where they "need" money to buy materials? Now, I don't flip houses, so I'm not asking a contractor to front $10, 20, 30k worth of materials. But I want to see some work done before I give money. Even 25% work and then 25% money works for me. But I'm not giving anybody 50% money up front to start work. I had a lot of plumbing work done (rough in basement, egress window work that he arranged, etc) to the tune of $7,000. His response to payment? "Pay me when my work is done. If I die before the work is done by wife isn't sending you a refund check". 

If it hasn't been stated yet, how about an escrow type situation for the money? Again, I don't flip houses, so I'm just thinking out loud here. Contractors want a guarantee to be paid. Customers want a guarantee that the work will be done. I'd be ok putting money in escrow that can be released at stages if and when part of the job is complete. But again, coming from a customer perspective, the "give me money and I'll put you on my schedule" thing means I am not hiring you. And like somebody else said, as a contractor you can put a lien on the property. What is the customer to do when you, the contractor, takes my $5k and disappears into the wind? 

Are there bad contractors that are going to run with your deposit??? Sure, but for every bad contractor there is also a bad investor/ home owner that has not paid a tradesman upon completion of a job. Yes, a contractor can put a mechanic's lien on your house, but that is little recourse to putting food on the table.

As a former subcontractor, I usually requested a deposit on larger jobs, $10,000+, on little stuff I wasnt as worries about it. 

Now, as an investor I am still willing to put a small portion down up front, and then I work out a draw schedule. GC's should be used to working like this. 

Bottom line, if you have a good working relationship it will be less of an issue. If you are forcing your contractor into letting you buy materials and then refusing any money upfront I guarantee you are getting the special P.I.T.A. pricing.

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