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

Mindy Jensen
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Posted Aug 26 2019, 09:07

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.

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Replied Aug 27 2019, 10:33

@Mindy Jensen

In the "proper" construction world, everyone uses the AIA system for construction projects. There, a contractor would submit a schedule of value to the owner (or subcontractor to the GC). Most folks divide up the schedule into four categories. Something like this:  

  • Admin/Mobilization/Shipping: This section accounts for paperwork and other administrative tasks. Also accounts for mobilization costs (e.g. lodging for field team) and shipping costs for materials. 
  • Materials: This section accounts for all the material costs. Depending on the project, you could have many different sub-sections. 
  • Labor: Accounts for the installation and labor costs per scope. You can create multiple subsections. 
  • Punch List: Accounts for any punch list items involved. 

And then there is retention. In the commercial construction world, you have a 10% retention that gets paid at the end of the project once everything is done. The idea is to motivate the contractor/subcontractor to deal with any issues that may arise within a few months after the project is done. 

Can smaller projects adopt the above model? Maybe. I have to say that the AIA system --- despite its flaws --- makes it easy for parties to work together. Everyone understands how it works so folks do not need to invent a new system from scratch. 

In the AIA system, there are no real deposits or advances. Once in a while, you may have to do so if the material vendor requests it. But the contractor and subcontractor are expected to foot the bill for one to two months. 

In terms of the owner buying the materials, I personally wouldn't recommend it unless the owner really knows what he or she is doing. If someone made that offer to us, we would either reject it or expect the owner to get it completely right. If they are wrong, we would submit a change order for additional costs. In our trade, I would not expect any owner or GC to get this correct since our industry is extremely specialized. If you are in a commodity trade, maybe.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

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Replied Aug 27 2019, 10:33

@Bill Kramer, @Mark Fries, @Matthew Paul I've never thought paying for supplies could be detrimental. I thought I was helping out the contractor so they didn't have any money sitting there. 

I meet my contractors at whatever supply company they choose, at the time they say. (I was a stay at home mom when I did my last big project, and really had all the time in the world.) But I can see how others would not be. This is super helpful to hear the contractor point of view. 

How does it work when you're entering into a relationship with a client? Do you provide references? How do you convince them that you won't run off with their money? I know so many people who have been ripped off by contractors.  

@Lorenzo Wright, Once I've established a relationship with them, I'm not as concerned. It's the first-time experience with the contractor that worries me. And while there are plenty of skeezy homeowners, I know I will pay the bill, unless you go way off budget and we didn't talk about it ahead of time. But how do I convey this to you, the contractor I've never worked for before?

@Jerry N. I like the idea of a hold back until the punchlist is complete, but that doesn't prevent an unscrupulous contractor from stealing the initial deposit...

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Replied Aug 27 2019, 10:50

@Mindy Jensen

Maybe it's all just individual preference? I'm a very fast paced individual that is extremely schedule and results driven and if I have a customer that wants to provide all the materials I immediately run the other way because it's just going to slow me down.

I've been doing this basically my whole life and I can tell within about 5 minutes of a phone conversation if I'm dealing with somebody that I can trust and also dealing with somebody that knows how this system works.

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Replied Aug 27 2019, 11:02

Depends on the size of the job, but I am a big fan of a draw schedule where the first draw is after the demo phase.  for a few reasons, they don't need to buy materials to demo, other than the few $100 to rent a dumpster (or better, if they have a dump truck), you get some work out of them, and if they do a ****** job, pay them for the demo and hire someone else.  They get the first set of cash they need for the first set of materials.  I have seen to many contractors take the upfront money to finish off their previous job, then wait for final payment on that to order materials..and extend my job several weeks as a result of their bad business skills.  That said, for a small, 1 day thing, sometimes it's better to just write a check for materials up front, they can pick it up, usually at better prices and/or selection.

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Replied Aug 27 2019, 11:05

@Mindy Jensen

I’ve been in business for myself for 16 years. #1 I hate when customers buy materials. They almost never get it right. The only thing I will normally ask them to get or pick out is tile. There’s to many choices. And everyone wants to go to HD and buy Behr paint because consumer reports says it’s the best. No thanks, I’m charging you more or I’m not doing it. I’d be happy to use my Sherwin Williams and save you $10/gal.

#2 if I don’t know you, I’m not working until there’s a check in hand. Been burned to many times.

#3 you are the one that called me, and I ask for 1/3 down. If you want me bad enough, you’ll write that check. Why should you not have to put money down but me put out labor or materials $.

#4 in my state, it’s illegal for a contractor to rip off a homeowner. But not illegal for a homeowner to rip off a contractor. I can get arrested for theft, the worst that can happen to you is a judgment and/or a mechanics lien on the property, which neither is a guaranteed check.

So like others have said.. I’ll pass, but thanks anyway.

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Replied Aug 27 2019, 11:19

I also don’t think I’ve ever been asked for past customer references, and other than small commercial jobs, I don’t think I’ve been asked 5 times if I have insurance by a homeowner in 16 years. I’ve never ripped anyone off, in fact if I forgot to do something I’ll end up having a dream about it and go back and do it. My clients appreciate that. 10 years ago, people used to offer you lunch, drinks, etc. no one even offers a glass if water anymore.

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Replied Aug 27 2019, 12:26

I gladly provide 2 good references and 1 bad upon request. Why 1 bad? To show I am human and not faking my references. Thankfully, there's only 1 guy to use for the bad reference.

I want to see something money wise to see you are not one of the thousands of tire kickers out there. Nothing huge, but at least something. 

I get 1 out of 20 jobs I bid, so excuse me if I don't take you serious until I see your money. At the bare minimum that deposit has paid for the countless hours bidding out the job, and narrowing down a scope, etc...
 

I don't mind a customer wanting to cover materials, but I pick them. But, countless times I have been at the register (usually pro desk [which has limited hours anyway] at home depot) and the customer not answer their phone for 30 minutes. Now what should have been a 1 hour run for materials turns into a 2nd hour.

If I am buying materials, I can order on the app and its ready when I get there. Monster time savings on my end, and I do it when I get home at night. I just keep a running shopping cart throughout the day/week. Also, whenever possible I create wish lists for the next phase, and when I'm ready to start I put it in my online cart and go.

Everyone has been burned by everyone. We can't make the next guy pay for the last guys mistakes. Get over it and move on to the next one.

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Replied Aug 27 2019, 13:09

@Mindy Jensen Hey Mindy, yes there has been a lot talk about it on the forums lately. 

For us, the only time we pay contractors upfront is when it is for really specific jobs like full HVAC and full Electrical jobs, and these are somewhat large companies with vans and trucks, so we know that these guys aren't running anywhere with our $3k upfront payment. 

On the other hand, for the subs, we never ever pay upfront, we pay at the end of the week based on our agreed scope of work and what needs to be completed by Friday. Typically, this gets the subs moving at a much faster pace, as who doesn't want that Friday payday check!!! 🤑🤑🤑

As for materials, we get the sub to call us at Home Depot and we use the company card to pay for it.

Paying an upfront fee for smaller subs seems like an interesting plot for a CONtractor mini-drama series... 🙃

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Replied Aug 27 2019, 14:24

@Mindy Jensenryrf

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Replied Aug 27 2019, 14:36

@Mindy Jensen  You said " 

"I've never thought paying for supplies could be detrimental. I thought I was helping out the contractor so they didn't have any money sitting there."

I dont buy from home depot that often . I place an order with my supplier and have it delivered . And yes there is a mark up .  Time is money . 

The customer signs our contract , we get 1 /3 down .Now people tend to thing thats for materials , thats partially right , First it secures you a time frame , if you cancel we keep the deposit as liquidated damages . The job starts when paperwork begins , ordering materials obtaining permits , lining up subs etc . Now the deposit covers up front costs , some materials , overhead and PROFIT . The second draw is paid when we arrive on site and start physical work . Same applies as far as materials overhead and profit . The last 1/3 is broken down as we finish up . 


@Matt M. Said it great .Especially  A legal contractor has more to lose than a homeowner . We hold a license and face criminal penalties . 

Rules for contractors 

NEVER use your money to fund a customers project ( unless you hold first lien position and charge interest )

If the money stops , the work stops .

Put everything in writing . What the customer "expects" and what you are getting paid to do should be in writing . If its not included in the contract its excluded .

Change orders are paid up front , and add time to a job .

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Replied Aug 27 2019, 16:14

@Mindy Jensen

Ive heard the stories, but fortunately haven't felt the hurt from being ripped off, yet! knock on wood. My contractors have always gone to there choice of hardware stores, placed the order and I've paid for the order in full and had it delivered to the job site for them, that way no out of pocket expense for them and conveniently at the job sites... Its a win win in my books! 

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Replied Aug 27 2019, 16:41

@Mindy Jensen

Buying materials can backfire on you. I just had 2100 sf of luxury vinyl flooring installed. I bought $6000 worth of materials and the guy went to work. I checked in two days later and he had completely botched the install- amongst other things he staggered every other joint and the place looks like a checker board. I’m out $6k on materials and have basically no recourse other than to fire him.

In answer to your question, consider the value of the materials and the likelihood that it could go wrong before taking the approach of buying it yourself.

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Replied Aug 27 2019, 19:00

One big problem with customer supplied materials ........... no warranty . 

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Replied Aug 27 2019, 19:02

@Tom Shallcross this is how it’s done until you establish some sort of trusting relationship. I’ve recently worked with an investor from BP who gave me 50% of the project total after I completed half the work (about a 1 week project), these are terms we both agreed upon. I was happy, they were happy.

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Replied Aug 27 2019, 19:52

I purchase the materials and have them delivered or deliver them to the job site. This way the contractor isn't running to the store and waiting on anything. It's best that when the contractor arrives at the site, the materials are there already so they can get right to work.

Then I pay the contractor as the job moves along. I check in on the job to ensure that things are being done the way I want them done.

If there are issues, the contractor lets me know and we discuss how we're going to handle it. It's understandable that unexpected things arise sometimes, especially when you're opening up walls or dealing with older electric or plumbing.

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Replied Aug 27 2019, 21:26

State laws typically limit how much a Contractor can require up front.

There are always start up costs for contractors. In CA Public Works, they typically allow 1-3% mobilization costs.

Depends on how large of a project you're doing and what the contractor is to provide, like portable restrooms or storage containers. There are some overhead costs that the contractor has already sunk into your job like providing the estimate and material lists. 

Also, part of the contractor's profit is derived from the material mark up. If you're buying the material, their labor just got more expensive. And the contractor's prices are usually much cheaper than what you can get it for. I'd bet in most areas that even with their mark up, the materials are cheaper than what you're paying. Plus if any of the materials are damaged, wrong, or of low quality you're going to be the one who has to deal with returns or exchanges. 

I once did a repipe and the customer wanted me to use their copper pipe, which sat under their house for a few years. The copper pipe was pitted and flaking. I never had a leak before this project. This project was on time and material. So my price per hour went up and the customer was charged the extra hour of my crew and I to fix the leak. So he saved $100 to only pay an extra $300. 

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Replied Aug 28 2019, 04:27

@Mindy Jensen, in the case of repeat customers I’m far more likely to not take a down payment as I trust them. If I had a bad experience with s customer I wouldn’t work for them a second time so as far as repeat customers goes, we have each others trust. I try to schedule my payments in the contract so that we are both pretty even throughout. This requires more frequent payments of smaller sums. Ex: payment upon completion of Sheetrock, payment upon completion of tile, payment upon completion of inspections.

If my customer wants to order materials, I think it would lessen the down payment but I still have payroll and overhead to cover. Plus the occasional run out quick to grab some last minute materials. In this business time is money and if I need to reach out to a possibly unavailable homeowner every time I need something, this will slow up the project.

Not taking a down payment would also depend on project size. You can’t expect a contractor to not take a down payment on a large scale project that took six months or so to put together.

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Replied Aug 28 2019, 05:53

@Chris K. You bring up a really good point, which has actually been on my mind a lot over the past two years. I've been working in the commercial world for over four years, doing project management for a large general contractor in the DC region. I've been dabbling for the last year or so in the residential world doing side projects, helping friends and family with renovations on their personal homes and managing my own live-in flip. 

In the commercial contracting world, the systems in place really work well to mitigate a lot of the risk for all the involved parties. Having agreed upon SOVs, payment schedules, retainage, design documents, and well written contracts really take a lot of the "unknowns or potential problems" out of the process. If a residential contractor can take the AIA system, paired with the commercial professionalism and apply it to their residential business, I can't imagine how they wouldn't be successful. 

I think the biggest benefit of the AIA system really shakes out to be the effective & clear communication of the guidelines and procedures for construction management, which tend to be much more muddied in the residential world. The level of professionalism in the commercial world is a big standout to me as well. All in, I think a large amount of GC's in the residential world tend to operate in less professional manners, which results in a lot of the problems we have read and seen above. I believe this comes from a lack of knowledge about how their businesses should be run. Just because you are a great baker, doesn't mean you should own and run a bakery. That's not to say all of them, there are definitely a lot of professional and successful residential GCs (take a look at some of the guys commenting above, their track records are impressive). I just feel there are many residential GCs, who may be great builders, but are not fit to be running their own businesses, and this results in some horror stories and a bad reputation for the rest of us. 

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Replied Aug 28 2019, 07:09

Part of the problem is that most smaller investors are working on smaller projects. And oftentimes, the projects lack enough margins to afford the "best" contractors.

Consider the common claim on BP: you cannot find contractors that are good, affordable, and timely. While true as a practical matter, it's not because there are no such contractors. The issue is that if a contractor can deliver all three, their business will blow up. And once it blows up, they move on to bigger, more stable projects.

That's good for their business. But they are no longer "affordable" to the smaller investor at that point. Hence, the search continues.

On a related note, I would say that the biggest issue that small investors face is underbidding. Many disasters happen because smaller contractors run out of money during the job. Now I would say many contractors do not do this with malicious intent. They instead lack the skill to do a proper bid. This issue gets compounded since many investors don't know how to spot an unrealistic bid. Hence the countless posts on BP where the investor got burned by accepting the lowest bid.

This is why in the "proper" construction world, the GCs have many meetings with their subs to de-scope the bid. During that time, the GC and the subs to review how the subs arrived at their number. There, they make sure that the sub has included all the labor and materials for their scope of work. This allows the GC to make sure they are comparing apples to apples. They also review logistical issues that the subs may not pick up from the bidding docs. For example, not having on-site storage can cause a lot of logistical and financial issues. Same goes with restrictions on equipment.

After these meetings, the GC often asks the subs to increase their bid. This is not because they like the subs and they want to pay them more. It's because they do not want the nightmare of dealing with an unqualified sub that underbid the job. It often delays or even halts the project. When you have 30 to 50 subs on a job, those delays impact everyone. So no one wants it.

I would say the same principle applies in the smaller world as well. The problem is that it's hard to execute all this at a smaller scale. And it may ultimately be a scale problem --- it's hard to work with the "best" when you work on smaller projects. There's just not enough money to go around.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

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Replied Aug 28 2019, 12:51
Originally posted by @Kenneth Bullock:

@Mindy Jensenryrf

What does this mean?

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  • Columbia, SC
Replied Aug 28 2019, 14:54

@Will Gaston I can't speak for others but this is how I do business. If it is a small job then I will come out of pocket and pay for the materials. (Larger jobs I require an upfront fee and I still purchase or supervise said purchase of materials.) However there is a payment due to cover material cost before any work can occur. After that I have a draw schedule set up in stages. If I am not paid at each stage no work will continue until the balance is settled. It's to easy to dig a hole for your self on good intentions. With new clients I have a detailed contract outlining the SOW, time frame, and draw schedule. I have a detailed list of terms that I have my clients sign off on before any work can ever begin.

Bottom line. Risk exists on both sides of any new arrangement. It takes time to build the necessary trust between two parties.

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Replied Aug 28 2019, 16:11

as a customer being able to NOT pay up front is big for me.  Anecdotally, I noticed many repair men seem to do a worse job overall (slower, lower quality work, coming late or even cancelling on days) when paid up front.  If my job paid me a month in advance I could easily see myself less motivated to work hard.  And then if there's disagreements or new items to  re-negotiate, you lose most of the leverage if that person already has your money in their pocket.  And then I've been outright robbed from someone who took my money and disappeared.  I'd much rather do a daily pay as you go agreement where the repair person is literally working for their pay each day. 

  Im not saying all repair men are like this.  The best contractor I ever hired was one who required up front deposit.

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Bill Kramer's profile image
  • Contractor
  • from Evansville, IN
  • Member since Jun 1, 2019

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Bill Kramer's profile image
  • Contractor
  • from Evansville, IN
  • Member since Jun 1, 2019
Bill Kramer
  • Contractor
  • Evansville, IN
208
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142
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Bill Kramer
  • Contractor
  • Evansville, IN
Replied Aug 28 2019, 20:55

Anything over $1500, I am definitely not financing.

Service calls, sure. But most of my work is 2 to 3 month jobs at $40k+ if you don't want to put a couple grand up front on a $40k remodel, that raises flags immediately. 

The first week alone, I have demo done and am installing materials. With no deposit, I gotta stop and wait on a draw. 

I generally don't have materials on site and in my way on demo. 

Usually for me it's a deposit for the trashout guy and lumber as framing is 2nd trade after demo. Then a draw for mechanicals, then drywall/paint,and so forth.

I have found that uploading pictures to a shared dropbox folder, with frequent status reports eases everyone's minds .

I have used my credit accounts in the past and been stuck with the bill. So I try to avoid that if possible. If I deposit a check, and have to wait on a bank hold then I use my credit lines.

If a client has been burned, I will gladly take multiple small draws. But its preferred to have bigger draws less frequently.

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Replied Aug 28 2019, 20:59

I am a plumbing contractor. The plumbing industry has so many different type of materials and codes that most customers simply don't know what to buy and get frustrated after so many trip trying, because they keep buying the wrong thing. As the condition change in construction so does materials. There is Cast iron, pvc, copper, pex, galvanized, lead, brass, stainless steel, hoses, flanged, threaded, waste pipe, waste fittings, vent fitting, gas, water and on and on. I prefer customers to buy there fixtures only, that's it. If they have specs that calls for a certain model number then I can  purchased and get it delivered or picked up. In this event I ask for a down payment. When customers want to meet contractors at home depot it cost  more time because contractors are constantly consulting because they haven't made up there mine. Jobs under 2,500 I will purchase materials because its a small job and  I will be finish in a day or two. When I am the only contractor and the job is under 2,500 I prefer to finish the job and get paid. When there are multiple contractors and  sub contractors involve like a framer, painter, tile man, electrician and others. I ask for a down payment even if its under 2,500 this is because the customer will often times run out of money once they pay everyone else then hire one of these other guys to finish up for cheap. While you are waiting to finish up to get your remaining balance.

Dustin P.'s profile image
  • Realtor
  • from Tempe, AZ
  • Member since Jul 25, 2017

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Dustin P.'s profile image
  • Realtor
  • from Tempe, AZ
  • Member since Jul 25, 2017
Dustin P.
  • Realtor
  • Tempe, AZ
438
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Dustin P.
  • Realtor
  • Tempe, AZ
Replied Aug 28 2019, 22:03
Originally posted by @Lorenzo Wright:

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.

 I'm willing to bet that there are more instances of contractors burning investors than the other way around. It's a tough situation overall because everyone will always talk a big game. Unfortunately you just have to keep trying different people until you find the ones that work and then never let them go. Definitely the hardest part about the whole process.