Are materials purchased before or after rough inspections?

[Mike Kalob]

I'd like my lawyer to add a clause in the GC's contract stating ALL (or majority) materials (ie cabinets, stone countertops, vanity, appliances, flooring, ceiling) are to be purchased before rough inspections.. is this reasonable given below terms of 3 total payments below?

1st - 50% down payment to begin demo work

2nd payment - 25% after rough inspections 

3rd payment - 25% after completion.

My first contractor left mid-job post-pay; what's to stop this one from leaving after 75% of payments?   

If I change the 2nd line to "2nd payment - 25% after rough inspections PASSED and purchase and delivery of all (or majority) of materials completed," should this contractor leave again, at least I'd have the materials in hand to protect myself... That said, I'm not sure what the norm is, so want to be fair.

FYI I think this guy is actually good and means well, it's just the first GC's burn has me maybe overthinking things.  I understand there is currently a delay with materials, so I have to take that into consideration too. I want to keep this guy and want to be fair, but also don't want what happened previously to reoccur.  Advanced thanks.

[Bjorn Ahlblad]

If you pay a contractor 50% to start demo you may not ever see him again! Many states have laws about payments, if so follow them. I have never paid a contractor to start demo. Generally the contractors I deal with get paid when the job is done or milestones are met. Sometimes I pay for material. I have done progress payments from time to time. Frankly a contract does not mean much if things go bad. I'd rather check the person out thoroughly and go with a handshake. The contractor can put a lien on your property if you don't pay. You don't have that option.

[Bruce Woodruff]

@Mike Kalob No, no, no, no ,no, no....! 

First - never set up a payment schedule like this! No money upfront and every payment should be reconciled with the work that was performed, completed and inspected. I.E prior to framing a Contr might ask for 25% or so of the framing $ for materials. They finish framing, pass rough, and then you pay them all the framing money left due. Same with electrical/plumbing/drywall/roofing/cabinets/counters/tile/paint/etc......

A good GC or sub will have accounts at suppliers so they don't even need to ask for money for materials. But they should anyway or else they're giving you too much latitude. It's got to be even and fair. NEVER pay 30% of the project cost. What is it going for? It's not possible for anyone to account for this.....

Back to your original question, which is moot now, but no it wouldn't be fair for you to expect them to order materials out that far for 1/2 of the project money.

[Mike Kalob]

Thanks guys, I have spoken to about 6+ contractors and the majority want 33%-50% up front.

0 will start work with demo, no fee.  I did get one guy to go as low as 25% of LABOR only costs and I buy materials to start the job.

I'm thinking this is a local market issue?  I'm in North NJ where costs are high and I assume contractors are super busy so can leverage their terms.

The only 'person' I know of who's able to get $0 down is someone who works for a hedge fund and his firm owns hundreds of thousands of apartments. 

Someone from the tri-state hopefully can correct me.  Nevertheless, thanks for the insight.

[Sanderson Mittnacht]

Quote from @Mike Kalob:

Thanks guys, I have spoken to about 6+ contractors and the majority want 33%-50% up front.

0 will start work with demo, no fee.  I did get one guy to go as low as 25% of LABOR only costs and I buy materials to start the job.

I'm thinking this is a local market issue?  I'm in North NJ where costs are high and I assume contractors are super busy so can leverage their terms.

The only 'person' I know of who's able to get $0 down is someone who works for a hedge fund and his firm owns hundreds of thousands of apartments. 

Someone from the tri-state hopefully can correct me.  Nevertheless, thanks for the insight.

I recently did a (mind you, small job) and payments were not made up front in North, NJ. I would keep searching the forums for better GCs. 

[Chris Martin]

Quote from @Mike Kalob:

I'd like my lawyer to add a clause in the GC's contract stating ALL (or majority) materials (ie cabinets, stone countertops, vanity, appliances, flooring, ceiling) are to be purchased before rough inspections.. is this reasonable given below terms of 3 total payments below?

1st - 50% down payment to begin demo work

2nd payment - 25% after rough inspections 

3rd payment - 25% after completion.

My first contractor left mid-job post-pay; what's to stop this one from leaving after 75% of payments?   

If I change the 2nd line to "2nd payment - 25% after rough inspections PASSED and purchase and delivery of all (or majority) of materials completed," should this contractor leave again, at least I'd have the materials in hand to protect myself... That said, I'm not sure what the norm is, so want to be fair.

FYI I think this guy is actually good and means well, it's just the first GC's burn has me maybe overthinking things.  I understand there is currently a delay with materials, so I have to take that into consideration too. I want to keep this guy and want to be fair, but also don't want what happened previously to reoccur.  Advanced thanks.

Pretend like there is a bank involved for funding the rehab and the banker is right beside you. What would he think? 

I would set up draws based on who supplies what (at what stage) and actual work performed. 

[Bruce Woodruff]

Quote from @Mike Kalob:

Thanks guys, I have spoken to about 6+ contractors and the majority want 33%-50% up front.

0 will start work with demo, no fee.  I did get one guy to go as low as 25% of LABOR only costs and I buy materials to start the job.

Keep looking then. I know NJ does not have a law restricting amount down like most states (10% or $1000), but you still do not want to get upside down with your Contractor, and I'm speaking as a Contractor.....

I can't see why any reasonable, honest Contractor would object to getting paid as the went along. It's actually better and easier to manage for the Contractor.

Are these guys all younger in age and experience?

[Ricardo S.]

The reason those contractors want so much money upfront is because they know you are inexperienced and you want them to pay for materials upfront.

If you allow a contractor to pick materials they will buy the bare bones cheap stuff most of the time.

What you need to do is ask for a material list from your contractor if you don’t know what to buy and purchase it yourself and pay for LABOR ONLY.

Good luck.

[Bruce Woodruff]

Quote from @Ricardo S.:

The reason those contractors want so much money upfront is because they know you are inexperienced and you want them to pay for materials upfront.

If you allow a contractor to pick materials they will buy the bare bones cheap stuff most of the time.

What you need to do is ask for a material list from your contractor if you don’t know what to buy and purchase it yourself and pay for LABOR ONLY.

a) The materials should be spec'ed in the Scope Of work
b) If you provide the materials and do not allow the Contr any markup at all, then you need to pick them up, or meet the truck, sign for them, unpack them, dispose of all packing and cardboard, carry them into the house and set them where you want them to go.

To ask the Contr to do all of the above for free is totally unfair...

[Mike Kalob]

Quote from @Bruce Woodruff:

Quote from @Ricardo S.:

The reason those contractors want so much money upfront is because they know you are inexperienced and you want them to pay for materials upfront.

If you allow a contractor to pick materials they will buy the bare bones cheap stuff most of the time.

What you need to do is ask for a material list from your contractor if you don’t know what to buy and purchase it yourself and pay for LABOR ONLY.

a) The materials should be spec'ed in the Scope Of work
b) If you provide the materials and do not allow the Contr any markup at all, then you need to pick them up, or meet the truck, sign for them, unpack them, dispose of all packing and cardboard, carry them into the house and set them where you want them to go.

To ask the Contr to do all of the above for free is totally unfair...

 Thanks a lot for this detailed tidbit.  I am out of town so will be managing the GC remotely.

The project is around 40k.  I have the capital and the last thing I want to do is offend a capable GC.  I just want to make sure he doesn't abscond is all.

I know I could put a lien on his home per BP podcasts but i don't wanna go that route and just want to find someone reputable.

I've listened to a bunch of podcasts to see it from the GC's end and understand they're just as scared of not getting paid, which speaks to the downpayment.

I guess I just need to lets one go and take my time procuring the guy who'll work with little to no down which seems nonexistent in this market for GC's...

..mind you I have had subs and handymen work for me prior no payment til finished and all went well.. this is a 40k General Congractor job, not exactly a handyman, so maybe my previous wording conflated the 2, as if I were a GC I wouldn't demo until i had some security on a 40k budget as well.

I cant think of any GC on a $40k budget (its a basic rental flip, so not looking for high end materials here) starting demo with zero down unless this is the 10th job with the client.. are we talking of the same budgets? It seems the smaller jobs of a couple thousands are fine paying after job, though once you cross the 5 figure amount, deposits are necessary? 

I should have led with the price tag first to differentiate from sub trades to see if this changes any. Nevertheless thanks, ill keep interviewing GCs..and to avoid wasting their time, ill ask for payment terms initially upfront which I know can be off-putting to many GC's but at least won't be wasting their time.

[Mike Kalob]

Quote from @Sanderson Mittnacht:

Quote from @Mike Kalob:

Thanks guys, I have spoken to about 6+ contractors and the majority want 33%-50% up front.

0 will start work with demo, no fee.  I did get one guy to go as low as 25% of LABOR only costs and I buy materials to start the job.

I'm thinking this is a local market issue?  I'm in North NJ where costs are high and I assume contractors are super busy so can leverage their terms.

The only 'person' I know of who's able to get $0 down is someone who works for a hedge fund and his firm owns hundreds of thousands of apartments. 

Someone from the tri-state hopefully can correct me.  Nevertheless, thanks for the insight.

I recently did a (mind you, small job) and payments were not made up front in North, NJ. I would keep searching the forums for better GCs. 

Thanks Sanderson, if you wanna promote or dm me your guy if avail I'll let him know you referred.  I'll keep searching as well.

[Bruce Woodruff]

@Mike Kalob There HAS to be an honest Contractor near you who will work without a huge amount up front. Make sure he knows that you will pay for each trade as you go. Give him something as each trade starts, and the balance when that trade is finished. Easy peasy...no risk for anyone, you or him....nice clean accounting and bookkeeping too.

[Mike Smith]

@Mike Kalob @Bruce Woodruff has really good advice, and I will add a little to it.  I would recommend paying for the work as similar to the new construction process as possible.

1. Create a line item budget, with specifications where needed.  Don't just say appliances.  List out Whirlpool XYZ123 or similar.  Otherwise your contractor will throw in the cheapest stuff possible.

2. Give your contractor a small down payment as goodwill.  This is a negotiated amount that has to work for both of you.  The contractor doesn't want to start with zero down, because he is afraid you won't pay him.

3.  Pay him promptly (I would recommend every two weeks) for work competed in the line item budget.  Break out labor and materials, so if the drywall is delivered but not installed, you can pay for drywall materials but not the labor.  Make sure you inspect the work that is completed and don't just take their word for it.

I would never work with a contractor that wants 50% down.  They are either a fraud or completely disorganized with money.  They are using your 50% down to pay last months bills.  This house of cards will come crashing down eventually.