Contractor payments - do they expect some upfront payment?

[Jacqui Dolan]

I will be rehabbing my investment property (property manager will oversee) and am wondering if contractors expect some upfront payment (e.g carpet layer to buy carpet, cabinet maker for kitchens). I currently have a small outstanding mortgage with a non-bank lender and if they provide me with funds to rehab, they require that all work be 100% complete, on-site and installed and inspected by them before funds are released. Do most contractors expect this or to be paid something upfront? Are there more flexible lenders available (non-bank) who will provide the funds in a different manner?

[Matthew Paul]

@Chris Merchant On smaller , quick in and out jobs thats not a problem with most contractors . But when the dollar amount of a job increases  a contractor would definatly require a deposit .  Large and small contracting business have funds , but there is no logical reason for a contractor to use their funds or credit to finance a customers project .  Its a foolish business practice unless there is a very good relationship already established . 

I am running 4 to 6 jobs at a time , that could be $125K to $300K of materials and labor I am covering out of my business account . This isnt a good use of funds , that same money should be earning money for the business .

We do offer financing options to the customer . 

[Matthew Paul]

Quote from @Carlos Ptriawan:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

 maybe my method is different than yours but we typically only pay for labour, materials they purchased at HD with their or my card so I just reimbursed the bill. For customer like me it is win win situation.

 Well if you found someone to work like that , good for you . I go to HD for little things , but I get better pricing at distributors . And yes I mark up all materials . My discounts that i negotiate are part of MY bottom line . This " we pay our contractors for material then labor " Is not a professional business model for a real contractor . It may work for someone looking for work . But thats not how you operate a business . 

[Matthew Paul]

Quote from @Nicholas L.:

@Bruce Woodruff

@Terrell Garren

most here want 10-25% to confirm the job, whether you're scheduling a day or a month or 6 months in advance.

I believe the legal limit in PA is 1/3 so that's pretty hefty...

No , 30%  isnt much . The job doesnt start when guys show up on the job . The job starts when the contract is signed and the paperwork starts . Permits are applied for , materials are ordered , subs are scheduled , etc . The 1/3 deposit is pretty much gone on the first week of physical work . 
Pa and Maryland are similar in their laws . We get 1/3 at contract signing , 1/3 when we set foot on the job and then draws for the remainder . We are ALWAYS ahead with payment , if money stops , so does work . As a contractor we do not put ourselves in the position of losing money 

[Matthew Paul]

Quote from @Bruce Woodruff:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

YES! Everyone please especially note that COs are paid up front! If you, as a customer, want something changed, it needs to be specifically written up in a proper Change Order so there are zero misunderstandings. And it needs to be paid in full at the time of signing that CO.

Customers thing Contractors get rich off COs....quite the contrary. Any change screws up the schedule and costs the Contractor time and money (Beyond the cost of the actual additional work). Work stops and everyone must rethink the whole phase of the project, and how it interacts with the rest of the project.

Contractors have a huge carrying cost for every job they have running. Every extra day they are on a job, the money clock is running...Overhead is enormous in even a medium sized Construction company, at least hundreds of dollars a day.

 @Bruce Woodruff I love these contractor posts . " Investors " think the contractors are the enemy . Problem is they never hire contractors , they hire unskilled laborers at cheap prices and expect quality work , cheap and fast . And then complain when they get screwed .   WHY ?    They dont hire contractors .    They hire "Chuck in a truck " 

They get what they pay for .

A $50K job sounds big , its not , thats a 2 week job with a 3 man crew on average materials included . Small job actually .  

We did a roof last week $15K  crew was there at 7 and done by 4 . Was this a big money job ? No just average .  No big deal . Just another day .  But the customer doesnt remember , the time dealing with the insurance adjuster , inspecting the roof , the office time , payroll etc . They " think" you made 15 grand in a day . 

They have no clue 

[Carlos Ptriawan]

Quote from @Matthew Paul:

Quote from @Bruce Woodruff:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

YES! Everyone please especially note that COs are paid up front! If you, as a customer, want something changed, it needs to be specifically written up in a proper Change Order so there are zero misunderstandings. And it needs to be paid in full at the time of signing that CO.

Customers thing Contractors get rich off COs....quite the contrary. Any change screws up the schedule and costs the Contractor time and money (Beyond the cost of the actual additional work). Work stops and everyone must rethink the whole phase of the project, and how it interacts with the rest of the project.

Contractors have a huge carrying cost for every job they have running. Every extra day they are on a job, the money clock is running...Overhead is enormous in even a medium sized Construction company, at least hundreds of dollars a day.

 @Bruce Woodruff I love these contractor posts . " Investors " think the contractors are the enemy . Problem is they never hire contractors , they hire unskilled laborers at cheap prices and expect quality work , cheap and fast . And then complain when they get screwed .   WHY ?    They dont hire contractors .    They hire "Chuck in a truck " 

so typical.

[Matthew Paul]

Quote from @Carlos Ptriawan:

Quote from @Matthew Paul:

Quote from @Bruce Woodruff:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

YES! Everyone please especially note that COs are paid up front! If you, as a customer, want something changed, it needs to be specifically written up in a proper Change Order so there are zero misunderstandings. And it needs to be paid in full at the time of signing that CO.

Customers thing Contractors get rich off COs....quite the contrary. Any change screws up the schedule and costs the Contractor time and money (Beyond the cost of the actual additional work). Work stops and everyone must rethink the whole phase of the project, and how it interacts with the rest of the project.

Contractors have a huge carrying cost for every job they have running. Every extra day they are on a job, the money clock is running...Overhead is enormous in even a medium sized Construction company, at least hundreds of dollars a day.

 @Bruce Woodruff I love these contractor posts . " Investors " think the contractors are the enemy . Problem is they never hire contractors , they hire unskilled laborers at cheap prices and expect quality work , cheap and fast . And then complain when they get screwed .   WHY ?    They dont hire contractors .    They hire "Chuck in a truck " 

so typical.

 @Carlos Ptriawan Typical of business people running a profitable contracting business , I agree . 

[Carlos Ptriawan]

Quote from @Matthew Paul:

Quote from @Carlos Ptriawan:

Quote from @Matthew Paul:

Quote from @Bruce Woodruff:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

YES! Everyone please especially note that COs are paid up front! If you, as a customer, want something changed, it needs to be specifically written up in a proper Change Order so there are zero misunderstandings. And it needs to be paid in full at the time of signing that CO.

Customers thing Contractors get rich off COs....quite the contrary. Any change screws up the schedule and costs the Contractor time and money (Beyond the cost of the actual additional work). Work stops and everyone must rethink the whole phase of the project, and how it interacts with the rest of the project.

Contractors have a huge carrying cost for every job they have running. Every extra day they are on a job, the money clock is running...Overhead is enormous in even a medium sized Construction company, at least hundreds of dollars a day.

 @Bruce Woodruff I love these contractor posts . " Investors " think the contractors are the enemy . Problem is they never hire contractors , they hire unskilled laborers at cheap prices and expect quality work , cheap and fast . And then complain when they get screwed .   WHY ?    They dont hire contractors .    They hire "Chuck in a truck " 

so typical.

 @Carlos Ptriawan Typical of business people running a profitable contracting business , I agree . 

 I meant the typical is the customer that's looking for the cheapest ever job and expect great thing as they think everyone can do the job lol

[Bruce Woodruff]

No they have zero clue that our overhead AND profit is 18-20% - if we're lucky.....

[Carlos Ptriawan]

Quote from @Matthew Paul:

Quote from @Carlos Ptriawan:

Quote from @Matthew Paul:

I am a contractor , I get a deposit , and draws . I never gamble my funds on a customers project . I can be the bank , but the customer will pay for that .  Money is the fuel that keeps the machine working . Change orders are paid up front .  As a contractor , I will tell you that you are not paying for materials and labor . You are paying for a finished product . 

 maybe my method is different than yours but we typically only pay for labour, materials they purchased at HD with their or my card so I just reimbursed the bill. For customer like me it is win win situation.

 Well if you found someone to work like that , good for you . I go to HD for little things , but I get better pricing at distributors . And yes I mark up all materials . My discounts that i negotiate are part of MY bottom line . This " we pay our contractors for material then labor " Is not a professional business model for a real contractor . It may work for someone looking for work . But thats not how you operate a business . 

 every contractor I guess has their own preference, but this contractor that I am talking about, is only doing that when we work together LOL ... for me the labour/material issue thing is not really big deal, but when he gives financing that's the big bonus LOL

[V.G Jason]

I pay 10% deposit but through my debit card. Make sure paper work is agreed to. I have my own I require, too. I have had some push back, but when they read it-- they all have agreed. If anyone doesn't, it literally exposes them as frauds.

Upon start, that Thursday or Friday. I do Thursday, if that's their 4th day at the site, they get 25% more. I'll do Friday if that's their 4th, but if it's the second or first it's only 5% more. So basically show up and do some meaningful work, and you get 35% in first week. Don't and you get 15%. By end of week 2, if there hasn't been more than 5 working days I'll go change the locks, get my 15% back and have a backup crew ready. I also require no consecutive days off(business days). 

The next 20% comes when they claim the work is 50% done. Another 20% when 75% is done. By done I mean property manager/inspector, and city (if necessary) agree.  Again via debit card.

Last 25% is paid via cash if they accept a lien waiver or 25% via debit card otherwise, when work is done after walk through and practice example. I pay an extra 2.5% cash for every 3 days sooner they finish the job without hiccups in workmanship. Max 12 days, so 10%. 

For 1-2 day jobs that require heavy material cost up front like a roof, I ask for the source of the materials and will source myself and pay them 110% of what they billed me as labor. 125% if they sign a lien waiver. 50% before job via debit, other 50% right after. I make sure start dates and certain details are all signed up on, and ask the property manager to sign as witness. 

[Terrell Garren]

@Matthew Paul This " we pay our contractors for material then labor " Is not a professional business model for a real contractor . It may work for someone looking for work . But thats not how you operate a business .
They have no clue
They hire "Chuck in a truck "

The main reason I got my GC was to take the added cost out of equation.  The secondary reason is not to deal with pompous GCs.

[Chris Merchant]

Generally it is on a case by case basis but I would NEVER pay for more than just the materials up front.  Larger contractors will usually have the funds on hand to foot the cost for materials.  It basically comes down to whatever you and the contractor negotiate in the bid/contract.  

Where I work (doing landscaping and excavation) we only require money up front if the client wants something that requires a special order product.

[Shafi Noss]

I own part of a general contracting business. Sometimes HMLs will hire us to finish up projects that other flippers have messed up. We usually ask for a material deposit up front, and then we are reimbursed for completed work and then fees are earned in stages as the project is completed. 

[Matthew Paul]

@Chris Merchant On smaller , quick in and out jobs thats not a problem with most contractors . But when the dollar amount of a job increases  a contractor would definatly require a deposit .  Large and small contracting business have funds , but there is no logical reason for a contractor to use their funds or credit to finance a customers project .  Its a foolish business practice unless there is a very good relationship already established . 

I am running 4 to 6 jobs at a time , that could be $125K to $300K of materials and labor I am covering out of my business account . This isnt a good use of funds , that same money should be earning money for the business .

We do offer financing options to the customer . 

[Carlos Ptriawan]

Quote from @Matthew Paul:

@Chris Merchant On smaller , quick in and out jobs thats not a problem with most contractors . But when the dollar amount of a job increases  a contractor would definatly require a deposit .  Large and small contracting business have funds , but there is no logical reason for a contractor to use their funds or credit to finance a customers project .  Its a foolish business practice unless there is a very good relationship already established . 

I am running 4 to 6 jobs at a time , that could be $125K to $300K of materials and labor I am covering out of my business account . This isnt a good use of funds , that same money should be earning money for the business .

We do offer financing options to the customer . 

 Hi Matt, what happen if your material cost is very high compare to your funds account ?

Have you ever met a customer that cancelling the project or refuse to pay ? 

What's your worst case situation ?

[Chris Merchant]

@Matthew Paul I do agree with you, but this would all be relayed to the client and included in the bid/contract.  It is also what would make it a case by case basis situation.

[Nate Marshall]

Yes. You should give them a small advance. I have Contractor Agreements, Scope of Work schedules, draw schedules etc for real estate investors and do AMA's every Wednesday. 

You should break the job into 1 or 2 week draws

Have completion dates. Bonus if early. Penalty if late. 

Require transparency and accountability using something like Company Cam. 

[Nate Marshall]

Quote from @Chris Merchant:

Generally it is on a case by case basis but I would NEVER pay for more than just the materials up front.  Larger contractors will usually have the funds on hand to foot the cost for materials.  It basically comes down to whatever you and the contractor negotiate in the bid/contract.  

Where I work (doing landscaping and excavation) we only require money up front if the client wants something that requires a special order product.

 Contractors shouldn't be your finance company or bank. If they have supplier accounts you should reimburse them on delivery for materials. Draws for labor should help them meet payroll. 

[Matthew Paul]

Quote from @Carlos Ptriawan:

Quote from @Matthew Paul:

@Chris Merchant On smaller , quick in and out jobs thats not a problem with most contractors . But when the dollar amount of a job increases  a contractor would definatly require a deposit .  Large and small contracting business have funds , but there is no logical reason for a contractor to use their funds or credit to finance a customers project .  Its a foolish business practice unless there is a very good relationship already established . 

I am running 4 to 6 jobs at a time , that could be $125K to $300K of materials and labor I am covering out of my business account . This isnt a good use of funds , that same money should be earning money for the business .

We do offer financing options to the customer . 

 Hi Matt, what happen if your material cost is very high compare to your funds account ?

Have you ever met a customer that cancelling the project or refuse to pay ? 

What's your worst case situation ?

 I have had customers slow on pay . Put a lien on a house once , and collected .  Main reason is we dont play the bank . Its common for builders to float money on the back of the contractors .  Now if the customer needs hard money loan , we can arrange that .  

But put our companies funds up to finance a customers job ?  Nope .   Our funds are invested making money . 

I could fund all our jobs no problem , never have , never will

[Lloyd Preece]

Pay weekly or buy the sub-project within the rehab. Request videos, pics and materials receipt ahead of each payment. Holding vendors accountable through instalment paying but also paying in a timely fashion is a fair way to do things

[Becca F.]

@Jacqui Dolan

I did a major renovation (my first). It was down to the studs in the kitchen and 3 bathrooms, all new electrical wiring, plumbing, knock down a hall wall, drywall, insulation, and interior painting and permits. I paid my contractor $1000 at the start. There were several change orders. I did purchase my own kitchen cabinets, kitchen sink, quartz countertops, bathroom vanities, the tile for the bathrooms and light fixtures for all the rooms. 

The contractor purchased the rough materials, shower and tub, LED lights, and toilets. I paid as the work was done, every week to 2 to 3 weeks, depending on the task, and made a total of 29 payments. I'm very happy with how it turned it and he has returned to fix minor things without charging me. 

I did a cash out refinance on it (house had lots of equity) so that's how I paid him. 

[Zackery Smith]

@Jacqui they need money for mobilization and materials. I

Wouldn't give them anything without their insurance and clear contract with a timeline. Also get the owners ID just to let them know you mean business.