I've got a property that requires a pretty major rehab (asbestos siding, and needs new electrical, plumbing, HVAC, walls ....). I have a general contractor that I think will do a good job. I wanted to do the work as cost plus. He is fine with that but wants 30% of his estimate up front. That could be $30K or more. It's not that I can't fund it that way, it just seems like I'm giving him an awfully big chunk of money without having anything to show for it.
I understand he needs funds for supplies, etc and that gives him a bucket to work from, but does he really need that much? I guess I'm worried that if I give him the funds, I have no way of holding him accountable for those funds. Yes, I can refuse to give him any more money, but that is still a lot of money to potentially lose if something goes wrong.
What are your thoughts on how much to give a GC up front?
I may be biased because I work in primarily commercial work, but if a GC asks for money up front its an automatic decline. I am not opposed to draw at pre defined milestones but money up front is a red flag for me. If they dont have a 15 to 30 day line of credit for materials, its a good sign they're cash strapped. I know it seems hypocritical for investors seeking OPM to have this mentality, but it's an important consideration.
@Wayne V. Thanks for the insight. It's not so much that I'm balking at the concept of a deposit. I'm fine with that. As @Nick Stango pointed out, it takes money to keep a job moving -- I get that. I was concerned about giving someone I have no history with $30K or more upfront. Maybe I'm running into @Guy Gimenez rule of thumb of giving him more than I'm comfortable with -- as I'm already losing sleep over this by being on BP talking about it :)
@Joseph B. Wow, thats a big chunk, remember, he is bonded, but bonds only cover 12,500 or 15,000 depending on location, and if he is working on multiple projects and defaults at them all at the same time, you will have to aplit them with the others. If he has not yet dealt or has issued a performance bond to anyone, then its likely he will not, mind you performance bond is 3% so contractors charge 4-5% for that, and qualification could set back a week or two. If this is a cost plus, you need not to give him money, he will have to give you the quote, then you issue a check to the supplier everytime he buys them (your local homedepot calls this "managed account services"), for small items, he needs to fund it (or you expose $1000 as revolving fund, to be deducted at last payment). for all material receipts, he will have to keep all of it, and bill you a certain % from the total amount, if doesn't give you the receipt, it doesnt exist (good way to keep your receipts too, have him submit it to an envelope along with a tape/tabulated excel printout). for payroll, you will negotiate a specific rate per trade (all inclusive to lessen litigation issues), and you will have to pay him 2 calendar days after he sends his payroll (maybe friday after work hours, or saturdays preferred). for your safety, be sure to get a waiver of subrogation on all of his insurances naming you as additional insured, call your local agent for this, they know best. If he wants to work outside those terms, then its not cost plus but fixed price or a hybrid.
@Joseph B. this is from the Fairfax County website, it looks like there's some good info there.
Fairfax Co Contractor Hiring Advice
Paying a contractor upfront always irritated me. Mainly because as a commercial grading contractor we would have to float the project sometimes for 45 days before we saw a penny. Do you have any idea how much fuel a small fleet of heavy equipment and dump trucks can burn in 45 days. Not to mention payroll, overhead, and most vendors had net 10 terms. I'm jealous.
I hear you bud, factor out those AP. there are many factoring companies, they charge 1-1.5% at 30 days, pass the 2% to your client. or have your rates at 100 n45 / 95 n7, 5% is a great motivation. frees up your opex, you could expand operations with that cash flow.
I am also a GC in Phoenix and I have been taken advantage of by the client. The client actually got their financial funding and took a big chunk of it and went on a Disney cruise and left me holding the bag at the end of the project. 60% upfront, from that point forward, was then asked for - not unreasonable. We as contractors don't like having to spend our time and resources chasing bad money (the only ones that really win are the attorneys). One thing I think people should ask them self is, "if they were contractors would they feel comfortable spending their own money to build someones dream, in hopes of being reimbursed?". Remember, we are all people and all we can do is our due diligence to the best of our ability. Remember the cost of the material is what they are, so every time you think about beating your contractors up on price, the contractor has to put food on their table as well, so do your homework and get more than 1 bid. Usually 3, and do your research i.e., find out what materials should cost. Remember, the lowest bid may not be the one that you really want to go with. Oh, and for all of those that think I have been outrageous on the 60%, would you actually believe that they have become a private investor with me and only ask for their annual interest and this is what they suggested after the first flip project that they had funded. Trust is what we all have to earn and to give.
I do building envelope inspections and full apartment rehabs in Portland, OR. Sometimes my bids are 1.5m and up and we require mobilization $ up front. 30% for residential is fair but write up your own contract for the GC to sign, legal zoom has samples. Include time of completion with a liquidated damages clause (barring no change orders occur), when and how much you're willing to give, hold 10% until punch list is done, etc. Check CG certs for dealing with asbestos it takes special training and disposal practices. If the references are good, you can afford 30% and they sign your contract then play ball! Start that flip already... every day costs dollars
Some sound advice here. Although I have heard both good and bad sides of this discussion I'm more apt to believe that if you've done your homework then all should end well. Alternatively, what is common here on the West, when the GC or sub is at the big box store, i.e. home depot, in the GC line they, store workers, give you a call. They can verify your job site and get payment from you right over the phone. So, your GC might knock off 5/10% of that deposit if you pay for the equipment in that fashion. Best of luck
I did mostly cost plus work when i was doing remodeling work. You could try to negotiate to say 20-25%. They do need working capital for your project. It should be a complete open book contract with cost plus. This can save $. How much is he taking on for O&P? If the contractor is honest guy it can save you some cash but be carefull to stick to the budgets. Cost plus can go beyond the scope and you will spend more. Have the contractor bill you weekly to keep track of all the bills.
Past performance is not indicative of the future
This has been the age old debate From my side contractors take on too much work and a very underfunded. They might take deposits from multi jobs but 1 problem of not getting paid on time creates a snowball effect on the other jobs They quickly run out of money and have robbed Peter to pay Paul. Other than a costly court battle with little chance of success the consumers should always keep a tight rein on the money .
Not sure what world those who think a deposit is a red flag are living in.
Absolutely agree with @Account Closed, a contractor did that down here last year and at least eight people lost hundreds of thousands of dollars between them. Lots and lots of commingling, and no amount of legal recourse is likely to get you back money like that.
@James Wise I'm thinking the amount of the deposit is more the issue for some than the deposit itself. Personally, based only on my own experience, there's no chance I'd freely give $30K before any work was done, licensed and insured or not. An amount suitable to purchase materials until the first draw, sure, but nothing remotely close to that amount. Then again, my experience is somewhat limited, but the particular experience that taught me that lesson was a doozy...
I use contracts when I work with GC's. Everything is spelled out in writing and is legally binding. I set up set up payment draws for when specific targets are met and never let the money get ahead of the work. Once you have relationships and a track record with trust it gets easier. I dont understand why the OP is taking on cost plus rather than having a lump sum bid?? I like to know what my costs are going to be(I always have contingency funds for unforeseen issues) rather than hoping they come in below his budget. Contractors can slow down on T&M and do you want to be paying for his time if he is disorganized and inefficient. I recommend going lump sum and like others have stated here getting an ins certificate with your company as additional insured.
I may be biased because I work in primarily commercial work, but if a GC asks for money up front its an automatic decline. I am not opposed to draw at pre defined milestones but money up front is a red flag for me. If they dont have a 15 to 30 day line of credit for materials, its a good sign they're cash strapped. I know it seems hypocritical for investors seeking OPM to have this mentality, but it's an important consideration.
I agree. I was a GC for years and still take on certain projects. I've never asked for money up front. The most I ask for is weekly draws but usually split into 3 draws that are set for certain stages of project progress. I have accounts with suppliers and enough cash on hand to work between draws.
I use contracts when I work with GC's. Everything is spelled out in writing and is legally binding. I set up set up payment draws for when specific targets are met and never let the money get ahead of the work. Once you have relationships and a track record with trust it gets easier. I dont understand why the OP is taking on cost plus rather than having a lump sum bid?? I like to know what my costs are going to be(I always have contingency funds for unforeseen issues) rather than hoping they come in below his budget. Contractors can slow down on T&M and do you want to be paying for his time if he is disorganized and inefficient. I recommend going lump sum and like others have stated here getting an ins certificate with your company as additional insured.
Not sure about the slow part, but your speed gives you more business. I can knock down, do cosmetics, mini electrical and plumbing in a hotel room at a rate of 25 rooms on a hotel a week with 16 guys. since you are in T&M (aka cost plus) contract, you could fire the GC if he doesn't hit his milestones, yes, of course, you still have milestones, i would like to setup mine in 4 phases, doesnt matter if it is a 6 month project or 2 weeks.
No cash upfront. Have them pull up all the permits on their license and they pay for them. You provide all the supplies. Only pay by the job. Only pay after passing inspections.
I just worry that if you give someone a big chunk of money then where is their incentive to perform.
Sure. That's why to me you haven't done enough due diligence yet. You should either be totally comfortable with your vendors or you should not be doing business with them.
It's not a contractor's obligation to finance your project either. On the other hand, if he does then you should be paying him for this service, nothing is for free even though real estate investors are notorious for thinking everything should be.
I wouldn't be doing any business with anybody I wasn't comfortable with. If you've checked him out and you're confident that his past performance will be indicative of his present performance then there is nothing to be worried about. If you're not there yet then you aren't ready to hire anyone.
I've walked away from many customers who wanted to change terms of contracts in their favor or wanted what I felt were unusual guarantees, I've simply told them, that they haven't done their due diligence. We use the same contracts with every customer and we aren't about to change them for them. A customer like that is either going to be bigger trouble down the road or they simply haven't done their homework and are lazy and they want me to solve their insecurities for them by weaken my protections for my company.
I may be biased because I work in primarily commercial work, but if a GC asks for money up front its an automatic decline. I am not opposed to draw at pre defined milestones but money up front is a red flag for me. If they dont have a 15 to 30 day line of credit for materials, its a good sign they're cash strapped. I know it seems hypocritical for investors seeking OPM to have this mentality, but it's an important consideration.
I agree. I was a GC for years and still take on certain projects. I've never asked for money up front. The most I ask for is weekly draws but usually split into 3 draws that are set for certain stages of project progress. I have accounts with suppliers and enough cash on hand to work between draws.
I don't think most of these apply, some just work for something just to feed the family. i have those lines myself, but i won't recommend them extending to a client, its a risk for me if they don't pay up on time. if i do, i would probably escrow the money or some sort of deposit the money to my supplier (never tried that, just speculating). having up front is not such a bad thing, as long as it is spent within 3 days, i would prefer to pay the supplier myself if its 10k or more, that way i could establish record for their company too and in future, i get a good discount matrix.
@Manolo D. I would rather pass on the labor risk to the GC and not take it on myself. My point mainly was to know your cost going into the project. I control costs carefully and don't make guesses based on a budget that may be good or may not be.
Assuming you have completed reference check and they're a solid business, give them just enough cash to buy the materials (at cost) or up to 50%, pay for labor upon delivery if it's a short job less than 1 mo, or pay for labor in milestones for a longer one.
Or, if it's a longer project split it in manageable milestones when you front the $$ for material cost and pay for labor upon milestone accomplishment.
Agreed with @Mitch VanDeveer and @Nick Stango . I cannot emphasize enough how important it is to do ALL of the due diligence that they listed.
I'm a GC in DC and we also ask for a deposit but it varies based on the size of the job. Even if I have a line of credit, it's not my clients' place to dictate how I should use the money that's available to me. It sounds like you want to work with this guy but still have some hesitation. Why not be honest with him and say you want to build the relationship but on this first project maybe you split the 30% into two 15% payments that take place relatively close to each other? Then work together to define the milestones that will trigger each payment for the life of the project.
@Eric Munson
I totally missed the mark on my estimate of what it would cost to rehab. I had 3 estimates, 2 were very close, 1 was much cheaper. The cheaper one didn't have enough detail to make me comfortable and when I asked for more info, never responded..
I wanted to do cost plus so I could see the cost of every last nail and improve my estimating in the future. If I can't ballpark the rehab correctly, I can end up in a bad place.
get another estimate, or self contract the work to individual service providers Let each one know that you will be using them often and you can get a contractors price you will also save that contractors fee plus give smaller deposits to each contractor specializing in their own field. I also agree with @Marcela Correa ask your contractor if you can do a smaller deposit or break it up into two deposits early in the job if he is a nice guy he might work with you.