Contractors requesting deposit - is this standard?
Hi Everyone,
What do you do when your contractor asks for a deposit?
My partner and I have always done our own rehab. The next project we are working on we can’t do ourselves and are looking to hire a contractor.
We’ve contacted several reputable companies and all of them are asking for a deposit of 25-50% up front.
Is this standard practice?
We’ve all heard stories from rehabbers who put down a deposit and never hear from the contractor again.
The companies we’ve contacted all have offices, professional websites, and several references that we checked.
I’m wondering how safe is it to give a deposit with a company that is established.
What has your experience been?
I understand from the contractors point of view they don’t want to do all this work and not get paid. But from the owners perspective it’s the same thing - they don’t want to pay out money for work that might not get done.
What is the best way to serve both parties so that they both feel secure?
I think the contractors want funding for materials to start the job. They probably also would like to see a draw schedule for payments. Normally, the "up front" money can be considered Draw #1. If there are say 3 draws the first one will always be the biggest due to materials. I know many investors like to hold the largest payment as the last payment.
I do know that if the contractor is funding much of it himself, sometimes he runs out of cash and has to get cash from working on another job, in turn - this slows down my project.
Most rehab contractors don't want to fund someone else's investment. Even had one say one time that if it's his money he should be able to charge interest on it.
I manage a lot of rehabs and these are the types of things I hear from the contractor side.
It's tough, because as investors we don't want to write a check, and end up getting burned. I feel ya!
Jennifer Jacobs along with what Ritch Bonisa said, what dollar amount are you looking at for the total rehab? The upfront materials are the biggest line item (cabinets, drywall, lumber, etc). Depending on the size of the rehab will depend on the draw schedule, but I typically like to do 30-30-30-10. If the rehab is less than $30k, I will typically do 33-33-33. It would have to be a very large rehab to do a lower upfront draw >$100k, in that case I do 10% upfront and the other draws vary.
Jennifer, I once had my GC license in FL. It's pretty typical to ask for 20-50% upfront. The idea on the $$ upfront is that the license is SO valuable that they can request that type of payment upfront or move on to the next client that will pay it.
You get a lot of scams in FL so they make their licensing tough, mine happen to be an 18 hour test broken down to 2-9 hour days of testing. The rigorous testing is supposed to hold the contractor to a higher standard, or at least that's the thought.
Jennifer Jacobs , The best way to establish a relationship is to make them apart of your team. Vet investor friendly contractors that understand both your budget and execution schedule. You have to establish relationships with your contractors like any other vendor you regularly do business with. This way there not focused on overhead & profits of one project but there focused on the volume of work that you may potentially bring immediately and long term. Additionally, don't expect for these guys to both carry your project and be cost efficient. You'll most likely get one or the other. If you expect them to carry the project and some will your cost just increased. Please be mindful that managing these guys daily is an acquired skill. Until you acquire that skill set please use an experienced Construction Manager or Mentor to manage your contractor relations. They'll administer the projects procurement policy, scope of work, specifications, draw schedules, required permits, communications, execution schedules, liscence & insurance limits etc.
@Ricky Butler I totally agree!
@Jennifer Jacobs , from an investor standpoint, you don't want to give them money, only to never hear from them again. These forums are filled with these types of stories, unfortunately.
From a contractor standpoint, they want to know you can perform. I've given deposits simply to hold my place on the calendar for a very busy contractor.
Ask if you can give a lower deposit to hold the spot on the calendar and have them connect you with their materials supplier so you can pay for the materials instead of them. They stand to lose far less if you have paid for the upfront costs.
Perhaps you can put the deposit in an escrow account?
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In calif, contractors can literally request the lessor of $1000 or 10%. On my fire restoration of $95k, We agreed (regardless and at MY suggestion) on a 10% deposit and progress payments of 30/30/30% and the last one to include the signing of the city permit.
Everyone knows what to expect and when they will get paid.
@Mindy Jensen, that's a great idea however we've been contractors in NJ since 2007. We serve both public and private clients. Low income, affordable, market, high end etc. Each client present different methods of payment such as an approved draw schedule, upon completion, 30/30/30/10, 50/50, 30, 60, 90 days etc.
What I'm trying to say is that if we don't trust our contractors select another one. I'm not saying to be naive but set up safe guards to maximize production where possible and try not to let guys front load projects where if things dont work out you get stumped.
I think that some investors should retain the services of a good PM until they acquire the skills to procure contractors. I also think that as investor's we'll be more effective, efficient, and productive if our primary focus was the next project and not worried about our contractor being Missing in Action. Sorry for rambling guys just wanted to share my thoughts.
@Ricky Butler Great points you make. Are you ultimately suggesting for someone new with little to no experience in dealing with contractors to hire a property manager right away and have them oversee the rehab process? What if you don't intend to keep a property manager when it's finished? For example if the property is a flip or you will self manage it after the rehab is done?
My father-in-law is a contractor and when he has his contract given to the potential client, he has on it the estimates and also payout schedule. Depending on how big the project is, he does 3 or 4 payments. 25% upfront for materials and to pay his workers, 50% when half of the project is completed and the last 25% when the projected has been completed. When it's 4 payments it is divided equally. Usually, my father-in-law does this because if there is a breach in the contract, say from the client, he would not be underwater because he has some of the money. Just something I learned from him.
@Brian Garrett, Apologies, excuse me for not being clear I meant a PM as in a Project Manager not Property Manager. Moreso, a Construction Manager or even a Mentor to facilitate or provide guidance over the daily operations of the rehab.
This service may be of benefit to both the seasoned and newbie investors. However, each would be receiving this benefit for various reasons within there investment career. (Newbies because they may require the service and veterans to be more efficient with there time.)
@Ricky Butler Makes sense my apologies. Great advice nonetheless!
I have my own accounts at all of the local major suppliers. Materials are put on my accounts so the only thing I am paying the contractor for is labor - and I dole that out as they perform.
@Ryan Murdock, Now your talking !!! Labor only performance based compensation with bonus incentives !!! Right?!!!
@Ricky Butler Sure, you can structure it however you want. Bonuses for finishing early etc (be careful they don't cut corners to hit the goals though...).
I just like buying my own materials so I know they are not getting marked up and I'm not writing that fat check at the start.
It also helps me gain clout with vendors for my purchases, not the contractor. I get great discounts at the smaller and big box stores because of my consistent volume purchases with all of them. You could spend a million dollars per year at Lowes via your contractor and they still wouldn't know who you are when you walk through the door. Start putting that same million on your own account and you will attract some attention every time you show up. I only spend a fraction of that and they still treat me pretty well :-)
@Ryan Murdock, that's fantastic because contractors do obtain perks as volume customers at certain locations.
However, I hope that guys aren't marking up supplies beyond man hours and related cost for delivery in your state. Some companies would to make up for under bidding or low balling the project it's almost like an automatic hidden change order or addendum.
Either way bring the crew lunch on Fridays sometimes nothing fancy pizza or finger food. It doesn't have to be personal but speak to guys on site shake hands or nod your head be inviting have a smile on your face and be honest truthful and respectful. Lead your contractor to finish your project on time within budget constraints #People don't care what you know, until they know that you care.
Jennifer,
The only way I would ever pay my contractor 50% upfront is "NO way". I've been doing business with him for years and I wouldn't give him that much upfront. In my opinion, there's no need to give a contractor 50% upfront, unless there are "special" circumstances. That's just too high of a percentage. A special circumstance might warrant it, but it would have to be a very special one. We're doing a rehab right now. It's $15k and will take 3 weeks. The 3 week time frame is a longer time frame than normal, because of some special things we have to do to the house that are labor intensive. Anyways, he's getting 40% upfront, 30% after 1 week and 30% when the work is done. So the last 30% is given to him after we have done an inspection and approved all of the work. Make sure that you do a thorough inspection before the last payment is made. That's critical. I guarantee you'll find small items that need to be addressed. On the other side of the coin, some experienced contractors will ask for 50% upfront if they don't know you or you're new to the business. They don't want to get ripped off either. I've been ripped off more times than I care to remember. But keep in mind that contractors also get burned by their clients. It's a 2 way street. Also, contractors may put a clause in the contract that relates to additional funds. My contractor writes in every contract that I understand that he may come to me for more funds, if it's warranted, up to 15% of the cost of the rehab. Once they start opening up walls and such, they will almost always find unexpected problems. My contractor will fix the small problems without asking for more money. He builds that into his price. But typically if it's over $200, he comes to me for more money. He has to document the problem and show me receipts that prove it was fixed. My contractor has the work all scheduled out almost day by day. So, if the plumber is there and he finds an unexpected problem, he just fixes it. Then we deal with the money side. This saves all of us time and money. We both trust each other and it works out well. I hope this helps you. Best of luck.
In California, my GC b/f said, it's 10% or $1000, on the signing, whatever is less, then you can schedule draws, but they should never exceed the amount of materials or labor that has already been done on the job.
Diane, I am a GC in California and that is the law here.
Any reputable contractor is going to have accounts setup at all of his suppliers and typically will not have to pay those accounts for 30 days. In my opinion, if a contractor can not float doing some work for 30 days it speaks a lot of their financial position and would trigger alarm bells in my mind. I have heard of contractors out there who will ride the deposit out and as soon as it gets low they focus their efforts on the next job that gives them a good size deposit and let the other ones go on the back burner. Not good when you're trying to flip a project and get your money back! They might still get the job done, but it could be the difference of you putting your house on for the spring and summer Market versus a fall Market which could be detrimental to a sale. The more you owe the contractor, the quicker he is going to want to get the job done and the sooner you are on the market! As a contractor, my recommendation would be to keep hunting until you find someone who is hungry for the work and willing to work with you. just food for thought as well, a contractor can put a lien on a property if he is not paid so the property cannot be sold. That might help in negotiations to mention. " do not worry, if I do not pay you when this project is done, you can always put a lien on my property and I will not be able to sell without paying you which is the whole point of this venture to begin with." :0)
True Sean! :-)
There used to be a thing called fund control that the contractors preferred. Fund control operated like an escrow company in that they held all the funds for the project, and would disperse to the contractor at performance milestones reviewed by their knowledgeable inspectors. The reason contractors liked it was the money was assured and payment predictable. Not like the
Event where the owner runs-out-of -money. But it was costly to the owner. The Construction Manager can preform the same task for you and give guidance which is what you are paying him for. This thread has been an interesting discussion on a volatile topic, a tough area of the business.
@Sean Walsh Great information thanks for sharing your knowledge and experience!
This is a great thread! I am financing the materials to have control of the spending and to save overall costs, and then paying the contractor for labor only plus his fee. What is standard draw schedule when it is labor only, and what percentage of budget is generally considered materials vs. labor?