I can tell you from a tax perspective that you'll want to get a signed W-9 prior to issuing payment to any contractor. I have seen too many of my clients get burned when they realize January time that they are obligated to file 1099's. At that point, the contractor can be long gone. Without a signed W-9, you have no leverage to issue the 1099. Get the signed W-9 in advance of payment.
I pay my contractors however they want to be paid. Very important though to put the terms of the payment draws in a contract beforehand. Write it on a napkin and have him sign it if you have to.
2 weeks ago I had a few handyman walk out on my rehab because they didn't think they got paid fast enough (they were 3 days ahead of schedule). They had work to do after the drywaller finished, and he hadn't. But apparently they thought they should have been paid in full the day they finished. So they just ghosted the home with most of the excess materials, and found out a few days later from the drywall guy who watch them take off. No huge financial loss, just a pain in the rear. If payment conditions were talked about before and in writing, then clear expectations would have been set.
Another contractor I had came in and finished a bathroom on a job. I wrote him a check and he cringed. He had to go back to Texas, and my checks were from New Mexico, which would have taken longer to clear. So I paid him in cash. No problem.
I am happy to pay in cash, check, wire transfer, Chilie's gift cards... for consistently used contractors you can even set up a local joint checking account, transfer it in, and let them scoop the money out. If I pay someone more than 600 on the year, I collect a W9 before the final payment. And get some sort of receipts too for those cash ones, because you know, the IRS and stuff.
I structure my own payment schedule and have my clients agreed & signed before start work too. But of course I make them "fair" for both sides.
Mostly, after the first small down payment, subsequent payments are based on milestones of task completions. Done demolition, passing rough electrical inspection, finish tile work, etc... That way, both clients and contractors are happy and it drives the momentum.
One of a bigger contractors who I am a sub for pays out every Tues & Thurs if you send a bill a day before for the agreed upon amount, which is also milestone completion driven.
Thanks Daniel, i didn't even think of that. Is that w-9 for GC or/and their sub contractors? If i was managing properties on my own, would each sub i use need that filled? Thanks again Daniel
Thanks Christopher, great advice.
Thanks Nhi, i'll have to go over the common fixes and see what we can do to make it more like you mentioned. Think it be better than just paying gc weekly.
Get a W-9 from anyone that you pay. If the GC is paying his/her subs, that's on the GC.
Got it thanks Daniel
I pay my current GC four draws:
40% deposit at contract signing (which I typically don't sign until the day I close on the house)
20% after the county concealment inspection is passed
20% after the county final inspection is passed
20% after I approve of the work during my final homeowner walk through (after paint touch up and misc items are completed -- or basically on the day that we both expect none of his guys or subs will be coming back to the house again)
Thanks Doug, I never considered it that way; does that work with all levels of rehabs? Would the 40% be enough to cover the labor/material, say for a complete gut, until concealment inspection passed? Or do you modify it based on your project, like increase deposit at signing or additional draw if needed before concealment inspection passed. Thanks again Doug
I think it depends on who the GC is. I did a new build that cost a significant amount and my deposit due at signing was only $8k. Draws after that were in the six figures and they happened after certain work was finished (foundation, framing, etc.).
I am doing the 40/20/20/20 on two rehabs right now and one is a total gut while the other is a remodel on a 5300 sqft home. I find that the GC is very motivated and incentivized to hit the milestones and get paid.
Thanks Again Doug!