GC contract/draws/fairness questions

15 Replies

Hello,

A little background.  This past year we have run the gamut of GC's.  A fellow rehabber was taken for 23k.  The GC just took the money and never showed up.  I had a few bad experiences culminating with this last one - we hired who we were told was the best GC in town.  The 80 day rehab has now ballooned to 8 months due to him spreading himself too thin and using me as his unwilling free hard money lender.  Now we are suing.  Anyways.  Its been less than ideal.  

We are now starting a new project.  We are now that girlfriend whos been beaten by some dude for months, and now our next relationship gets to deal with our baggage.  LOL.

Ive been told by a rehabber in town that its not realistic to have the GC sign anything that commits them to penalties if they run over, so thats off the table....right?

How do you guys structure your contracts?  I dont see myself giving anyone 50% up front anymore.  Is it realistic to think we can find a GC who works more hand to mouth?  Who can afford materials and labor without us prepaying?  We want to be fair, but we dont want to find ourselves in the position of them having all of our money again, and us not having any recourse.  

Not fun an my sympathies.

A couple of suggestions;

Check RECENT references - a reputation is difficult to build and easy to destroy.

Separate materials from labor and pay / deliver material to site yourself. Note - now if material is not there on time, you are the one at fault.

Pay minimal upfront fee and schedule payments on completion of various tasks / stages.

Hold back final payment (10%?) until every last nit picky item from the final inspection is DONE.

Hi, had  similiar experience until I was lucky to find someone who worked with me. However, I also learned to provide material, pay per project completion and made that clear up front. Portion out your rehab into 3,4 etc phases and go from there.  Give something upfront but on your terms, maybe a third but the key is things have to be on your terms. 

Thanks for the responses everyone.  Im just trying to avoid being unreasonable.  Ill pay them upfront and do 3-4 draws based on key tasks being accomplished, holding back 10% for after the punch list based on what Im reading.  

What the GC has proposed -

Materials: $9000 estimated 


50% of material down to start job = $4500 


25% of material due in 7 days of project start = $2250 


25% of material due in 14 days of project start = $2250 


Labor: $15,000 

estimated Labor broken down into 5 even payments 

$3000 due upon start of project $3000 weekly payments due every Friday or every 7 days from project start. 

Final labor payment will be held and paid once project scope is complete.


This doesnt protect me from him starting the project and then not showing up again, thereby having 7500$ of my money I would then have to go to court to get.  Does this look reasonable to you?

Unless you are a GC buying materials yourself is not a good idea. GC's get better pricing on materials and know what is going to work and not going to work. They also remember to get all of the little things that you will forget (eg. Wire Weld Framing Nails and Sawzall Blades). When labor is running you 1,500/day even minor stoppages are costly and if you insist on buying the materials you should expect to pay for any stoppage. 

Truth is, at your job size it is hard to get super consistent and good contractors.  

I charge on a cost plus model which could work well for you. Cost Plus is where you agree to pay the cost to build plus a service fee. Some people charge a percentage as a fee but I prefer to set a fixed number. I think it aligns everyone's incentives better.  

Basic structure is this:

Costs are hard costs and associated overhead. These are calculated and invoiced monthly. 

Professional Fee is a separate line item and paid out over mile stones eg. foundation, framing, etc. 

I usually take 25% of my professional fee when the contract is signed. BUT, I don't start billing costs until a month after we have started. 

Like I said, it's really hard with smaller projects to get good contractors and the better ones are going to charge you for the estimate. 

As a contractor , I can put the materials on my account , BUT I wont . I want money up front . Its strictly business , If you want me to front the materials then I will be a hard money lender . 

The truth is how does the contractor know YOU are going to pay him ?  Too many so called "investors" dont have the cash to get the job done right . 

Customer supplying materials .  Well when they arent on the job , or they are wrong or there is not enough . I am now billing you by the man hour while I wait . Not only is the job delayed by 2 or 3 days waiting , but you are paying for my time .

Contractor Marking up materials ,  But of course they do , I get a nice discount at the supply house , The customer pays retail . My relationship with the supply house is to my benefit .  

Completion date , we always give one , But anything outside of our control that occurs extends that date .  Inspectors backed up , weather , etc . 

As far as paying the customer damages , if not done on time ,  thats only on commercial big jobs , not gonna happen on a little residential job . 

We get 1/3 when we sign the contract , 1/3 when we start on site and the final 1/3 upon completion .  If a customer doesnt like those terms , we just move on to the next job . There is too much work out there . 

Thanks for the replies guys.  How do the investors protect themselves when theyve paid you 2/3 just for starting the job?  We have seen with our own eyes tens of thousands of dollars stolen when people do this. 

Originally posted by @Steven Mitchell :

Thanks for the replies guys.  How do the investors protect themselves when theyve paid you 2/3 just for starting the job?  We have seen with our own eyes tens of thousands of dollars stolen when people do this. 

I am licensed by the state of Md , I have a bond . 

finding a good contractor is like finding a good tenant ,  Check licensing requirements , check court records , find out who owns the contracting company , do they own a house or rent , ( if they dont own   dont deal with them )  ride by and see their house . 

if you go with the cheapest bid , you probably made a bad choice . Professional licensed contractors are not cheap . 

Working in commercial construction the terms that residential contractors get it's absolutely insane. I meant if I was a residential GC I would do the same thing; however from the outside looking in it is pretty much highway robbery. We don't get anything up front to start a job, we bill on a month to month basis depending on the amount of work put in place, and the client holds 10% retainage until all the I's are dotted and T's crossed. Then more often than not there are liquidated damages on top of that. 

My advice would to be to negotiate with your next GC as best you can. Maybe try to explain your past experience and that you are looking for more favorable terms in order to protect yourself and allow them to still proceed with work. A third at signing, third to even begin and then the final third at the end seems very one-sided. I would probably try to navigate more towards 25% at signing, 25% at a 3rd complete, 25% at 2/3rds and then 25% at completion. If they start to fall behind hold the payment. Should be an incentive to keep on track and not try to take advantage of you. If nobody will give you any favorable terms then the construction market there is just over saturated.

Just a thought. I'm no expert in residential. Others may be able to chime in better.

The 1/3 down then 1/3 at start and 1/3 at finish is the in the Maryland home improvement law . 

I agree with Matthew Paul.  Find a reputable contractor who has a bank account in the name of the business(no checks written to their personal name) and preferably credit at Home Depot and local suppliers.  When you find a good one treat them well.  My current one has been with me for seven plus years and we have completed several dozen projects together.  I bring them lunch from time to time and give them bonus.  

@Steven Mitchell
1. Yes I include liquidated damage clauses in my contracts
2. I do not provide any upfront mobilization costs.
3. I get them to sign a contract that includes
My language with schedule days / durations in it
4. I work with them on the requisition (payment structure) for how and when they get funded
5. If the project is over $100k I may require them to get a payment and performance bond which can be included in the cost.

If they are adamant on some payment upfront (which should never be 50% I would not give more than $2500) then I would not do it unless they give a bond. That way if they bail you go after the bonding company. If they can’t get a bond it means there company is not financially viable and you don’t want them.

I tell people this upfront not to waste their time or mine. You will find that those that agree to this are truly legit and you don’t have issues with them. You will pay more upfront but less in the long run because your not dealing with the issues.

@Steven Mitchell We do, we can eat up to 50k without billing. But what protects us from you or any other financial institution you work with? I mean, if we deal with say a corporate company like Hilton, we know they are professionals in dealing with contractors, pay them when bills are due, understand what a change order is, and all that good stuff; so basically we speak the same language. Now how do we know that YOU get our terms,
lingo, and standards? I’d agree with bonds, that’s a 5% premium but you have full recourse. But of course, if your guy with a truck and tools give a quote of 30k, don’t expect a 30k bid from a bonded contractor. With bonds, we get 10k from you, and we don’t show up, call our bond company and get your 10k back, takes a little time to get it but you will.

I actually didnt know we could get bonds.  Yes, Im that ignorant, lol. 

Thankyou so much for all the replies, it looks like the bond is the missing piece here. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.