Rental Property Investor · Round Rock, TX · Member since 2019 · 251 posts · 159 votes
Just got my first deal. Now we are ready to renovate. Is it customary to pay contractors anything up front? Most bids came in asking for 50% up front and 50% upon completion.
I wouldn't give a contractor 50% upfront and 50% upon completion especially if I've never worked with them. It's common for contractors to ask for some money upfront typically to cover the cost of materials. Then moving forwards payments should be on a draw schedule as they complete and sign off on stages of the rehab. It's important to have this documented and agreed upon (via contract) before you give them any money or they begin any work.
@Tim Miner look up mechanic’s lien on google. I am not sure if I can post external links here but this should point you in the right direction. If you’re a contractor, your supplier can do these for you at no cost. It protects your interest, and theirs.
@Robert Tinker
Hi Robert, I'm a contractor and I don't take anything up front.
I typically do progress payments in 5 draws. Gather the entire scope of work, propose a schedule with estimated completion timelines, and propose a progress payment schedule for 25% draws once I hit each milestone.
Most Contractors have wholesale credit accounts with their supply stores so they dont have to pay for material up front. I pay the supply stores after I've been paid. This allows my investors and other clients to trust me from the start and if I don't get my first draw after 1/4 of the work is done, no problem I'll put a lien on the place and get my payment then. It's a win win on both ends.
I do this with contractors for my out of state properties and we've developed wonderful relationships once they know you cam be trusted to pay up.
Best
Junior
So we buy all of the martials for the contactor and set up a draw schedule that we're BOTH comfortable with. It is typically once a week AFTER work has been completed and I have a lien waiver signed.
Material cost is the only real reason for them to want a large sum upfront, so covering that yourself helps cut back on their risk and yours.
@Greg Dickerson how does a contractor demonstrate “financial ability to perform”? Thanks.
You ask for vendor and subcontractor references to see if they pay their bills on time or have any past due balances. Check with current and past clients to see if there have been any issues.
Just be careful about leaving materials on the site. I would only take what is needed for the current job and even then maybe only in chunks. Give everyone instructions to not leave any tools visible from the out side and make sure blinds or curtains are drawn.
I would also pick the materials up myself or someone I trust.
I worked as a controller for an industrial contractor and the 3 main ways to bill a job is Time and Materials (profit comes from mark-up and billable rate), Lump Sum (profit comes from estimate plus margin), and Unit Cost (labor and overhead built into the material markup, this is less common).
I have it worked out with my contractor that I buy all the materials and then pay for labor weekly. So T&M but without the material markup. We've done several houses this way and it works for us, it's a very transparent way of doing business. My contractor has a pretty small operation because he's mostly retired so I'm not sure if this is easy to get.