Contractor requesting 50% Upfront

192 Replies

Hello,

I have a contractor that is requesting 50% of what he quoted the job up front. It isn’t a super large sum of money, but I’m curious on what type of things I should do/look for to protect myself. As of now all I have for information on the guy is his phone number.

Thank you!

Alex, in michigan alot of guys do that. Being your an investor, I wouldnt pay 50% up front. You should have maybe 20% down. Then have a draw schedule set up that he gets so much as he finishes different aspects of your job.

Depends on the job, smaller jobs 50% is justifiable.  Sometimes depending on job 50% is the cost of parts and material. Create a contract with clear payment schedule and work to be completed you both agree on and sign it.

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@Alex Varner generally speaking, when a contractor asks for that much up front, it's because he/she does not have enough money or credit to purchase materials for the job. It's a red flag for me....

I often foot the bill on major materials. I know where to get them better price, coupons, rewards discount. The contractor gets paid so he can hire sub-contractors with may be 10% of total. As soon as a phase is completed I pay labor right away. 

My concern is I pay you 50% upfront, when you are going to complete the 50%?  I gave you just enough so you are eager to complete the first phase I will immediately take care of you. If you complete on time as agreed you get a bonus on top.

Okay so I have a question for all of you that are contractors or work with contractors on a regular basis. In my experience, having done 3 live-in lips with most of the work being done ourselves and a few things hired out, no contractor asked for any portion of payment up front, and for the most part, I had good experiences with just about everyone. In 2017, we bought a piece of land and moved a house on, did a basement, etc, and it ended up being a $100k job. The contractor required 50% upfront and the remainder due upon completion. I had serious doubts about 50% upfront since it's a lot of money, but I also understood that they'd be out a lot of money if a homeowner failed to pay, so after due diligence, I went ahead. It all worked out, and they were great. 

Recently this year we built a large outbuilding, and I hired a contractor to do all of it since I had enough other things on the go. Did my due diligence, checked references, saw photos of previous work done, price was reasonable, signed contract, and went ahead with him. Paid for all the special-order materials that would take a few weeks to come in and permits, and he gave me receipts for all of it. Excavation started, and then he quit showing up, and all the materials that were ordered... weren't, as I then discovered. Ended up losing quite a bit of money for those materials that were supposedly ordered but weren't. 

So my question is, how are you supposed to differentiate between the contractor that's trying to scam you and will take your money and run, and the legitimate ones when paying an up-front deposit is reasonable? 

In my first instance of paying 50k up front, I insisted on some kind of contract because their response was "Oh usually the client will just sign the quote sheet, pay the 50%, and then we get started." And those guys were great, I'd use them again and recommend them without any issues. 

But the second guy? He had "references" readily available, photos of good work done, a contract, everything that spells out legitimate to me. And yet, here I am on the losing end of that one. 

So how do I and others avoid the pitfalls of bad contractors? 

@Brianne H.

It is always a bit of a gamble working with someone new.  The following advice may not be helpful to you if you work in widely different areas but this is how I do it.

1. I use the same guys over and over for every project.  I don't even have most of them quote anymore, I just go over the job with them and they bill me afterwards.  Relationships are built such that none of my go to guys would lose my continued business.

2. If I need someone new I work strictly by referrals.  I will call up property management companies that operate in my area that I have become friendly with and ask who they use for a particular job.  I'll also ask general contractors that I trust who they use.  I would like to use Yelp and Google, but I find better work at better prices through referrals.

I have a contracting company. When we do very large jobs, we will do 50% down. However, it is at the end of the first week of work. We will have all materials delivered, demo completed, and rebuilding starting before a payment is made. We only do the payment to protect our investment. If funds are secured through a bank, then we do smaller payment amounts. Waiting to take the down til the end of the week has made all of our customers comfortable, yet assures if the customer defaults at the end, we can cover losses better. Giving 50% before anything begins or is ordered is not a good idea. It does show a red flag that the company isn't stable and may runoff to collect the next downpayment. When we do roofing or windows, we do not collect anything until completion.

@Alex Varner

I'd be hesitant to give 50% up front with someone I've never worked with before. As I'm sure some successful contractors will tell you, if someone says they need it for supplies and materials, they're not running a very profitable/stable business.

Fly-by-night contractors have a tendency to get busy, take on other jobs, and disappear leaving your work unfinished if you pay too much before the job's complete.

@Alex Varner

As a contractor myself, I only ask for 1/3 down. Unless there are special order items in which needs to be paid for up front, like windows.

Alex,

I have less experience than most of these people here. But my wife and I did have a rough experience with our first contractor. He did not ask for half up front, but also did not outline how costs were going to be attributed, especially since we purchased the majority of the bigger materials ourselves.

We recently hired a second contractor to redo our bathroom. This was ~$4300 that would be paid to him and included basic materials, the tub, and labor. I told him since it was a smaller job that we would purchase all of the other major items (tile, toilet, vanity, shower fixtures, etc...) and that I would pay him at the end once everything looked good.

So my newer rule of thumb is that if the project is less than $10k and I can personally pick up the majority of the big materials, then I will pay them at the very end so I can ensure the quality of the work and incentivize them to work quickly.

For the bigger projects, I would listen to the others as I have not taken on another big project yet

Originally posted by @Matt M. :

@Alex Varner

As a contractor myself, I only ask for 1/3 down. Unless there are special order items in which needs to be paid for up front, like windows.

  This is pretty much industry standard 

is he a company or a man with a truck type contractor? it's a red flag for me, I'd check local courts for any civil actions in his name and run.

I coincide with @Matt M. as our company has a 1/3 initial deposit then transitions into progress payments for the remaining 2/3. Now a caveat to that is the first progress payment is when the "materials touch the grass." So if the materials are 60% of the total cost (including their markup) that would be due relatively immediately sometimes even before deconstruction. Once the materials reach the site the homeowner owns them.

When you go to Walmart you don't pay 25% of the shelf price and say well let me take them home and see if I like how they fit in my cabinets.

Just something to consider because if the overall amount is small you may have a materials heavy job.

I would never pay 50pct up front. You are removing his incentive by doing that.  20-30pct avance is reasonable but only in a labor and materials contract.  

Frankly, younshould find another contractor even if he agrees to the 30pct down.  Fact is he tried to take advantage of you.  

Alex, I co-own a construction company and we always require 50% up front to purchase materials and pay the guys for the first couple weeks. However we are an accredited and trusted company. I would make sure you have personal references.

Another thing to protect you, the final 25% or however much, never pay until the job is completed successfully.

@Alex Varner check your state laws. That is illegal here unless that 50% contains special order things like cabinets. Do a Google search for “home improvement act YOUR STATE.”

@Alex Varner unless it’s a super established, well respected company I would never do it. Too much of an incentive for them to either underperform or not even show up. I had a guy try this with me once, I said “no”, we agreed on 25% and I ended up regretting that as he was terrible.

For small projects (3K) I wouldn't bother to negotiate the 50%, if they have good references and reviews.  For medium scale projects, I would negotiate the 50% to a 20% down.  

For large projects (+40K), I have done contracts with 10% down upfront, then phased it out by milestones, paid the portion of the phase once is completed.  I also hold 10% as security for liquidated damages, and I put in writing what is liquidated damages (time related cost, etc).  Once the project is at 100% complete, the contractor has demobilized and cleaned-up any mess, I do a final inspection.  If no punch-list items found, then I pay the last 10%. 

Originally posted by @Jason D. :

@Alex Varner generally speaking, when a contractor asks for that much up front, it's because he/she does not have enough money or credit to purchase materials for the job. It's a red flag for me....

 I agree with you.  Contractors with not enough experience and not enough cash flow to purchase materials... red flag.  

When a contractor tells me he needs 50% upfront for materials, I have asked them to get me a quote for the materials at their discount prices.  I have asked them to stored the materials in my property, and I will pay whatever cost they have incurred for the purchased, then pay labor/profit when the project is completed.  Interesting enough, not all contractors are willing to do that.  Why?? If they don't accept my terms, I just keep looking. 

Originally posted by @Paul Bommarito :

Alex,

I have less experience than most of these people here. But my wife and I did have a rough experience with our first contractor. He did not ask for half up front, but also did not outline how costs were going to be attributed, especially since we purchased the majority of the bigger materials ourselves.

We recently hired a second contractor to redo our bathroom. This was ~$4300 that would be paid to him and included basic materials, the tub, and labor. I told him since it was a smaller job that we would purchase all of the other major items (tile, toilet, vanity, shower fixtures, etc...) and that I would pay him at the end once everything looked good.

So my newer rule of thumb is that if the project is less than $10k and I can personally pick up the majority of the big materials, then I will pay them at the very end so I can ensure the quality of the work and incentivize them to work quickly.

For the bigger projects, I would listen to the others as I have not taken on another big project yet

 Sorry to hear your bad experience.  One thing to keep in mind is to let the contractor buy the materials you specified in the contract.  If you buy your won materials and and they don't fit or other related work from other contractors is an issue, then you are liable, and that is likely a change order (more $ for the contractor).  

I weight in already on the larger scale projects, but I din't mention you can make the contractor to be insured with a bonding company.  Depend on the size of the project, this could run between 1-3% of the job, and they will likely put that in the quote.  That way you have means to go after the contractor and another company will take over in the case of default (i.e. contractor file bankruptcy, not able to finish the work). 

If you have not worked with them before, then they should not be asking for that much up front in my opinion. Like others have said though, it depends on the scope of the project As to how much you should be willing to put down up front

You might try looking into your state law regarding contractor down payments. I believe in Massachusetts, contractors can only ask for 1/3 down. Having said that, I'll sometimes pay a contractor I know well 50%, especially if it's a job where 50% of the cost is materials. With a contractor I'm working with for the first time ... materials only up front, and maybe not all at once.

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