Contractor requesting 50% Upfront

192 Replies

Originally posted by @Matthew Paul :

I am a Contractor and Landlord .  There are so similar . I supply the lease to the tenant , and I supply the contract to the customer .  A security deposit and first months rent is collected at lease signing for a tenant . With a customer they sign the contract and we get 1/3 down to get on the schedule .  Tenant has no money for rent ....eviction , customer has no money for second draw , no work . 

I think its funny when I hear ,"dont give a contractor anything up front "  You buy the materials , Charge the contractor if the job runs over .  These people are not hiring licensed professional contracting businesses .

In my world as a contractor , The customer signs MY contract  ( its 25 pages plus work details) . We supply all the materials ( and we mark them up too ) . It there is a change order ( and there always is )  its paid up front , AND days are  added to the completion time .  We get 1/3 down ( as allowed per Maryland law ) each and every time . 

The job actually starts 5 days after the contract is signed , even though we wont be on site for another 5 weeks . We are ordering supplies , setting up subs , permits , etc .  Now by the time we place foot on the property we have spent a good chunk of that deposit . So after 1 week we get the second third .  the final third is broken down weekly .  There are no freebies or "while you are heres " if its not in the contract its an extra . Any delays caused by the customer , cost the customer . 

A professional contractor NEVER finances a customers project , thats what banks , hard money or savings are for . A Professional never lets the customer get behind on payments or uses their funds or credit to do a customers job .  When we hear " I dont pay deposits " I am actually hearing " I am going to screw you on this job " . Contracting is a lot about managing risk , as long as you dont let the customer run behind in payments your risk is minimal .  If you dont trust a contractor DO NOT HIRE THEM . Good contractors are never the cheapest , the cheap guys go out of business quickly . Do a background check on the contractor , because as a contractor I do them on my customers . ( liens , judgements , criminal , lawsuits ) . 

 Like others have said . the amount of shady contractors out there is equal to the amount of shady customers . 

Spot on, as someone who has worked as project manager both for a fix and flip investor and for a A-rated(Better Business Bureau), Class A general contractor you hit the nail on the head, a true contractor (one can run his own business, schedule efficiently and effectively, not get in over his head and do all of this with a degree of professionalism) knows better than to finance a project, typically from being burned in the past.  

You may be asked to pay more or pay more up front by someone who operates a professional business but a cost that is well worth the benefits.

In full disclosure, the general contractor for whom I currently work operates in a niche market and off-the-street business accounts for less than 25% of our total revenue, we do require a 50% deposit for new customers with whom we have no business or third-party backing from.  We also have been in business 20+ years locally and have 100+ Google Reviews accompanied by Yelp, Angie's List and Facebook reviews also, along with many local charity projects published in local newspapers.

A company with this much good publicity is easy to gauge and justify the 50% deposit.  A company with very little 'presence' I would most definitely do my homework and ensure I have all of their pertinent info (business info, contractor's license, etc....) and verify it with the proper sources.  On top of this I would ask around on local message boards and/or other investors who have used them.

50% on a small handyman type of job isn't unreasonable, but 50% on a large job should be pause for due diligence, not that I wouldn't do it depending on my trust and experience with the individual but definitely a cause for due diligence.

As has been said before, for every shady contractor, their is usually an equal number of shady customers.

@Alex Varner

Because you don’t know each other, it’s up to you to negotiate in a way that is a win win scenario, whatever that looks like.

50% upfront although not uncommon isn’t a win win starting point generally.

30/30/30 is far more common and a good way to ensure work keeps moving.

@Alex Varner I have never paid the contractors upfront for any sort of down payment. Everything on completion of the work. For roofing and siding work, I bought the material and had it delivered to all my properties. Labor was paid once the work was completed. For my carpet installer, since I have always used him, he actually gives me 30 days to pay but I send payment within a week. My handyman is my go to guy and he gets paid within a week of completing his work and all this is because I am not readily available to pay not because of lack of funds. I have made them use Cash app and Zele so I can make quick payments.

There are waaaay more shady contractors than there are shady customers @Matthew Paul , and it's not even close.  I respectfully disagree with that statement.  I do agree, however, on what you've outlined it's exactly how projects are managed.  As a certified PM myself, I detail a plan to the contractor, and nickel and dime every cost.  They look at me like I'm crazy.  It is not.  I repeat, it is not my problem if your subcontractors call out, don't want to show up to work etc. my project is delayed a day after your projected completion, it will be deducted from your funds. Not even up for discussion.  I've got burned once, and learned my lesson.  Now I'm militant when I manage even a light-bulb switch.

@Alex Varner Always stay ahead of the contractor. I typically provide materials for all jobs, and as they finish each quarter of the labor to my liking I pay out. If they walk or disappear at least your cost to completion is balanced. Only time I have had a sub ask for anything upfront (with me providing materials) always turned out to be a situation that they don’t have the tools or the know how.

Hope this helps!

Artis

@Alex Varner

@Brianne H.

Hi - I am a Developer and GC for residential homes in Southern California. Here is my take on the situation.

**NEVER PAY A SUB 50% upfront**

1st Always have a proposal from the esteemed subcontractor it vendor, with their information - qualify the sub no matter how big or small the job is:

• look up their State License on your state license board - make sure it’s active, not suspended

• Let them send in their insurance information with your property as the additionally insured

• keep track of any Preliminary notices that they may send to you

2nd Come to a written agreement/contract of a payment schedule* - with less 5% retention on each invoice until close of project scope

A timing schedule is also really good to have in your contract that way they are not just prolonging the job.

Payment Schedule can be as following example:

10% upon scheduling / start (less 5% retention)

25% when 1/3 of work is complete (less 5% retention)

25% when 2/3 of work is complete (less 5% retention)

25% when 3/3 of work is complete (less 5% retention)

15% (Pay the retention) - upon final inspection

**As a 1/3 is completed you pay 1/3 (less retention)**

The less checks you have to write - the better

A written agreement for payment schedule lessens the chance of them asking for a check every week, they know how they will have to manage their payments, and so will you.

I recommend always purchasing the materials yourself, or paying for them separately / if the sub has materials included be sure to cut joint checks to suppliers + subs, prevent liens from suppliers if the subs don’t pay them.

Hope this helps to clarify some things when it comes to paying subs. I always have an onsite meeting, ask for previous work photos, website, reviews, and referrals from others help to narrow down good subs. Get your agreements in writing!

@Alex Varner

Depends what type of work. I request 50% upfront especially if my material cost is more than 50% I also do 3rds if the job is to be done over many weeks. It’s sad to say but I can’t even trust family to give me a 0% deposit. I don’t think enough people ask for references. It’s always a tough decision on what to do.

As a former contractor, and lifelong RE investor / flipper/ etc........I've had more than one contractor disappear after giving them 50%.   I never do it anymore, regardless of size of job, regardless of referrals.   If it's a week long thing,   nothing up front.    If it's a several week thing,  maybe a 3rd at most.   

First off, materials are a small portion of the cost of construction.  Most of the cost is labor.    So 50% up front is a joke.   Especially when no labor has even occurred, yet you are expected to pay for it up front?     

Second, yes on the flip side, one could argue they should not have to pay for materials out of their own pocket especially when they are about to permanently attach those materials they paid for to your land or building.      So paying for materials up front is reasonable.   But labor shouldn't be paid for until labor has happened.    

So what I do if a lot of materials are needed up front is figure out a way to pay their supplier direct.    Super easy if a small thing - you can tell your contractor to go to home depot, and you can pay by phone.   (ask cashier to give you a general run down of what's being purchased first).   Or if a bigger thing involving a lumber yard or specialized vendor, you can agree to meet them there and pay the vendor direct.   

Then you know your up front material money is truly going towards materials, and materials specifically for your job.   And not their cell phone bill or rent.       

@Alex Varner

To often customers don’t want to pay even though they agree to a price. Besides that customers always want to decide when they will write the checks, when it’s convenient for them. We’re not talking about a slice of pizza but you don’t pay for food a week after you eat it. When the work is done money is due. I’m on the contractor side of the business, I just did work for a customer yesterday and after I was done they told me they weren’t going to pay because they didn’t feel like it, they decided my services were free. I can’t blame anyone for wanting to collect a deposit. I showed up, I drove an hour to get there, I stayed for two hours and I drove an hour back. They agreed to pay before I got there. Respect and word is a dying trait.

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@Alex Varner in my area and how i like to do payements is a 1/3 at start and the rest upon completion. If it is a bigger job maybe 1/3, 1/3, and 1/3. I always provide a detailed estimate of all the work to be done from start to finish and if the client would like one an itomized material list. The first 1/3 for me is just in case something happens and i don't get paid the rest at least i have enough to cover the matierals for the most part. If you have a contractor that you use somewhat often such as a plumber, electrician, etc... ask them if they have heard of the guy or business and can give you some feedback.

@Alex Varner

This has been touched on a lot in this thread but I wouldn't pay 50% up front. Just offer to pay for materials and make certain your contract is very clear. As a compromise maybe you could offer an incentive for completing the job, since it seems he is in need of some cash flow. Paying for materials allows him to get started and allows you to know exactly what you are buying and how much it cost. That along with a 3 maybe 4% "bonus" for completing ahead of schedule is a good way to find a win win. Good luck!

@Alex Varner The most that I would consider as a fair initial price is 1/3 of total cost. However I do typically like to see the contractor begin the project (at least setup) before I lay out any funds. I typically do no make my first payment until project is 50%+ completed. Best of luck!

One thing lots of contractors do is jack up the materials cost.

They do not want you to see the cost of the materials. So, they ask for monies up front avoids a bill with how much the materials truly cost.

On a HVAC job they really jack the cost up on the unit 30% to 50 %.

This thread goes to prove there are many different ways of conducting business . 

There are contracting businesses , and there are guys in trucks trying to make a living swinging a hammer . The latter are not contractors . Most rehabbers / flippers cant or wont afford the professionals , they look for the cheap way .  When you go cheap you get cheap .  

If a customer hires a contractor that takes the money and runs , the ONLY person to blame is the customer . They didnt do their homework . Finding a worker  on craiglist , home advisor , in the home depot parking lot is THE worst way to find someone . The BEST way is thru referrals .

if you cant afford to do it right the first time , how can you afford to do it over 

@Alex Varner I recently had to tighten up control on a project, I used a whiteboard and a task by task break down.

When we put up a task (e.g. demo and install backsplash) we would put a level of effort next to it on the whiteboard (1.5 days). I was paying for crew time at a specific rate per day, and paying for materials separately.

I would pay 50% of the day rate to put the task on the board and pay the remainder when it came off (was complete).

Worked well until one of my carpenters took some pills, sprayed high-gloss cabinet paint everywhere (including brick on facade) and then shot my refrigerator (yes, with a gun) when I fired him. But that’s another story.

Originally posted by @Matthew Paul :

This thread goes to prove there are many different ways of conducting business . 

There are contracting businesses , and there are guys in trucks trying to make a living swinging a hammer . The latter are not contractors . Most rehabbers / flippers cant or wont afford the professionals , they look for the cheap way .  When you go cheap you get cheap .  

If a customer hires a contractor that takes the money and runs , the ONLY person to blame is the customer . They didnt do their homework . Finding a worker  on craiglist , home advisor , in the home depot parking lot is THE worst way to find someone . The BEST way is thru referrals .

if you cant afford to do it right the first time , how can you afford to do it over 

 you can do all the homework in the world and still get bent over. like i've mentioned some pages ago, the only solution i can think of that will protect both parties is an escrow account. anyone see any cons to that? (other than fees)

I have been wishing that we all used some kind of escrow method, to protect both the contractor & customer.  Why don't we do this... have a 3rd party (bank, organization, title agency) hold money in escrow until agreed upon work has been completed?!

@Alex Varner

I have been a contractor for 12 years and require 50% deposit to get on our calendar. I never push the customer for the deposit, I discourage them from making the deposit until they are absolutely certain and ready to schedule. Most of the deposits we collect are via credit card which there is some safety there for the consumer. We require it to not avoid not being paid by our customer as much as avoid last minute cancellations and reschedules. In our experience House flippers are shopping around for the best deal and last minute cancellations can leave us with employees with nothing to do.

Our company actually avoids working with newbie house flippers and many other contractors do the same. So I would advise not telling your contractor you are planning on flipping the house. Because what the contractor hears is looking for lowest bid, tight time lines, borrowed money. If you are flipping for the long haul find a reputable contractor pay promptly especially when you do find a good contractor.

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