Contractor requesting 50% Upfront

192 Replies

Lots of posts and opinions on this topic, many of which state that 50% deposit upfront is unreasonable which I agree with.

Clearly the laws in other states differ dramatically from CA as contractors are not allowed to charge more than a $1000 deposit upfront at contract signing. Then your draw schedule kicks in and should be a fair draw for both sides. Obviously it is risky and unfair to have a contractor charge a client too far in advance of work completed and on the other hand, unfair to the contractor to have to outlay funds too far in advance as they risk the client not paying. Yes they can mechanics lien the property if they take the proper legal steps but who wants to deal with that.

As a developer and investor, I have always ensured that my contractors deliver a fair draw schedule and I am never paid too far upfront to eliminate risk. As a general contractor myself, I also ensure I have some kind of draw to cover upfront expenses as to not get burned by a client.

Ultimately, the client show investigate the contractors license, check to see if the contractors board has any reports filed against them, check the contractors insurance, workers comp, and bonds, and you can even go as far as checking the BBB and the owner’s name to see if there are any criminal or other negative items against the business or the owner. Due diligence is key as there are too many unscrupulous characters out there and that includes clients, not just contractors.

Hi everyone

As a contractor it depends on how well you know the contractor. I have been given 100% of the proposal price but my company worked with the client for over 40 years.

As for protection, 20-30% is reasonable. Myae sure you have a proposal detailing the work and payment schedule. Also make sure the contractor is licensed insured and has workers compensation.

I hope this helps.

My husband is a contractor and he owns a custom cabinet shop. For most of his construction work, he charges after he is finished. All of his suppliers, he has credit accounts for. He has 30 days to pay on these credit accounts, once the materials are ordered. Now that I am thinking about it, it might make sense for him to charge an amount up front though.

For his cabinet jobs; however, he charges 50% up front. He does not own massive amounts of material for the wood to make the cabinets or the stain/colorant colors and finish. He charges that much, in case a customer decides to back out. That way, he covers the costs of the goods he purchased for the cabinet job the customer agreed upon.

I hope this helps.

Originally posted by @Tyler Kinkade :

@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.

Thats it .  

Its interesting , almost all those who are contractors say yes to deposits  ( amounts vary )   and most of  those who are not contractors say never pay a deposit . 

Originally posted by @Matthew Paul :
Originally posted by @Tyler Kinkade:

@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.

Thats it .  

Its interesting , almost all those who are contractors say yes to deposits  ( amounts vary )   and most of  those who are not contractors say never pay a deposit . 

 well, you guys want to get paid, and we don't want to get screwed...

I had a roofing company with great reviews ask for 40% up front. I hesitated but they  had great reviews, had the best price and reportedly had the best service. 

I made a mistake of not getting in the contract the start and completion date of the work, weather permitting. 

It took me 3+ weeks of hounding him and excuses to finally get him to schedule my job. He completed it and I paid him the remainder.

Before I paid him/or even hired him I made sure his LLC was legit, that I knew where he lived/ran his business from and that he was bonded through the state.

It does seem to be a risk you take but so long as they have great reviews and are in good standing with the state, you mitigate the risk somewhat. I'm dying to know if anyone has a better way....

@Alex Varner I'm a contractor & have been for over 25 years. I only take 25% upfront then set weekly draws depending upon the scope of work & how long the job is to last? I have worked with guys that does take 50% have very lil returns or ripps you off. I'm landlord and investor friendly I only charge what I feel I have in the jobs & all customers pays my discount prices I dont mark up on materials like my competitors do. Hope this helps! Have a nice day.

Doooonnnn'ttt doooo ittttt..... I've been burned this way in the past (more than once, guess I didn't learn my lesson the first time!). There are plenty of ways to manage their outlay of cash in smaller increments, and perhaps you can ask for receipts when they buy materials and pay them daily or weekly as work gets completed. Ideally, tie each payment to a milestone or deliverable so you can ensure the work gets done and you aren't left out of pocket with a project that's going nowhere fast. Good luck!

Originally posted by @Yelena Johnson :

Doooonnnn'ttt doooo ittttt..... I've been burned this way in the past (more than once, guess I didn't learn my lesson the first time!). There are plenty of ways to manage their outlay of cash in smaller increments, and perhaps you can ask for receipts when they buy materials and pay them daily or weekly as work gets completed. Ideally, tie each payment to a milestone or deliverable so you can ensure the work gets done and you aren't left out of pocket with a project that's going nowhere fast. Good luck!

Ask for receipts for materials ? Pay daily ?      You must be dealing with chuck in a truck . 

Contractors provide you a price for a finished product .Included in that finished price are materials , labor , overhead and profit .  What we pay for materials is none of the customers business .  We get prefered pricing at the supply houses , depending on how much we spend , we can even get free vacations from some depending on our volume . Our relationship with suppliers does not get passed to the customer , it is part of our profit . 

I would not do this if you are inexperienced with this contractor.  15% - 25% is fair, but 50% is a major red flag for someone you do not know.  I would explore other options.

Ill be honest I haven't read all 3 days worth of replies and Im sure there is a ton of useful information that has answered your question and I will probably repeat ... but Being a contractor... here it is anyway!!!    CONTRACT, CONTRACT, CONTRACT.... if he can't give you a Contract then he's not a real CONTRACTOR! The contract that HE should give you should have the project address, anticipated timeline, detailed scope of work, payment terms, and some legal section about what happens when things don't work out. Im a General contractor, the legal section of my proposal is 8 pages of size 10 font. It spells out all that things from what happens if the dumpster cracks the drive way to what happens if payments are late. IF you want to pursue working with this man you should have him provide a Contractor license number that you can verify with code enforcement, proof of insurance (General liability and Workmans comp), a List of all his subs and THIER insurance certificates. The detailed scope should include mentioning what ISN't Included and what IS included (who pays for the faucet if he just goes and gets one? Who's bringing the tile to the job? ECT...     As a General Contractor    I do not do free estimates because I don't work for free, (Do you?) I do require 35% due at the signing of the contract. Notice I do not get paid until my customer has signed the contract and everyone is bound under an agreement. Then 30% after that upon the start of drywall and upon the start of electrical trim out, the remaining 5% then is due upon the completion the contracted work and signed punch list. Any change orders are due in full before work on them begins and the customer needs to sign off on the cost and the time the change is adding to the project. 

Originally posted by @Matthew Paul :
Originally posted by @Yelena Johnson:

Doooonnnn'ttt doooo ittttt..... I've been burned this way in the past (more than once, guess I didn't learn my lesson the first time!). There are plenty of ways to manage their outlay of cash in smaller increments, and perhaps you can ask for receipts when they buy materials and pay them daily or weekly as work gets completed. Ideally, tie each payment to a milestone or deliverable so you can ensure the work gets done and you aren't left out of pocket with a project that's going nowhere fast. Good luck!

Ask for receipts for materials ? Pay daily ?      You must be dealing with chuck in a truck . 

Contractors provide you a price for a finished product .Included in that finished price are materials , labor , overhead and profit .  What we pay for materials is none of the customers business .  We get prefered pricing at the supply houses , depending on how much we spend , we can even get free vacations from some depending on our volume . Our relationship with suppliers does not get passed to the customer , it is part of our profit . 

LOL - I've dealt with everyone from a 'Chuck in a Truck' (great phrase, by the way) to contractors building $5 million homes in the Palisades to massive firms building out $100 million+ campuses for hospitals, tech companies, and airports. I've seen all the budgets, and I've seen the receipts from supplies, especially for residential. If you aren't transparent, how am I supposed to know what quality materials you are using, and whether  myself (if I'm the investor) or the client  (if I'm consulting and providing financial auditing / oversight) is being taken advantage of and getting what they were promised? Markup should be clear and transparent, and apparently it's not in your community, but I assure you it is with professionals in California who I've worked with. Investors know the contractor has to make a profit, and I like to work with contractors who are transparent and up front about what their profit margin and fee is - not someone who is trying to bake it into the cost and hide it from the investor or client. 

I don't know what actual project the original poster is working on, but assuming it's likely a personal investment property. Most investors on this site are thus working with people who are smaller scale contractors, and managing your investment and asking to see receipts should be standard practice unless you've worked with someone countless times and have built up a trusting relationship. And even then, seeing receipts as the project continues and tying payments to milestones is 100% the RIGHT way to do it - if you care about making money, you need to know your costs. You can be lazy all day long as an investor and 'trust' that the contractor is using the right quality materials, not cutting costs, overcharging or cutting corners on your project, but don't expect that you aren't increasing your risk of being taken advantage of in some way by 100x. 

@Alex Varner as heard from a recent bigger pockets podcast, this is usually a red flag. The first part of any project is demo. Which has no material costs. Let them complete the demo, then material cost can start coming into effect.

@Yelena Johnson  Honestly the contractors profit margins are his business , not the customers . The quality of materials ?   The specific materials are listed in the contract .  Now a lumber package , drywall , insulation , whats the difference in quality between 2 by 4 's ?  Unless I open my companies books to you , you will never know my profit margins . 

Originally posted by @Ian Brookwell :
@Alex Varner as heard from a recent bigger pockets podcast, this is usually a red flag. The first part of any project is demo. Which has no material costs. Let them complete the demo, then material cost can start coming into effect.

  

Ian , the first part of the project is paperwork , and office work .  Permits have to be applied for and secured and paid for , material has to be ordered , scheduled ,  and sourced . Subs need to be contacted and scheduled . Dumpsters need to be delivered and most get paid up front . 

Materials are bought thru the entire project , the first third is not a materials draw , it pays the labor , pays for some materials , pays for other overhead , and yes part of it is profit to the contracting business . We dont wait till the end to collect profit , it is ongoing as the project is being done .

investors are always under more risk by paying a large % dp. people keep mentioning contracts, but even if you win in court (think court fees, lost time, etc.), good luck collecting that judgement. Matt, do you really think contractors carry more risk? At least you can put a lien on a property. What similar mechanism do investors have?

I agree with @Shawn M. it depends on the size of the project. I would say anything around $10,000 is small.

@Alex Varner

I require a piece of mail with their address on it and a copy of their drivers license.

@Brian Beck LOL then I would never use your contract company. 5 weeks before you even step foot on the jobsite ?  what kind of nonsense is that. and by that time you're already asking for another 3rd. WOW. Plus you are marking up the materials. You must do alot for just homeowners because i dont see investors being able to do that. You keep all the profit and none for the investor. Heck NO! I find good, cheap labor. I supply materials. Most investors should do that  and not let a contractor run up their bill. Hell No. 

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Depends on the contractor. If you are using someone who is a very small business (which is who I normally use), they may not have the money to front the supplies. Sometimes I have them pick up the supplies and then Home Depot will call me and I'll pay with my credit card. This lets me avoid giving money up from and they don't have to front the cash for supplies.

Thank you Alex for asking the tough question. I am in the same boat. Closing is on the 1-31-19 in Redford MI (suburb of Detroit MI) and the contractor quoted a price of $6800 and wanted $4500 upfront I negotiated down to to $3200 but I am still a little uncomfortable. The guy was referred to me by my Realtor and when he used him he only paid for materials through Home Depot pro desk. I am a rookie without a proven track record so the guy wants some cash. I am curious to see the thread results and thank you all for showing us the way.

@Victor S.  Contractors should carry no risk on a customers project , they dont share in the reward .

Sure I can put a mechanics lien on a property . That takes time , and money . The property most likely has a first , maybe a second on it . So now I have a lien , but I have paid my subs , paid my suppliers , and all the other business expenses . I am in negative numbers . 

@Alex Varner good afternoon Alex my name is Andre I’m from California and I am a California licensed contractor in California, it is required by law that a contractor receive 10% down of the contract prior to starting which is a good rule of thumb but in order to help the job progress faster because we know money talks and BS walks put him on a progress payment schedule by percentage of work done you give them the 10% he comes in he gets The work done to a percentage and you pay them based on the percentage if he’s having trouble acquiring material to start the job have him and his vendor deliver the material and you pay the vendor direct or you pay your contractor and he pays the vendor direct on the spot to protect you from any Leins any future questions don’t hesitate to ask aloha hope this helps

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