Best methods to pay contractors??

61 Replies

I’ve heard most investors say they wouldn’t pay any money upfront but then most contractors I’ve heard say they wouldn’t start work without a deposit. How do you come to an agreement where both sides feel comfortable to move forward without any snags or resentment before the project even starts. Thanks guys and gals.

It is standard procedure to pay a deposit or at least a percentage of the cost of the work upfront. However, before I would do that, I would check references and see if they are registered with the Better Business Bureau. Be sure you are dealing with someone reputable before you hand over any cash. 

A common theme I hear from pro's is to pay in 3-4 parts. Maybe an initial deposit to pull permits, then pay them after rough-in work is done, then a 2nd payment when they finish and finally, the last payment when it passes inspection. This keeps them obligated to complete the work correct the first time to get paid. If they are total scammers, you are only out permit pull money, but hopefully your due diligence beforehand will avoid those types.

We usually pay either 1/2 or 1/3 up front but won't make the final payment until the job is completely done. Beforehand though, we always meet with them/interview them to make sure they seem trustworthy, check online for reviews if they have them and ask for references and call.

But most importantly, we always try to start them on a small project (a turnover or small rehab), that way, if they do run off with the money or do a bad job, we won't lose much money. That way we can make sure they are trustworthy before giving them bigger jobs (but even still, we don't pay more than 1/2 up front).

@Anthony Porembski If we are dealing with a contractor for, say, one project, we never pay anything upfront, and we pay on Friday based on work done during the week. 

For larger projects in which the contractor has to buy all the materials, you would have to pay some sort of money upfront to get the job going. 

@Anthony Porembski I would pay as work is completed. Like @Ola Dantis suggested, do something like every Friday. Keep in mind most contractors have terms with their suppliers. That means material delivered today is probably not requiring payment for weeks. Payroll is different. That is every week or every couple weeks. So if you are paying them every week for work completed, that should give them plenty to cover their costs. 

@Anthony Porembski it depends on your history with the contractor. You can pay 25% upfront and after that make progress payment on work completed. You can also pay weekly, bi-weekly, or monthly, based on work progress/completed (that means you only pay for the work the contractor finishes during the billing period). If you make that 2nd arrangement, you must fulfill your end of the agreement each time to build a trust level for future work with the contractor. On either senecio, NEVER pay the final payment to the contractor until you have a “Cert. of Occupancy” at hand. Hope this is helpful.

@Anthony Porembski

In 16 years in business, I have never had someone tell me they won’t give me a deposit when I asked for one on a proposal or contract.

And if they did, good bye. Sorry, find someone else. I’m to busy year round to deal with that.

@Anthony Porembski I try to pay my contractors quickly. I want them to know that when they do work for me, they won’t have to wait on their money. It seems to make them take my calls a little quicker next time a project comes around. Also, I don’t try to nickel and dime them on the cost.

I have found that the better you take care of your contractor and also look at it from there perspective, the better for all. To many times we use our "contractors" as lines of credit and don't realize that they have to make payments for materials and permits upfront (typically). For this reason I like to do 30% deposit when contract is signed. 30% when material drops or work begins, 30% when job is completed and I always withhold 10% until I can inspect the work. I know a lot of people will look at it from an increased risk pov, but honestly I have been doing this for years and have never been burned. The contractors seem to always go above and beyond for me. @Anthony Porembski

Originally posted by @Anthony Porembski :

@Ralph Stowe

Agreed, sounds like a practical system. Due diligence is definitely crucial. I hear so many stories on here of people getting the shaft. Thanks Ralph.

Most of those stories are from new investors that are looking for the lowest price and expecting the highest quality . They have generally  underestimated the repair costs .They dont hire state licensed contractors , they hire laborers who say they can do the job .  One third down is industry standard .  Maryland law allows me to get 1/3 at contract signing , 1/3 when work starts and the final third can be at completion .  And thats exactly how we do it . 

Remember , just as many contractors have been screwed by customers . 

 

Originally posted by @Anthony Porembski :

@Andrew Syrios

Good advice and tactics. I’ll keep that in mind. Thanks Andrew.

Sure thing Anthony. I wrote this article on finding and dealing with contractors a while back as well. You might find it helpful: https://www.biggerpockets.com/blog/2015-07-15-7-tips-finding-keepingcontractors-team. Good luck!

@Anthony Porembski

So as both a contractor and an investor I agree in some way or another with each of these other responses. The purpose of a deposit is not just to put money in a contractors pocket without them doing any work.... the purpose of the deposit is to logistically get the job going ... i.e. purchasing materials and to cover operating expenses. It is unreasonable in my opinion to expect a contractor to “invest” in your project by covering material expenses. Now in some instances, such as where you are hiring a contractor for strictly “labor only” as opposed to “labor and materials” I never receive a deposit as I’m not expecting to get paid for work I haven’t done yet... I guess a good example of that would be replacement windows or cabinets that you have ordered directly and hired the contractor to install. Additionally, if a client has a good track record with me, I have started projects before where I didn’t take a deposit just for the sake of getting on a project as quickly as possible. Just keep that in mind, that the purpose of the deposit is to get materials on site . The amount of money that a contractor is allowed to ask for up front is usually governed by state law but generally where I am at, if the job is $5k or less I take a 50% deposit and the remaining balance once the project passed final inspection. For larger jobs it might be paid in 1/3rds or some other payment schedule that makes sense for the particular job...If it’s larger than that there is generally some kind of milestone to be able to identify as a point where another payment is made. I.e rough inspection .... generally unless your doing a very large job there shouldn’t really be a need to pay a contractor a large amount of money for work that has not been completed yet.... and never ever pay a contractor in full before the job is done .... it’s human pshycology that once an incentive to finish something goes away the will to finish it goes away also.

I've never had any problem with paying a deposit to start work, provided that the contractor was reputable (as everyone else has said - do your due diligence).  What I won't do is pay an excessive up front deposit (depends on the scope of the project, but generally no more then 20%).

Here's a tip that has worked well for me when negotiating draw schedules/amounts with contractors: tell them that the final draw, to be paid only after all inspections are passed and punch out work is completed, will be no less then the initial deposit.  Once I started introducing this guideline I found that my contractors were okay with much smaller initial draw amounts.

It is true that most contractors, whether subs or general, will not start a job without a deposit. Just break the contract into sections and pay as the work is accomplished. It is easy to check out a contractor to see if they have been around awhile. Once you check them out, set up a payment schedule and pay them on time if you want the project to move along smoothly. 

I pay 50% upfront. Then installments when he asks for more. I’ve only done 3 major rehabs, but so far this has worked. And building trust with your contractor is important. Once that’s established, it’s smooth sailing for future projects with him again.

@Richard Wade

Thanks Richard. I guess due diligence is the most important part of this process. Make sure you got the right guys in there. Thanks Richard, I appreciate it.

@Anthony Porembski I know that a lot of investors they will use some kind of draw program when they get started with a project. Once the work is completed and satisfactory they get paid the full amount but not until the work is finished. It keeps the contractor working and honest. Also you already have scheduling and price figured out so they are not trying to switch the price quotes on you or argue when he or she said it would get done.

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