Paying Contractors Upfront
Hello,
I’m fairly new to real estate investing and wanted to see how everyone typically structures payments with contractors on rehab projects.
What do you consider normal? Small deposit upfront? Pay for materials upfront and labor as work is completed? 50% upfront and 50% at completion? Or progress payments based on completed work?
I understand every contractor and project is different, but I’m trying to get a feel for what’s considered standard and how other investors protect themselves while still being fair to the contractor.
For larger rehabs in the $30k–$50k range, how do you normally structure the payment schedule?
Thanks!
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#1 All Forums Contributor
- Investor
- Pacific Northwest
Caleb, for a $30k–$50k rehab I’d structure the payments around verified completion, not the calendar and not contractor cash needs.
A reasonable deposit for mobilization/materials can make sense, especially with a contractor you know. What I would avoid with a new contractor is putting 50%–85% out the door before enough value has actually been created on the property. The thread is already showing the same pattern: people get more comfortable advancing larger amounts only after a contractor has built a track record with them.
For a larger rehab, I’d want the contract to define the scope and then break the job into milestone draws. Example: mobilization/materials, rough work complete, finishes substantially complete, then retain enough for punch-list and closeout. Each draw should correspond to specific completed line items that can actually be inspected.
I’d also keep materials and labor visible separately. If a contractor needs you to fund a major material order, I want invoices, receipts, and clarity on who owns the materials once purchased. I don’t want a vague “materials deposit” disappearing into working capital for another job.
And I’d protect the last payment aggressively. Jules made the right point: there should still be enough money outstanding at the end that finishing the punch list matters economically.
The other control I’d add is change orders. No “while we were here we went ahead and…” Every change should state the scope change, cost change, schedule impact, and approval before the work happens.
So for me the rule isn’t “never pay upfront.” It’s never get materially ahead of the work unless you already have enough trust and documentation to justify the exposure.
This is exactly the kind of construction-state problem our system looks at: what’s approved, what’s complete, what’s owed, what changed, and what has to happen before the next dollar moves. Feel free to reach out if you want to compare notes on structuring the draw schedule.