How do I protect myself when entering a contract?

[eddieK]

I'm about to have a garage/shop built, the whole project will be in the $35-40k range. I've never hired anyone to do anything so I have no experience in the matter and have heard some horror stories of people getting taken by contractors. The payment terms with the builders are 50% up front, 50% on completion.

How do I know they are not going to go on a joy ride with the up front cash and then tell me they need more along the build for "unexpected costs" or "underestimated this", ect ect, you get the idea.

What sort of measures are people taking to protect themselves from situations like this?


A friend suggested getting a cost sheet of all materials and get it notarized to prove that what I gave them up front is enough to cover the build. Does this sound like a valid idea or are there better measures to take?

I wonder...if you were to make a large purchase from sears or say a mattress company...would you ask what their wholesale costs are? would you expect an answer? Can you get products and services installed without paying a dime for a period of time without a credit account or a credit check by any entity besides a contractor?

I ask for a percentage (depends on project how many billing cycles) at work commencement to cover purchasing and labor costs the first month before payment is received and before the bills from supplier start to accrue interest cost.

 

[DCarr2]

While there is some good advice here, there are some 'huh?' statements...

A cpl people said they wouldnt pay a dime up front? So you expect the contractor to bankroll your job and to fund your job, materials and labor, til the contractor reaches X milestone, and the contractor, who on projects like these, can have costs into the thousands of dollars, at which point he is out thousands of dollars, and hopes you pay him? And if you dont, he will lose 1/3 off the top when he sues you if you turn out to be a dead beat - thats his view...

Further, chances are good that you cant buy the materials cheaper than he can. and since he has done this before, and you havent, he knows what he needs at the site, and when he needs it. He also knows who to talk to and what needs to be done in what order.

you shouldnt expect a contractor to pay for your project out of his pocket. just like you shouldnt be expected to pay for his last project out of your pocket.

50% does seem a bit high to me, maybe do 1/3, or 1/4 and have draws along the way. Cash flow is the life blood of all small businesses.

And why shouldnt a contractor mark up materials? Especially if he has to spend his time, money ect on acquiring those materials?

For instance a box of nails is $20 at lowes, his cost is $10 from his supplier, but marks it up to $15 for his time to get those nails. Your saying he shouldnt get paid to order, and pickup/schedual delivery of those nails?

Dont you expect to be paid when you do work for your company? what makes the contractor 'different'?

While there are rip off and shady contractors out there, there are just as many rip off shady homeowners/customers looking to rip off contractors... just saying.

For me, typically its 1/3 down, 1/3 half way through, 1/3 at the end.

if its a bigger job, I break it down even more. so that I keep my cash flow and cover my labor and other costs, with out front loading contracts.

But to expect your contractor to foot the entire bill for all work, material, labor ect, for X amount of time out of his own pocket, with out any sort of payment from you, is BS....

 

[jetnow1]

As a small contractor I would say 50% down should only be done if there are a lot of special order custom made items involved. I have had customers give me 50 % down
for whatever reason, but have never insisted on it unless there was custom made/non
returnable items involved that were 25% or more of the total contract. On a garage size
job it would be 10% down, 25% when foundation/slab done, 25$ when rough framing
inspected, balance due within 5 days of certificate of occupancy or punch list done.

 

[jd_1138]

We broke up a large project into 25%, 25%, 25%, and a final 25% payment. I wouldn't think the guy would need 50% up front? Unless he's flat broke and can't manage money. I wouldn't want a contractor like that. I'm sure he'd take more incremental payments if you ask.

Be sure to look at the project to make sure you don't see any glaring mistakes as they happen.

 

[Thumper68]

I didn't read through all the responses but wanted to clear up something in my post.

I suggested that you pay directly for materials, in no way did I mean that the customer should order them, I said pay for on delivery.

When I was doing remodeling and construction contracting I always suggested this to my clients. I would order the materials from the yard and always suggested to the client that they pay for them on delivery and get a paid receipt, or if they did not want to do it that way I would pay on delivery myself and get a lien release for the client. I did the same with my subs.

A responsible GC should have no issues getting lien releases from material suppliers and subs.

 

[Dirtydan69]

I never pay up front. If your contractor is living on the edge financially, he will need your money up front to buy groceries and pay for materials for his last job.
It is reasonable to have a schedule of milestones and payments. For example, if they bring equipment and start, it would be reasonable to give them a small payment for mobilization and a little work. When foundations are done, another payment, etc. Do not let him front end load the payments.
You never want to pay for the entire value of the work done to date.
If the contractor does not want to get paid on completion, have him write up a schedule of milestones and what the value of reaching that milestone is. Then pay him about 90% of that value when that milestone is reached.
NEVER pay for anything that you have not received.
And get proof of insurance.
Here is an example:
Total job: $35,000
Mobilize and excavate value $5000, when done pay $4500.
Foundation value $5000, when done pay $4500 plus $500 held from excavation.
Framing value $10,000, when done pay $9000 plus $500 held from foundation.
Continue that pattern through completion. If you are not construction savvy, ask a friend or someone who is to look at the schedule of values and see if it is reasonable. The contractor might try to front load the values.
Sometimes the hold back is accumulated until the job is done. That is up to you and your contractor. NEVER PAY IN ADVANCE.
At the end comes a time called substantial completion. Substantial completion is where the job is mostly done and it is turned over to the owner for its intended purpose, but there are a few small things are still not done. These are things like paint touchups, trim painting tht had to wait for better weather, etc. Substantial completion is when a punch list is created with the incomplete items, a value is assigned to each, and you retain that much money with a 5 to 10 percent additional as an incentive for him to finish. All other contract money is paid.
Again, NEVER, EVER pay for something that is not permanently yours. Not even materials, as they can be removed from the site. If you never pay for anything that you do not have, you will not be ripped off.
If you give him the 50% up front that he wants and he leaves town, where will your $20K be? Or if he is behind on child support and he uses the money for that?
Try to avoid change orders. Base bid prices are not the lucrative part of the business, change orders are. They can get expensive. Make sure any changes in the original contract are in writing with the dollar amount added or subtracted from the original contract and signatures from both of you. Changes can the the source of problems, so make sure they are documented so there are no surprises later. T
Did I mention DO NOT pay for anything that is not permanently in your possession?

I will NEVER take a job of substantial cost where the customer is not willing to give some type of deposit. I won't make the effort to book my time.

 

[6768rogues]

I never pay up front. If a contractor cannot or does not want to do the job with no money until there is something to actually pay for, I get someone else. Why should I pay for something I do not have? I contracted for years and I always had 30 or more days to pay for materials, and I always paid in 30 days to get a discount. There was seldom a case where I could not meet a performance milestone before material bills came due and if it happened, I kept my business capitalized enough to pay the bill anyway. Any contractor who has been in business for years and who cannot occasionally pay material bills before collecting the job is not a good manager of money or business. Not the person I want on my property or at a large municipal project I manage.
I seem to be in the minority here. Go ahead, pay up front and let me know if you get ripped off. I never do. Alternatively, if you have a contractor who you really like and he will not do the job without knowing the money is there, have your lawyer hold the money in escrow for him until the job is done or until progress payments are due. It will only cost a little and you will not be ripped off.
So now you have a decision. Write a check for $20K or so when you have nothing but the contractor's word that you will get something for it?
Think about this:
What will you do if he cashes your check and you never see him again?
What will you do if you pay after materials are delivered and then the materials disappear without regard to whether the builder took them or if they are stolen? Builder's risk insurance does not cover materials until they are installed.
What will you do if he does a little work and then delays you over and over, leaving you with a partially built project?
What will you do if his ex wife gets a judgement against him and he has to give her your money?
What will you do if he gets hurt and cannot work?
What will you do if he does shoddy work and you already paid?
What will you do if early in the project an inspection fails and he refuses to correct it and continues, leaving you with a failed project?
What will you do if his transmission goes out and he has to buy a truck with your money?
What will you do if damage is done to your property and he already has your money?
I could keep this up all day. I didn't just think up that list. In my almost 50 years of contracting, construction management, facilities management and municipal capital projects i have actually seen every one of those things happen to an unsuspecting customer. The way to guarantee that you are not ripped off is to wait to pay until there is actually something to pay for. If you think you can give him money and nothing could possibly happen, I am sorry to tell you that you are wrong.

 

[59 wagon man]

have it read by a lawyer

 

[6768rogues]

have it read by a lawyer

Not bad advice. However, a lawyer will make sure it is legal, not that you get your money's worth. If the guy rips you off, the lawyer can help, but you are still ripped off.

 

[Hilltopmasonry]

Not bad advice. However, a lawyer will make sure it is legal, not that you get your money's worth. If the guy rips you off, the lawyer can help, but you are still ripped off.

Yeah most guys that rip people off usually do it by cashing the check and go out of business...bankrupt. Then there's usually nothing to sue the guy for because the business is closed


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[DCarr2]

I never pay up front. If your contractor is living on the edge financially, he will need your money up front to buy groceries and pay for materials for his last job.
It is reasonable to have a schedule of milestones and payments. For example, if they bring equipment and start, it would be reasonable to give them a small payment for mobilization and a little work. When foundations are done, another payment, etc. Do not let him front end load the payments.
You never want to pay for the entire value of the work done to date.
If the contractor does not want to get paid on completion, have him write up a schedule of milestones and what the value of reaching that milestone is. Then pay him about 90% of that value when that milestone is reached.
NEVER pay for anything that you have not received.
And get proof of insurance.
Here is an example:
Total job: $35,000
Mobilize and excavate value $5000, when done pay $4500.
Foundation value $5000, when done pay $4500 plus $500 held from excavation.
Framing value $10,000, when done pay $9000 plus $500 held from foundation.
Continue that pattern through completion. If you are not construction savvy, ask a friend or someone who is to look at the schedule of values and see if it is reasonable. The contractor might try to front load the values.
Sometimes the hold back is accumulated until the job is done. That is up to you and your contractor. NEVER PAY IN ADVANCE.
At the end comes a time called substantial completion. Substantial completion is where the job is mostly done and it is turned over to the owner for its intended purpose, but there are a few small things are still not done. These are things like paint touchups, trim painting tht had to wait for better weather, etc. Substantial completion is when a punch list is created with the incomplete items, a value is assigned to each, and you retain that much money with a 5 to 10 percent additional as an incentive for him to finish. All other contract money is paid.
Again, NEVER, EVER pay for something that is not permanently yours. Not even materials, as they can be removed from the site. If you never pay for anything that you do not have, you will not be ripped off.
If you give him the 50% up front that he wants and he leaves town, where will your $20K be? Or if he is behind on child support and he uses the money for that?
Try to avoid change orders. Base bid prices are not the lucrative part of the business, change orders are. They can get expensive. Make sure any changes in the original contract are in writing with the dollar amount added or subtracted from the original contract and signatures from both of you. Changes can the the source of problems, so make sure they are documented so there are no surprises later. T
Did I mention DO NOT pay for anything that is not permanently in your possession?

I never pay up front. If a contractor cannot or does not want to do the job with no money until there is something to actually pay for, I get someone else. Why should I pay for something I do not have? I contracted for years and I always had 30 or more days to pay for materials, and I always paid in 30 days to get a discount. There was seldom a case where I could not meet a performance milestone before material bills came due and if it happened, I kept my business capitalized enough to pay the bill anyway. Any contractor who has been in business for years and who cannot occasionally pay material bills before collecting the job is not a good manager of money or business. Not the person I want on my property or at a large municipal project I manage.
I seem to be in the minority here. Go ahead, pay up front and let me know if you get ripped off. I never do. Alternatively, if you have a contractor who you really like and he will not do the job without knowing the money is there, have your lawyer hold the money in escrow for him until the job is done or until progress payments are due. It will only cost a little and you will not be ripped off.
So now you have a decision. Write a check for $20K or so when you have nothing but the contractor's word that you will get something for it?
Think about this:
What will you do if he cashes your check and you never see him again?
What will you do if you pay after materials are delivered and then the materials disappear without regard to whether the builder took them or if they are stolen? Builder's risk insurance does not cover materials until they are installed.
What will you do if he does a little work and then delays you over and over, leaving you with a partially built project?
What will you do if his ex wife gets a judgement against him and he has to give her your money?
What will you do if he gets hurt and cannot work?
What will you do if he does shoddy work and you already paid?
What will you do if early in the project an inspection fails and he refuses to correct it and continues, leaving you with a failed project?
What will you do if his transmission goes out and he has to buy a truck with your money?
What will you do if damage is done to your property and he already has your money?
I could keep this up all day. I didn't just think up that list. In my almost 50 years of contracting, construction management, facilities management and municipal capital projects i have actually seen every one of those things happen to an unsuspecting customer. The way to guarantee that you are not ripped off is to wait to pay until there is actually something to pay for. If you think you can give him money and nothing could possibly happen, I am sorry to tell you that you are wrong.

Just to clarify, the 30 day thing is almost ALWAYS commercial or govt work... and some times the govt can take upwards of 90 days to pay....

In residential construction, your typically dealing with smaller mom and pop type shops, and expecting them to bankroll your project is unrealistic.

In a perfect world where home owners would never rip off a contractor on a large project like this, it would fly, but we dont live in a perfect world, I see your in WNY, Think Parco, or Top Gun, would bankroll your project with no money down? They wont. They want cash upfront for material and labor costs.

After all, if you decide to jip them on payment they still have to pay their crew, and the materials up to that point and are out thousands of dollars.

And while that may not bankrupt the contractor, why would you expect him to take that sort of risk?

The only way I would do a job for someone with no money down...is if I have worked for them before, and I trusted them... and thats a very short list.

 

[redneckcharlie]

No offense, but your posts read like a really jealous spouse that is telling on themselves. Using the process for public projects isnt an apples to apples scenario. The markup and margin om public projects is massive. And I know this will rub you wrong, but I've never come across anyone in my profession that went on the taxpayer payroll that was successful in the private sector. Next you'll start with how building inspectors are all knowing and reasonable. You completely missed/skipped the part about hiring a reputable contractor.

I never pay up front. If a contractor cannot or does not want to do the job with no money until there is something to actually pay for, I get someone else. Why should I pay for something I do not have? I contracted for years and I always had 30 or more days to pay for materials, and I always paid in 30 days to get a discount. There was seldom a case where I could not meet a performance milestone before material bills came due and if it happened, I kept my business capitalized enough to pay the bill anyway. Any contractor who has been in business for years and who cannot occasionally pay material bills before collecting the job is not a good manager of money or business. Not the person I want on my property or at a large municipal project I manage.
I seem to be in the minority here. Go ahead, pay up front and let me know if you get ripped off. I never do. Alternatively, if you have a contractor who you really like and he will not do the job without knowing the money is there, have your lawyer hold the money in escrow for him until the job is done or until progress payments are due. It will only cost a little and you will not be ripped off.
So now you have a decision. Write a check for $20K or so when you have nothing but the contractor's word that you will get something for it?
Think about this:
What will you do if he cashes your check and you never see him again?
What will you do if you pay after materials are delivered and then the materials disappear without regard to whether the builder took them or if they are stolen? Builder's risk insurance does not cover materials until they are installed.
What will you do if he does a little work and then delays you over and over, leaving you with a partially built project?
What will you do if his ex wife gets a judgement against him and he has to give her your money?
What will you do if he gets hurt and cannot work?
What will you do if he does shoddy work and you already paid?
What will you do if early in the project an inspection fails and he refuses to correct it and continues, leaving you with a failed project?
What will you do if his transmission goes out and he has to buy a truck with your money?
What will you do if damage is done to your property and he already has your money?
I could keep this up all day. I didn't just think up that list. In my almost 50 years of contracting, construction management, facilities management and municipal capital projects i have actually seen every one of those things happen to an unsuspecting customer. The way to guarantee that you are not ripped off is to wait to pay until there is actually something to pay for. If you think you can give him money and nothing could possibly happen, I am sorry to tell you that you are wrong.

 

[gsebast1]

Thanks for posting this. I was logging on today to ask the same type of question.
Great responses...I've learned a number of things from this post.

 

[6768rogues]

Redneck, I was successful in the private contracting business for 21 years and did not get down payments for work. I did sometimes get progress payments if the job was a large time consuming one. All private suppliers I used wanted payment in 30 days and allowed a discount if they got it. Then I had accumulated enough resources to retire and got bored so I did construction inspection and management for the county government. While I was there the county government overhauled their payment system so all contractors who submitted the proper paperwork were paid in less than 28 days. Then I had an opportunity to do facility and construction management for a large public school system. I have spent decades in private and public construction and have a bachelors degree in construction management.
Also no offense, but what are your qualifications? Oh, you own a hammer!
Protecting yourself as a customer is important. All the things I mentioned happened in the private sector. The public sector has other protections like bid and performance bonds. Of course, with your vast knowledge and experience you know that. Any contractor who needs money up front is not a contractor to let on your property. I managed my business and money so that I did not need money up front. Do you have enough money set aside so if you get hurt you can sustain 6 months of recovery without going bankrupt? I did. Do you need a down payment to buy this week's groceries? Not me.

 

[DCarr2]

Redneck, I was successful in the private contracting business for 21 years and did not get down payments for work. I did sometimes get progress payments if the job was a large time consuming one. All private suppliers I used wanted payment in 30 days and allowed a discount if they got it. Then I had accumulated enough resources to retire and got bored so I did construction inspection and management for the county government. While I was there the county government overhauled their payment system so all contractors who submitted the proper paperwork were paid in less than 28 days. Then I had an opportunity to do facility and construction management for a large public school system. I have spent decades in private and public construction and have a bachelors degree in construction management.
Also no offense, but what are your qualifications? Oh, you own a hammer!
Protecting yourself as a customer is important. All the things I mentioned happened in the private sector. The public sector has other protections like bid and performance bonds. Of course, with your vast knowledge and experience you know that. Any contractor who needs money up front is not a contractor to let on your property. I managed my business and money so that I did not need money up front. Do you have enough money set aside so if you get hurt you can sustain 6 months of recovery without going bankrupt? I did. Do you need a down payment to buy this week's groceries? Not me.

So your saying you have never been burned by a customer/home owner? well good for you.

I have, its only been small amounts (less than a thousand dollars) but when your talking about tens of thousands for a project, yes a small outfit that can be killer... Oh and the courts? they take months, and lawyers take a 1/3

Asking for a downpayment for materials, which are being installed on your house is NOT unreasonable.

Nor is it unreasonable to ask for progress draws. By your thinking why even bother asking for progress draws at all? you expect the contractor to foot the bill to procure the equipment, labor and materials, upfront, why not ask him to foot the bill for the entire project, and then just cut him a check at the end of the job?

Thats actually a serious question....

Personally, I think you may have been burned and now feel that all contractors are crooks.

 

[Hilltopmasonry]

So your saying you have never been burned by a customer/home owner? well good for you.



I have, its only been small amounts (less than a thousand dollars) but when your talking about tens of thousands for a project, yes a small outfit that can be killer... Oh and the courts? they take months, and lawyers take a 1/3



Asking for a downpayment for materials, which are being installed on your house is NOT unreasonable.



Nor is it unreasonable to ask for progress draws. By your thinking why even bother asking for progress draws at all? you expect the contractor to foot the bill to procure the equipment, labor and materials, upfront, why not ask him to foot the bill for the entire project, and then just cut him a check at the end of the job?



Thats actually a serious question....



Personally, I think you may have been burned and now feel that all contractors are crooks.

Yes I agree, being burned by a homeowner/builder *****. My dad (mason contractor) got stuck for 80 grand in 1980 because the builder got too far ahead financially. My parents almost lost everything they owned because the builder went bankrupt. At the time my dad never required a down payment or progress payments.

Using the legal system to collect a debt don't even get me started, it's a joke if somebody owes you 100 K you will be lucky in the end to get 45k. The only ones that truly come out are the attorneys

Any information that I have ever read or researched about being a successful contractor always states to never get too far ahead financially on a project.. for both the customer and contractor

Any customer that is going to hassle me about a small down payment is not the type of customer that I want. Usually when they balk that much about a down payment, i struggle to receive timely payments throughout the entire project And I have learned throughout the years it is easier to walk away from a job when people's only concern is about money or if they are too picky






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[wssix99]

A cpl people said they wouldnt pay a dime up front? So you expect the contractor to bankroll your job and to fund your job, materials and labor, til the contractor reaches X milestone, and the contractor, who on projects like these, can have costs into the thousands of dollars, at which point he is out thousands of dollars, and hopes you pay him?

Yes. I expect that. A financially solvent contractor should be able to float these expenses and pass the cost of financing on to the customer. If the customer doesn't want pay that - then they are a cheap sucker. <- These people deserve to pay up front.

And if you dont, he will lose 1/3 off the top when he sues you if you turn out to be a dead beat - thats his view...

Using the legal system to collect a debt don't even get me started, it's a joke if somebody owes you 100 K you will be lucky in the end to get 45k. The only ones that truly come out are the attorneys

Any information that I have ever read or researched about being a successful contractor always states to never get too far ahead financially on a project.. for both the customer and contractor

^ Great wisdom from Hilltopmasonry. Many types of businesses will do credit checks on their customers and craft their deals commensurate with the credit worthiness and stability of that customer. There is no reason why construction companies can't do the same. (A contractor financing a construction project is not a lot different than a car company/bank financing a car purchase. Why shouldn't a contractor run a credit check like a car dealer does??? Construction draws can be for even more money!!!)

I will NEVER take a job of substantial cost where the customer is not willing to give some type of deposit. I won't make the effort to book my time.

This mindset is killing your profitability. If you average out your in-progress construction, multiply that by your interest rate, assuming your customers pay that off every two months, and assuming that you would double that cost and pass it on to your customers - you are probably walking away from $20K-$50K of easy profit off of every $1M of business you do every year. Imagine the difference between a car dealer that offers financing and a car dealer who doesn't. Which company is going to do better? (The financier does take on risk, but that's why extra is charged to the customer - it builds up in the piggy bank for the future problems.)

I never pay up front. If a contractor cannot or does not want to do the job with no money until there is something to actually pay for, I get someone else. Why should I pay for something I do not have?

Contractors do have a leg to stand on asking for money up front, per some of the principles discussed earlier. Contractors make a significant investment in planning, development, and design before any dirt is dug. As long as the money requested up front is commensurate with this effort and the value added to the project by this real work, then asking for this money is consistent with a pay-as-you go approach. (It would not be appropriate to call this type of thing a "down-payment.")

 

[theoldwizard1]

Changed my mind. If you have to ask, hire a lawyer.

 

[ezover]

have not read the entire thread so if a repeat my bad. get a lot of details on the build. a pole barn has a lot of options that determine the quality.

trusses 24" or 48" on center. thickness and psi of concrete, etc....
for the amount you are paying it mite be worth your time to spend a few bucks more to have some one knowledgeable over see the project.

 

[RStewart]

Had a friend get an insurance policy on a deposit for a function, just in case THEY couldn't fulfill their end of the contract. Was through their insurance agent. Said it was short $$.
I would imagine your deposit would or should be able to be covered.
Oh yea, they had to cancel the function and were glad they did talk to their insurance agent.

 

[Platonic Solid]

Any contract is only as good as your ability to enforce it. Case in point – I recently had a new roof installed which included replacing sheathing. When the pallets of material arrived I verified all the materials were as contracted. Everything was correct. Pictures were taken of every stage. I thought I had all the bases covered. I couldn’t realistically be there all the time as I have to work. When the job was complete I realized that I had never seen a building permit as required by the town and very clearly defined in the contract. Exact statement in contract: “All applicable permits & inspection fees pertaining to job will be applied for & obtained by (name of business withheld).” When I called the roofer and asked if he’d pulled a permit, he said: “No, do you want me to get one?”

 

[redneckcharlie]

There is a huge difference between a construction company and a car dealer. Car dealers use a flooring line(not their money), and finance the sale through another third party. A car can be repoed without any court involvement. There is no magical pot of gold for construction companies and contractors to draw from, the exception being publicly traded companies. The sale of a car is nothing like that of a construction project. I can't speak for the other professional contractors but the last thing I'm going to do is try to pinch my customer for extra 3-5% by financing their project with the hope they will pay on time. One bad customer in your million dollar scenario will cost me well north of the 50k I may make. At the end of the day what's worth way more then trying to pinch every penny out of someone is doing a quality job in a timely fashion and having a satisfied customer at the end of the project. The referral's themselves are invaluable.

Yes. I expect that. A financially solvent contractor should be able to float these expenses and pass the cost of financing on to the customer. If the customer doesn't want pay that - then they are a cheap sucker. <- These people deserve to pay up front.






^ Great wisdom from Hilltopmasonry. Many types of businesses will do credit checks on their customers and craft their deals commensurate with the credit worthiness and stability of that customer. There is no reason why construction companies can't do the same. (A contractor financing a construction project is not a lot different than a car company/bank financing a car purchase. Why shouldn't a contractor run a credit check like a car dealer does??? Construction draws can be for even more money!!!)




This mindset is killing your profitability. If you average out your in-progress construction, multiply that by your interest rate, assuming your customers pay that off every two months, and assuming that you would double that cost and pass it on to your customers - you are probably walking away from $20K-$50K of easy profit off of every $1M of business you do every year. Imagine the difference between a car dealer that offers financing and a car dealer who doesn't. Which company is going to do better? (The financier does take on risk, but that's why extra is charged to the customer - it builds up in the piggy bank for the future problems.)




Contractors do have a leg to stand on asking for money up front, per some of the principles discussed earlier. Contractors make a significant investment in planning, development, and design before any dirt is dug. As long as the money requested up front is commensurate with this effort and the value added to the project by this real work, then asking for this money is consistent with a pay-as-you go approach. (It would not be appropriate to call this type of thing a "down-payment.")

 

[redneckcharlie]

Any contract is only as good as your ability to enforce it. Case in point – I recently had a new roof installed which included replacing sheathing. When the pallets of material arrived I verified all the materials were as contracted. Everything was correct. Pictures were taken of every stage. I thought I had all the bases covered. I couldn’t realistically be there all the time as I have to work. When the job was complete I realized that I had never seen a building permit as required by the town and very clearly defined in the contract. Exact statement in contract: “All applicable permits & inspection fees pertaining to job will be applied for & obtained by (name of business withheld).” When I called the roofer and asked if he’d pulled a permit, he said: “No, do you want me to get one?”

Did they do a quality job? You didn't say they didn't so I'm assuming they did. Permits for some scopes of work can be a double edged sword depending on your municipality. Around here if a permit for anything related to an existing structure is pulled, in the very near future there will be a notice of reassessment for property tax's coming. The other issue is what a building inspector can start demanding in regards to other areas of the home. Unfortunately the second happens more times then not. I'm not referring to permits for additions and added square footage, just work like kitchens and baths. I won't even start with the bs that is going on with the new electrical codes.

 

[Platonic Solid]

Did they do a quality job? ...

Kind of a mixed bag. Mostly yes, but there are areas that were not. Sheathing, underlayment, shingles and flashing are all good. 4 inch air gap between kitchen exhaust vent stack in attic and vent mounted on roof, plus 4" square hole cut in sheathing for this vent makes mating the 12" diameter stack impossible without removing the vent from the outside - not to overlook that this is a vaulted ceiling area making any interior attic work near impossible. Ridge vent was not installed to manufacturers instructions = hole for vent cut entire length and should have stopped 1ft prior to each end. Damaged gutter - promised to replace - even had a gutter guy come out and measure - gutter was never replaced. The only thing I think an inspector would have caught is the kitchen vent stack.

 

[DCarr2]

The moral of the story, is that most here feel that a reasonable down payment for materials and labor is expected, and understandable.

However there are a couple of folks that feel that the contractor should assume all risk, both liability and financial, and outlay hundreds, and perhaps thousands of dollars of their own money (the contractor's money) on their projects (the homeowners) with no out of pocket expense on the homeowner's end.

And pulling a persons credit report does 2 things. 1) it dings the persons score, so if theyre hoping to refinance, buy a car, ect, their score will now be lower. 2) a credit report only lists past and current financial obligations. While most with good to great credit wont risk losing thier gold star, life happens.

And even solvent contractors can get in over their heads if payments are late ect....

For you western new yorkers, just look at all the contractors that went bankrupt over broadway in Depew, cause the state was 'late' making their payments.

So while some of you will only hire those companies which will finance your projects, and will probably end up paying more for that 'service' at the end of the day your limiting your pool of competing bids for a particular project.

And I know for a fact that both Parco, and Top Gun (WNY Pole barn builders) require money down prior to beginning construction of your building.

After all, if its a reputable company, with a good reputation, why wouldnt you trust them with some money up front to buy materials? You trust them in your house, you trust them on your property, yet cant trust them with $2,000?

 

[Platonic Solid]

...pulling a persons credit report ... dings the persons score, so if they're hoping to refinance, buy a car, ect, their score will now be lower.

Not true. The only inquiries that count toward your FICO Scores are the ones that result from your applications for new credit.

 

[wssix99]

The moral of the story, is that most here feel that a reasonable down payment for materials and labor is expected, and understandable.

That's not what I read.

However there are a couple of folks that feel that the contractor should assume all risk, both liability and financial, and outlay hundreds, and perhaps thousands of dollars of their own money (the contractor's money) on their projects (the homeowners) with no out of pocket expense on the homeowner's end.

... and have the customer pay for this.

And pulling a persons credit report does 2 things.

No - do a credit check. Not pull a credit report. They are different things/actions.

You trust them in your house, you trust them on your property, yet cant trust them with $2,000?

Definitely not. It's not about the 19 of 20 good contractors out there. It's about the 5 out of 20 bad ones out there!

 

[wssix99]

There is a huge difference between a construction company and a car dealer.

Yes. Car dealers make money. Half of all construction companies go out of business in their first two years.

Car dealers use a flooring line(not their money), and finance the sale through another third party.

You are catching on... This is the way successful and large construction companies go. They have floating lines of credit and do not build with their own money - ever.

A car can be repoed without any court involvement.

It's real easy to file a lien and you don't even need a lawyer.

The sale of a car is nothing like that of a construction project.

That's the problem. If it was, customers would be MUCH happier.

I can't speak for the other professional contractors but the last thing I'm going to do is try to pinch my customer for extra 3-5% by financing their project with the hope they will pay on time.

It's not pinching if you are honest and open about your fees. Explain to them their options. Set your base price at this level and give them a discount if they want to pay you up-front so you can defer your financing costs. If they choose the discount, you are no worse off - except they feel like they are getting a better deal! If they choose the base rate - you get easy money.

One bad customer in your million dollar scenario will cost me well north of the 50k I may make.

Like a homeowner taking draws, you don't need to put it all on the line. Work to progress payments and you won't get over-extended. Bank what you make, save it up for a cushion so you can wait out a lien and foreclosure process. Don't over-extend yourself past what your capital can hold you for.

At the end of the day what's worth way more then trying to pinch every penny out of someone is doing a quality job in a timely fashion and having a satisfied customer at the end of the project. The referral's themselves are invaluable.

I think this thread is showing that the path to satisfaction and salvation is honesty.

Recent history has shown us that is indeed possible for business people to charge more money for equivalent products that your competitors offer, brag about it, (sometimes be insulting) be completely transparent about it, and people will still offer praise these people - and elect them President.

 

[rburke65]

I would not give him 50%. On my shop, I paid the lumber company for the material and they were delivered the next day. Their crew was there the next day. Prior to that, I paid a guy I somewhat knew from work to do my excavation when he was done. When the shop was weather tight, inspected, I paid the remainder to the lumber yard.

 

[redneckcharlie]

I take it I touched a nerve. Catching on? Give me a break. I've actually had a large flooring line before, have you? I get the financial equation very well. Been self employed my whole adult life. No successful contractor or builder I know would use a million in capital to make 5% in a year. It's a bad return. Large construction companies do not use lines of credit to pad their bottom line. They do it to float their projects, much the same way some use their credit at the supply house. Large construction companies are more times then not teteering on insolvency. My contracting company has an A+ rating with the BBB, how about you? I don't use credit for payroll or to float my projects. One of the most important issues any business has which they do not teach is how to manage cash flow. You obviously have a successful business of your own, correct?




s

Yes. Car dealers make money. Half of all construction companies go out of business in their first two years.




You are catching on... This is the way successful and large construction companies go. They have floating lines of credit and do not build with their own money - ever.




It's real easy to file a lien and you don't even need a lawyer.




That's the problem. If it was, customers would be MUCH happier.




It's not pinching if you are honest and open about your fees. Explain to them their options. Set your base price at this level and give them a discount if they want to pay you up-front so you can defer your financing costs. If they choose the discount, you are no worse off - except they feel like they are getting a better deal! If they choose the base rate - you get easy money.




Like a homeowner taking draws, you don't need to put it all on the line. Work to progress payments and you won't get over-extended. Bank what you make, save it up for a cushion so you can wait out a lien and foreclosure process. Don't over-extend yourself past what your capital can hold you for.




I think this thread is showing that the path to satisfaction and salvation is honesty.

Recent history has shown us that is indeed possible for business people to charge more money for equivalent products that your competitors offer, brag about it, (sometimes be insulting) be completely transparent about it, and people will still offer praise these people - and elect them President.

 

[wssix99]

I've actually had a large flooring line before, have you?

We're all on the internet, so we must all know what we are talking about. Nothing I have said can't be learned at any local community college in a business/economics class. It's 101-level stuff. Your assertion that cash-up-front contracting is smart business doesn't stand up to basic economic tests. I can't think of any other businesses (maybe prostitution) that operate under the same construct.

I would say that up-front payments for specialty finishes (like some types of flooring, special order fixtures, etc.) that might be custom/non-returnable or not easily transferable to another project would be reasonable. There is an extreme amount of risk there that a contractor would not be protected for until it was actually installed in a property. The transaction for these items is similar to buying any other type of finished good from a merchant.

No successful contractor or builder I know would use a million in capital to make 5% in a year.

You aren't doing the math correctly. If a small business takes $1M of business and chops it up in to little bits, they are making smaller "bets"; draw-by-draw. The line of credit required for that $1M of business over a year is maybe $50-100K. (This number is made smaller by the "free" lines of credit extended by material suppliers, etc.) The risk is smaller. The return is smaller. It's still add-on money - but on small risk.

Developers bet the whole farm and risk $1M at a time. They make much larger returns but risk much more at the same time. This is not what I am suggesting.

One of the most important issues any business has which they do not teach is how to manage cash flow.

Good companies can manage cash flows. Great companies use that skill, leverage investors, and turn it all into profits.

 

[Dragfluid]

You may want to also consider a lien waiver. I protects you from liens filed against your property if the contractor fails to pay his suppliers.

Read the above again, and then read it again. VERY important!

 

[6768rogues]

You can get a lien removed simply by proving that you paid in full. Never pay without a record that you paid.
In all cases of someone getting ripped off, the customer paid for something that he had not yet received. Progress payments are certainly reasonable.
Do you pay the grocery store in advance for food, then hope you get it later? The grocer pays for it and then sells it to you, he gets paid when you get the food. That is how commerce works. No reason to pay large down payments without having something to show for it. If a contractor cannot survive financially until the first progress payment is due, walk away from that contractor. Or give him $100 down, no more. Minimize your exposure to risk and you will not lose.

 

[Hilltopmasonry]

Nothing I have said can't be learned at any local community college in a business/economics class. It's 101-level stuff. Your assertion that cash-up-front contracting is smart business doesn't stand up to basic economic tests. I can't think of any other businesses (maybe prostitution) that operate under the same construct.

Kind of funny because every business class I have ever taken or book that I read relating to running a successful construction business all agree on the fact that contractors always should get a down payment before work starts.

Do you pay for your plane ticket after your flight when you arrive at your destination?

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[rustyjames]

^^^Agreed, Contractors shouldn't be expected to be a bank.

 

[Eslader]

That isn't a bad idea either. But you would need to find an attorney who is familiar with the building industry and their contracts and that may not be easy to do if you live in a smaller town.

And even when you do find him, there's not a whole lot he can do when the builder skips town with your cash and leaves his shell company to go bankrupt. That's been known to happen.

all agree on the fact that contractors always should get a down payment before work starts.

A downpayment is one thing. But 50% is excessive.

 

[Hilltopmasonry]

And even when you do find him, there's not a whole lot he can do when the builder skips town with your cash and leaves his shell company to go bankrupt. That's been known to happen.



A downpayment is one thing. But 50% is excessive.

I totally agree, even as a contractor myself I would be very uncomfortable giving somebody 50% down however I usually ask for 20% on my projects. Most of my projects are smaller being one day to a weeks worth of work. so I do not have a draw schedule with the exception of 20% down and the remainder due upon completion. On larger projects lasting more than a week then I would have a different draw schedule like 20% down, 50% due when the work is half complete and the remainder (30%) due upon completion

I feel that is extremely fair for both parties involved, neither the homeowner nor the contractor gets too far ahead moneywise




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[wssix99]

Do you pay for your plane ticket after your flight when you arrive at your destination?

Actually, you do. When you give money to an airline in advance of a flight, they hold those funds and then only actually book them following your flight. Airline accounting is crazy complicated - there are a number of companies that make a good business off of it: https://w3.accelya.com/financial

 

[wssix99]

^^^Agreed, Contractors shouldn't be expected to be a bank.

That's not what is being said. It's 'Merica and people can do whatever they want and fools will be separate from their money...

The assertion is that contractors can make more money by extending a short line of credit to their customers for in progress construction. Some construction companies do this and only extend themselves as far as the line of credit that their suppliers offer them.

By the line of thinking that contractors should not do this, one should say that suppliers should not do this, either. I fail to see how a lumber yard extending a line of credit, to buy materials, to a contractor is different. (This is how they extend their profits. If they operated a cash-on-delivery business, they would be mess.)

 

[Hilltopmasonry]

Actually, you do. When you give money to an airline in advance of a flight, they hold those funds and then only actually book them following your flight. Airline accounting is crazy complicated - there are a number of companies that make a good business off of it: https://w3.accelya.com/financial

When I book an airline ticket they immediately charge my credit card, or debit card so the airline is paid in full before I fly. What they do with the funds doesn't matter to me since I no longer have possession of the cash but if I do not provide the funds before I fly I don't get on the plane

Maybe contractors do the same thing, they hold your funds until the work starts. At least that's what I do when I deposit customers money I don't immediately use it it's actually just sitting in my account.


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