How do I protect myself when entering a contract?

[6768rogues]

I was a contractor for 21 years and most of my jobs were the type that took one to four weeks. I always had at least 30 days to pay for materials at the suppliers and often I simply paid them out of my pocket on the 10th of the month to get a 4% discount. The deal with my supplier accounts was that anything charged in a month was due the 30th of the following month, but paying on the 10th of the following month gave me a 4% discount. That discount was mine and not shared with the customer. It was worth it to me to use my own money if necessary to get a nice discount. No problem using my money to cover the job at 4% monthly interest. I never got a down payment on any job. In the event that a job was large and going to take substantially more than a month, I asked for 50% of the money when 60% of the job was done. I always had enough money available in my business account to pay for at least two months of materials or more at any time. I also kept enough money around so that I could pay for 6 months of living expenses if I were to get hurt. I thought those were responsible things to do for my family and my business. Occasionally using some of that money to get a 4% monthly return was great. If you are the kind of contractor who is waiting for today's money to buy tonight's groceries, you are not managing money well.
You see, not only did I avoid borrowing money and paying interest to cover material bills, I used money I had to pay the bills to get a nice discount. I think that is smart money management. The discount on materials alone paid for Christmas and a great vacation for my family every year.
And I never lost a dime. I always had good communications with the customer, did a good job at what I promised to do, and people were often anxious to pay me before the job was done.
If you think those discounts are no longer available, you are wrong. My son is a large scale contractor, with 10 to 15 jobs at a time ongoing. He gets as much as 7% discount at his suppliers because of his volume. He gets no down payments, either.

 

[2level]

6768rogues - 4-7% in one month is a great incentive, but perhaps it's built into the original pricing by the supplier -- in part or whole.

 

[6768rogues]

6768rogues - 4-7% in one month is a great incentive, but perhaps it's built into the original pricing by the supplier -- in part or whole.

Obviously if they make money the discount is baked in. However, the many suppliers I bought from all offered similar discounts. Pay by the 10th and get a discount or pay by the 30th and no discount. If a new supplier came along, I would tell them what I expected and they would give me a discount for early payment to get my business. At one time my wife worked at a supplier and surprisingly very few people pay by the 10th to get a discount. I always did; it gave me a competitive edge over my competition and a larger profit margin. The suppliers knew my money would be there on the 10th no matter what.
Everyone got the same pricing but discounts varied based on payment history and volume. I started at 2% and worked up to generally 4%, some suppliers a little more and some a little less. For those who did not pay by the 10th, it didn't matter.
One time I was going out of town and it was the 5th of the month and I didn't have one bill yet. I called that supplier and they told me they were running behind and that I should go out of town, pay when I got home and take the discount. If you need a favor or need something delivered now, they know who pays and who they have to wait for.

 

[2level]

Probably an attempt by stores/suppliers to be/seem competitive with the big-box stores "10% off" pro desk.

In my experience, dealing with manufacturers, few offer early pay discounts. The ones that do usually allow 1-2%/10 day terms. Volume discounts are likely to be an additional 2-5%. I once had a supplier that offered a 10% early pay/volume discount for about two years, before going out of business. They had severe cash flow problems.

 

[wssix99]

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.

The IRS has different rules for the way airlines account for their money than the way a contractor would.

Holding your customer's money in escrow would allow you to earn some interest on that money, but not as much as a general contractor would earn if they financed the in-progress construction and took progress payments. (I expect the opportunity is likely greater for general contractors who are in a project longer term vs. a specialty contractor who finishes their scope of work more quickly. I would also not advocate floating the cost of custom/special order materials - make the customer pay for those up-front like any other specialty good or finish they might buy, personally.)

 

[wssix99]

^ 6768rogues was on it!

6768rogues - 4-7% in one month is a great incentive, but perhaps it's built into the original pricing by the supplier -- in part or whole.

It's the cost of money, not fluff in the material price. If the contractor can manage the cash, they get the benefit and the profit. This is the money that most contractors leave on the table and let others take. The true value is much more - giving some of this profit back has mutual benefit for the supplier as they can then take their capital and reinvest it in their business, more inventory, etc.

 

[D rock]

1. Deal with a reputable contractor.
2. Don't have ridiculus demands, yes your paying...but be reasonable
3. Expect delays, things happen that are nobody's fault. Be patient
4. Have enough money saved for unexpected. Don't nickel and dime your builder, he's there to make a living, not scalp you. If he can't make money, he's going to go somewhere he can.

The easier you are to work with, the more understanding the builder can be, but don't get run over.

I have about 60K invested in my shop. The builder knew that I could and would pay for what I wanted, then when I needed more added to it, I would call him back. He never hesitated to come back to work for me again. I never thought about calling anybody else. It works both ways.

 

[2level]

^ 6768rogues was on it!



It's the cost of money, not fluff in the material price. If the contractor can manage the cash, they get the benefit and the profit. This is the money that most contractors leave on the table and let others take. The true value is much more - giving some of this profit back has mutual benefit for the supplier as they can then take their capital and reinvest it in their business, more inventory, etc.

If it's only the cost of money, then the cost of money would be equivalent to a 50-80% annual percentage rate. (4-7%/mo. X 12). Fluff in the suppliers' price is a bigger factor than the cost of money.

 

[redneckcharlie]

I noticed you didn't touch the question have you ever had a flooring line? Nor, the are you even self employed(reference to the BBB). I have a degree in finance with a minor in economics. Unfortunately very little of what I learned in school applied in the real world. My math wasn't incorrect. You obviously have never been in the situation of dealing with a deadbeat client and litigation. 100k gets eat'n up very quickly with almost no reward in the end. Cash flow is king for a gc, and using that much capital for speculation on such a small return is shortsighted at best. A 250k spec pays 400k on the right lot in 4-6 months. The occassional right flip for 80-100k pays 200-220k. You do the math. Would you use that kind of capital for the return you referenced? Sorry, but listening to someones theories and academic references is as usefull as an engineer or architect telling me how to build a wall that hasn't ever as much hung a picture level and plumb.

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.




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.




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

 

[6768rogues]

The original poster asked how to protect himself when entering into a contract. The only way to do that is simple, do not pay for anything that you do not have. Any money paid in advance leaves you open to being ripped off. The more you pay in advance, the more exposure you have to risk. Every case of someone being ripped off was preceded by paying for something in advance. You judge what your comfort level is and find a contractor who will work on terms that suit your needs. If a contractor needs your money today, do you think he is looking for a down payment to show good faith or is he a financial disaster and he needs money to buy his family dinner tonight and pay for last month's materials? That is what you need to judge before handing over any money. It is doubtful that you will be able to determine that, so protect yourself to your level of comfort. For me, that would be no more than a token payment of a couple of hundred bucks, if anything. Good luck.

 

[wssix99]

You obviously have never been in the situation of dealing with a deadbeat client and litigation.

I won't waste people's time by credentializing myself on an internet discussion board. If I said I was an engineer, contractor, specialty contractor, business executive, financial consultant, playmate of the month, or run the most successful flooring company in the world - none of it would matter. I might even be some 13 year old behind a keyboard or college student's experimental AI program. Would anyone really know?

Substance is the important thing. I have laid out some concepts and principles for doing business that allow higher performing companies to increase their profitability. Some others have chimed in, above, that they have successfully applied these to contracting businesses.

All you have given us is an assertion that contractors should go the easiest/most conservative route and seek out only the most unsophisticated customers who are willing to pay cash up front for work not performed and leave themselves completely unprotected. (Whereas the contractor enjoys the legal protections that mechanics liens afford.)

^ I think this reinforces that the OP should be very concerned with the original question.

 

[Eslader]

I don't think it's reasonable to advocate for *no* downpayment. The contractor is putting himself at risk by doing a job without any up-front money, because you might be a jerk who decides not to pay him once he's done.

And now the contractor has to hope that you aren't richer than him, and don't have access to better lawyers than him, because if you are/do you can tie him up in court until he's bankrupt and so he's just gonna have to eat the loss. This has been known to happen.

At least with a downpayment he has two things. First, he has a little money from the deal even if you rip him off for the rest of it, but more importantly he has evidence that you can and will pay money when it's due.

Just as I think a 50% downpayment is unreasonable, I think a 0% downpayment is equally unreasonable.

 

[wssix99]

I don't think it's reasonable to advocate for *no* downpayment. The contractor is putting himself at risk by doing a job without any up-front money, because you might be a jerk who decides not to pay him once he's done.

The contractor is never at total risk. They have a right to a Mechanics Lien (https://en.wikipedia.org/wiki/Mechanic's_lien) whereas the homeowner has no protection from an unscrupulous contractor running away with or mishandling a deposit. (Most often, problem contractors will finance past debts with current deposits in an order to forestall bankruptcy. Whichever homeowner doesn't have their work done when the contractor goes under - loses.)

The mechanic's lien is by no means a fast path to recovering funds. Having homeowners pay progress payments (for completed work) and pay in full for custom/non-returnable materials is always a good, equitable idea to limit a contractor's exposure on top of the lien.

 

[2level]

I wouldn't pay 50% in advance either. $20k on a $40k garage is probably more appropriate once all, or most, of the building materials are on site, and proof of payment is provided.

One of the problems in this discussion is that 'downpayment' isn't being clearly defined. Is it paid when the site prep crew is ready to go? Will materials and the framing crew be arriving right after the site is prepped?

If I was hiring a GC to build a 40k garage, I'd rather make a downpayment (DP) of $4k than pay an extra $500 to tap into the GC's credit line and go with zero DP: I'll take that risk vs. reward scenario. Defining DP as money to be used for permits and site prep. This DP would be made once the GC agrees to a start date. I'm not interested in handing over that DP weeks ahead of time, so it's really more of a pay-as-you-go situation.

Can we get an update, OP?

 

[Vintage Veloce]

Never pay up front. And withhold at least 10% from the progress payments until the entire project is completed and passed all inspections.

 

[6768rogues]

Years ago when I was learning I worked for a large construction company and I noticed that most of their contracts indicated that there was a down payment of $1.00 (one dollar). I asked the owner of the company why he got a dollar down on thousands of dollars of work and he said that payment in lieu of service shows good faith and makes it easier to collect if he has to go to court later. I am not a lawyer but my daughter is, so I plan to ask her about it. I would pay the dollar if requested but not much more.

 

[cdestuck]

Scribble Mickey Mouse on the signature line. They'll never notice

 

[nes999]

Scribble Mickey Mouse on the signature line. They'll never notice

I get signatures like that all of the time. Around election time I got dozens of donalds trumps, Mickey mouse seems the moat common. Honestly I couldn't care less what you sign, you're on camera so if it goes to court I'm bringing the proof that you signed.

Sent from my VS988 using Tapatalk

 

[6768rogues]

I sign Elmer Fudd on my son's business account at Lowes. No one ever noticed.

 

[2level]

I sign Elmer Fudd on my son's business account at Lowes. No one ever noticed.

Vewy vewy sneaky, and you're not even huntin' wabbits at Lowes