Retainage, Draw Schedules, and Sub Payment Strategy

[Bryan Hancock]

I was wondering if some on the board cared to share their overall strategy for construction/rehab projects.

Do you pay subs directly? If so, how much cash do you pay up front and how do you structure the payments as work progresses?

Do you let the GC pay subs and make the draws small? If so, do you get 50% of the lien releases before the next draw is issued?

What retainage do you specify? Would you increase this for a new GC you are bringing on and haven't developed trust with to date?

Please share your experience and thought process.

[Aaron McGinnis]

Well, I am the GC - so I pay everything directly.

If you're hiring a GC who has a license and a serious business, best thing to do is let him pay everything and you pay him. OR you pay him an administrative fee and then you pay for 100% of everything else.

The second technique can get really damn cumbersome for both you and the GC. Every time they go to Home Depot for a box of nails, they have to either do a phone sale or record it and remember to bill you for it.

However... do one way or another, but not both. Doing a bit of both gets really confusing. Who paid what? Now we have to break down our expenses to the box of nails. Gee, that's really damn confusing at the end of the day...

When I pay my subs, I really do a combination of techniques. Bottom line is that some of my subs are larger businesses who don't want or need to be paid until they're done (That works great for something like HVAC, which is really predictable... not to mention inspected... work)

Some of my subs aren't small and can't or don't want to float certain expenses... My painter (and roofer), for example, requires a draw at the start of a job to buy materials. That's fine with me. These guys to good work but don't have large businesses with lines of credit and I don't at all mind paying materials in advance.

Plumber and sparky get paid after rough inspections and again after final inspections.

Others, like my tile guy, floor guy, etc. are all kind of a mixed bag. Some want materials up front, some are okay without. Depends on the trade.

My feeling is that so long as the relationship is honest and the draws are reasonable, I don't have a problem with it. After all - at the end of the day, it's my house and not their house... if they don't want to effectively float me a loan for materials, they shouldn't have to.

Carpenters are the hardest. By carpenters, I don't mean "framing crew"... my framing crew gets paid by the job and then labor only as I buy 100% of the lumber. My carpenters are the guys in between the trades, and generally on-site throughout the whole job making sure that punch work is getting done and the trades are good to go for their part of the work.

Carpenters get paid on Friday and metered hourly. They are also the guys I pay a lot of attention to... they know not to solder and run the clock on me.