How to determine when to Pay GC or contractors on Rehab

Question

Hi Guys,

I am currently in the process of doing Rehabs on my 2 single-family homes around Philly. I had a bad incident where a contractor ran away in the middle of the construction and I have hired a new company who is working on the 2 projects now. I have made some payments for the initial advance and demo and currently, they are working on the house. My rehab is simple where I am replacing the floors with LVP, repainting, adding a half bath, kitchen redo, and bathroom redo. I had paid close to 50% on the first project and the contractor is asking for a payment. How do you guys set milestones on rehab projects and how do you determine project progress like 30% done, 50% done, etc? How do you determine when to pay the GC on payments? Do you have any project management templates in excel or any other tool which could help?

Buyan

Grant Thompson · Answer

Buyan,

If you have a contract with the GC (which I highly recommend) then you must paid on the agreed milestones. That being said, when we do rehab, we attempt to estimate the costs of the project for the contractor (project schedule + itemized quote) and pay those amounts along the way. At the completion of the work and acceptance by us, we pay the remainder. This allows us to make sure the contractor is paid for the materials / expenses then occur throughout the project while withholding their "profit" until work is completed. Both fair and properly incentivized in our minds.

David Krulac · Answer

We will rarely, and I mean very rarely will pay in advance.  Usually we pay in full when work is completed satisfactory.  Sometimes we will pay for materials and have directly delivered to job site. Contractors and subs must sign a Stipulation Against Liens. Occasionally we will have draws usually 4 draws with the largest draw being the final draw, when work is complete. Divide the work into 4ths and pay the draw when that portion of the work is completed satisfactory. Using that method, you are never paying in advance.  We have lots of contractors, who we have used for years, some decades.  And we always pay very promptly.  There is one contractor, we use who requires payment daily, which we accomodate.

Steve Babiak · Answer

Good answers so far. You put a draw schedule together, that establishes two things: what tasks must be completed to make a payment due, and the amount of that payment. Of course, you will have contractors who want to be paid prior to those tasks being fully completed - you then have to review with them what they omitted. No payment without being fully complete, or, you make a written change order that reduces the payment amount significantly for that draw while leaving out that which was not completed. And add the omitted work into a future payment draw.

This discussion then leads to a question of how to set up draws in the first place. Maybe the contractor wants a payment every week, so you look at the itemized estimate you have and together you figure out what tasks will be done in each week. But it’s easier to break things up into four or five draws, and together you identify what tasks are to be completed to comprise that draw. The value of the draw then becomes the total value for the tasks that were included. If tasks within a draw require a municipal inspection, then passing of the inspection should be required for that draw to be paid.

Retainage / holdbacks are another consideration. This is an amount that is typically say 10%, to cover situations where completed work has issues, and it is intended to motivate the contractor to correct those issues.

Then there is the matter of subcontractors. If payment for subcontractors was included in a draw given to the contractor, how do you know the subcontractors were paid so that they do not file for a mechanics lien? So you will have to require lien releases and lien waivers. Or better to insist on paying subs yourself directly, so you can get those lien waivers in person. This implies that you know which tasks will be subcontracted and who the subs will be. And maybe you disallow subs in the first place and hire those yourself.

A lot goes into this to make sure you are covering yourself.

How to determine when to Pay GC or contractors on Rehab

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