Financial Solvency Requirements for GCs?

Question

What do you all find as best practice for evaluating the financial solvency of a GC you want to hire?  If they can bear the cost in full of materials up front or is there anything else?

Bruce Woodruff · Answer

Sure you can use a bonding company if you feel the need. Some local type suppliers like lumberyards provide this service....one job I did the customer wanted to use Wells Fargo for the funding. So yes it can be done. Be aware though that this really slows down a project. You need to schedule an inspection by the intermediaries inspector prior to each payment. Then the request gets submitted to the funder and takes a week or so. In the meantime, many GCs will pull their crew to another job because they don't want to keep working for you when they've completely finished a certain phase of the job and have paid their employees out of pocket, so now they're down money to you, the customer. So away they go.

And in your worst-case scenario above, you should bear in mind that you are never going to give the GC 30% of the job contract all at once, just one phase at a time. So you are never really out much money, just a few grand. If you can't trust your GC more than that then you shouldn't have hired him. Or you have too little risk tolerance to play this game....

The best option is to find a great General who has impeccable references and that you can trust to treat you right.

Bruce Woodruff · Answer

@Corbett Brasington Gotcha. Sounds like you've pretty much got 'er covered. Well there are two scenarios here....

If you want to work with a larger company, they can probably provide you with some paperwork to make you more comfortable, like a balance sheet or similar from their accountant. But you will pay 20% nmore or so to work with a Contractor who could possibly fund the project them selves.

A smaller contractor, who may actually have better quality control and care more about your project, will not be able to carry much of your budget load, nor should they.

I was a medium sized General Contractor for much of my career(average remodel $500k, average build $1.5 mil), and the way I set it up was asking you for about 1/3 in advance of the trade in progress. For instance electrical, where I was paying a Subcontractor....if the total contract amount was $18,000, I would get $6k from you, give $5k of that to him as progress payment #1, and keep $1k for my overhead and profit. Then when the electrician was almost done, I'd ask for another $6k to match the progress of the work that you could visually see and verify yourself. Then after his final work had passed inspection, I would request the final $6k and disperse it.

That is a fair and comfortable way for all concerned because no one is too far into anyone else's pocket if you know what I mean....

Hope that helps....

Corbett Brasington · Answer

@Bruce Woodruff I understand that my concern though is when the project is only 2 or 3 months long using your model means that the investor is fronting a third of the total project so if it’s a 70000 total bid that’s 21k I would have to front the contractor of which they could just walk away with and there is no legal recourse other than law suits.

So if the reality is the GC really needs 1/3 upfront to pay their people and materials but I don’t want it to be so liquid that they can just walk with it….meaning I am not giving them literal cash.  What options does that leave me with.

I would love is there was something like a title company for rehab. The money goes to a third party for protection and payments are made directly to the sub (which I believe is called a two party check) and profit which is CSI code 00010 can go directly to the GC. Does something like this exist or are their other arrangements that I am not aware of that are suitable.

Don Gouge · Answer

You can find contractors to go along with this but you will have to pay dearly. You are looking at a model that is more suited to commercial construction where the contractor is bonded and he has his subcontractors working under a paid when paid agreement. In other words he dosent pay anyone until the owner pays him. There is also a retainage that is held from all payments until project end or even up to a year after.

Until I was actually involved in commercial construction. I never understood why things were so expensive. As a contractor you have to charge the owner a premium for the privilege of using your credit as well as the uncertainty of when and if you will get paid. I will gladly build your project and produce a bond and not ask for a penny until 100% completion but you will pay and pay mightily.

If you are building a standard residential project, no one wants to jump thru your hoops when there is so much work available right now. I learned a long time ago that all money isnt the same.

Corbett Brasington · Answer

What I have in my standard operating agreement with GC is that I will front 25% of materials costs per milestone at each milestone.  Billing is also done at the end of each milestone in full.  So a 4 month project will likely have 4 milestones as an over simplified example.

I am asking because I have have some GCs ask me to front them money for LABOR of their guys who they pay weekly.  They say things like "I have multiple jobs going on right now I need more in advance to get your project started"  I want to figure out how I can eliminate those people in when I prequalify general contractors.

Additionally I have been asked by more established GCs for me to provide them a financial resume.  Funds in the bank, sources of all lending for this deal, how much is financed for construction etc.  Which I have been happy to provide.  So if they are going to ask this of me how can I also reduce that same kind of risk of them

Bruce Woodruff · Answer

You would have to ask them for their books and I don't know anyone who would do that.

And why are you worried about them being able to handle the cost of materials? They are going to ask you for that money before they start each phase. And they are not asking for the material money because they can't afford it, they are requiring it because they don't want to get too much of their own funds invested in a job....not a good business practice for a Contr.....

Financial Solvency Requirements for GCs?

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