How to pay a GC? How to figure out scope of work?

Question

how you do pay your GC? If the GC requires a deposit and the HML only pays after work is completed (completely makes sense) does the deposit come out of pocket?

Also, I read a few times that your quotes from GC’s need to be have a specific scope of work and in writing. Do I need to have the type of materials I want used? What if I don’t know that exactly.

Lynsey Dreis · Answer

@Rigo V. Once you are under contract with your GC, you can ask them for a "selection's list" upfront listing what standard materials are included in their allowances.  Most likely when your GC gives you a quote they are pricing out "contractor grade" (standard nothing fancy) selections and will not always fit your criteria of what you want to ultimately choose in the end.  It is not unreasonable to ask for suggestions of standard materials & material suppliers that are included in their budget.

Just to be safe on your end as well you can insert a clause into the initial contract agreement stating that anything that goes past the agreed schedule scope of work (time wise) can be an additional amount per day.  For example, If your GC tells you he will have the job completed in 1 month, every day he goes beyond that deadline (besides for "unforeseen" circumstances beyond the contractor's control such as weather and permitting) can be an additional $250 credit off your original agreed amount.  This will make sure he knows you are serious and have done your due diligence.

Hopefully these suggestions help, let me know if you have any other questions.

Will Barnard · Answer

No, that is not what I was saying, the exact opposite. By being “ahead”, I meant that the contractor should have more work completed than what you have paid, thus, being ahead for your bank account. This way, you have leverage over the contractor to get the job completed. Another way to say it is to never pay in advance. Of course there are certain circumstances where this is not entirely possible but generally speaking, be careful on sending our advanced payments.

Rigo V. · Answer

@Will Barnard got ya! thanks for your clarifying and your input!

Rigo V. · Answer

@Will Barnard Are you saying that I should be paying more than the work that has been done?

I feel like everyone has a conflicting opinion on this. I read this article from J scott that says you should always be behind and to be honest I agree.

https://www.biggerpockets.com/renewsblog/2010/04/14/6-rules-for-managing-your-contractors/

Will Barnard · Answer

You should not wait until you are “under contract” with the GC before deciding on an item Zed list of materials. That should be done Before you agree to the contract as this is an addendum to the contract that needs to be agreed on prior.

I do agree to institute per diem penalties for contractor delays and on the flip side, a bonus per diem for every day they finish early. Providing not penalties with no incentives is not a good way to do business.

As to the OG questions, yes, you pay out of pocket, submit the expenses and the lender issues a draw after the inspection is completed to verify the work was actually done.

As to paying a GC or any sub money upfront, be careful, you should always be ahead, not behind as far as payments vs work completed.

Additionally, for a major rehab project, it is best that the contractor have a scope of work for all the rough labor AND materials and for fina sh work like lighting fixtures, plumbing fixtures, cabinetry, flooring, tiles, etc you pick it out and pay for it directly. This avoids the inevitable argument over what finish quality is included or not.

Rigo V. · Answer

@Michael J. Completely agree. I would not and will not pay a GC before any work is completed. I am currently looking for a larger home builder that will be able to afford starting work without having been paid up front. Otherwise I will look to purchase the materials and have them work on the rehab that way.

Michael J. · Answer

Most people I talk to with large rehab businesses all say that you should never pay for work before it is completed, especially with a GC or sub that you have not done a lot of business with already. Maybe hiring a GC complicates this but I would be extremely careful with parting with any money up front before work is done. Even if you have to cut a check every week for work already completed and purchase the materials yourself. IMO I would rather go to the site, inspect work and cut a check every day or few days than to risk losing a large deposit.

I know a GC needs to pay subs but I don't know of any company that pays employees in advance before the work is completed, my job pays me after my work period not before or in advance, Every job I have ever had pays me after the work week, never before.

Another thing to consider is, you have no recourse if the contractor takes off with your money and you don't have more than a name and UPS box address, the contractor knows the property address and can file a lien if they don't get paid, they have the advantage so you have to protect yourself.

Way too many stories of a GC or sub asking for a large several thousand dollar deposit and then you never hear from them again. I think this is another reason it is better to get referrals from other investors that have worked with a contractor.

I remember overhearing a conversation at a UPS store. Someone came in and was trying to track down a GC because all they had to go by was a UPS box and a name, the UPS store could not give him any more info. The guy paid the crook a $25,000 deposit up front to remodel their house and then never heard from him again.

Rigo V. · Answer

@Lynsey Dreis @David Robertson thanks so much for you responses this is really helpful.

As far as a quote from a contractor do they usually separate labor from materials? I am only asking because I know I will need to issue a 1099 for my gc and need to make sure I only really put the cost of labor on it not materials.

David Robertson · Answer

Hi Rigo,

If you are unsure what materials you are going to be using you can have the contractor exclude the 'finish materials' (tile, paint, plumbing fixtures, light fixtures) and include just the 'rough materials' (studs, drywall, wiring, piping, etc.) and installation of the 'finish materials'.

In this scenario, you will be responsible for purchasing and delivering all of the materials for the project, so it's added responsibility for you, but it will give you an opportunity to figure out what materials you are using on the project.

I have a Scope of Work example in my file place which will show you the level of detail & verbiage you need to include in your SOW:

https://www.biggerpockets.com/files/user/drobertson/file/sample-contractors-scope-of-work-documents

Sean Carroll · Answer

@Rigo V. a good scope has the materials sku number and pictures. Also concept pictures help if you are trying to mimic a picture. You should be paying your GC out of your pocket and being reimbursed by your HML. We do weekly draws with a list of items to be completed each week. If all items are completed then we invoice the full amount agreed upon. If only 90% of the weekly task were complete and the delay is on our end then only 90% of the weekly draw is invoiced. If it is not our fault such as subfloor needs to be replaced then we do a work change order in order to incorporate the new work that is not on the original scope.

How to pay a GC? How to figure out scope of work?

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