Upside down contractor. Loan to finish project?

Question

My contractor mismanaged his employees and subs and got behind financially on his most recent project with me. He is concerned that he can't get the project done without a loan or "pay day advance on future projects".

He's requesting a loan of $5,000 to get our current job done. In exchange, he'll agree to make $1,000 payments on each subsequent rehab project until he has paid me my original $5,000 plus $1,000. He has offered to sign an additional $5,000 construction contract for the "loan" so we can use his $12,000 bond as leverage. I'm not sure how that'd work...

What do you suggest I do? I hate loaning money, but I also don't want to have to find a new GC to finish when I've already given the current contractor payment. The current contractor is willing to get it knocked out, it's just a matter of needing the extra funds to finish.

He has taken all of his draws on the current project and only has a remaining balance of $500, which is dwindling quickly because he's also 14 days beyond his deadline and $50 for each day beyond our deadline is being deducted from the balance owed ($500).

Randy F. · Answer

The importance of a detailed scope of work cant be understated. Unfortunately, there are many contractors who basically fly by the seat of their pants, and a rehab can get out of control in a hurry.

A take-off from the detailed scope provides a detailed schedule, providing daily goals for crew, black and white expectations for accountability between investor & contractor and contractor a crew. And there is no better tool for both investor and contractor to track labor, and learn and fine tune estimating skills.

Generally speaking, a contractor who is unwilling to provide a detailed scope and schedule, isnt confident in his ability to either draft them accurately or meet their dictates. At that point its a crap shoot.

As Karen mentioned, why it got out of hand is important to know, and may clue you to whether to bail him out or not. Even if he does great work and plays well with others, if he isnt organized and hasnt learned to manage the work flow, how can you expect him to do better on the next five rehabs while hes paying you back.

Another thing to consider is what his financial health will be taking a $1000 hit on each job. Once you get behind the eight ball it can be tough catching up. And his incentive to put his time into other jobs will be greater if his cash flow is restricted.

Im not about bashing contractors... Theres enough of that going on already. He may do great work, have a strong work ethic, amd be a great guy to work with, but simply isnt the full package. The fact that you are considering the loan indicates he has redeeming qualities. In that case, you might treat this as a learning experience and work with him on doing it right going forward.

Please keep us posted. Good luck!

Kevin Yeats · Answer

Jacob, do you want to be a banker also?

Your GC, I'll call Ed, wants to borrow from you to complete what he has already been paid to complete.  The additional information states that Ed and you have a good history (Ed has character) and that Ed got over extended (Ed has capacity).

Does Ed have collateral to pledge?

Does Ed have a good credit history?  (If yes, why doesn't he just tap his credit cards or get a bank loan or ask his subs to in essence extend a loan by delaying all or part of Ed's payments to them?)

Does Ed have rock solid jobs lined up that you know will pay Ed in the next 30 or 60 days?

If you do extend a loan to Ed, what will happen if the worst occurs next week?  What will you do when that worst case scenario happens?

If I were in your place and thought that extending credit to Ed in this situation, I would keep Ed on a VERY SHORT LEASH

Aaron McGinnis · Answer

I didn't reply to this immediately, as I had to think about it awhile.

After pondering the topic over the weekend (While I may or may not have had a few libations to loosen up my thinking muscles), I came to the following conclusion:

1) Tell him to get lost.

2) Realize that what he's doing is asking you for an nonspecific change order because he is over budget and doesn't know where. Maybe the scope of work increased and he's too disorganized to realize it?

3) Realize that this will happen again with this guy. If he isn't organized now, chances are that's not going to change!

Him asking for a loan to be paid off in the future, with future work, is also a very clever trick - it means that you will feel 'obligated' to use him for at least the next 5 projects. In other words, he can stop selling for at least a few months while he 'works off his debt' with you.

Accepting this proposition is SIMPLE LAZINESS on your part. You don't want to go out and find the right guy for the job, you want to keep pretending that you've already satisfied this particular hassle and move on to the next hassle.

The trouble is that you haven't satisfied the hiring requirement. This person cannot perform the job adequately and is trying to sucker you into a bad idea.

Mark my words - the next thing that will happen is that he'll need another $2000. Or $3000. Or $5000. "To finish the job" ... this is exactly like lending money to your drunk uncle billy... it will not turn out well, ever.

Here's how you save yourself some time, trouble, and money - fire this doofus and go hire a contractor who can do the work and keep his accounting practices straight. Consider the experience a tuition payment and move on before this situation becomes more of a soup sandwich than it already is!

Karen Margrave · Answer

Jacob Evans I don't know what kind of bond the contractor can possibly have that would allow him to use it as collateral, that's unheard of. However; it already is collateral, because if he doesn't finish his work, you can go after payment from his bond.

If you want to let him finish the work, get a detailed list of materials needed. Tell him you will buy materials, he can do the work, and you will forgo the penalty being charged of $50 per day. For the record, no other contractor wants to come in behind another contractor because they then assume liability for work done prior to them.

Next time you work with this contractor, or any contractor, don't pay for work that hasn't been done. If there's a lot of materials, it's fair to buy materials, but make sure you have a detailed list of materials beforehand, with pricing, and then you can purchase them or pay for them. However; you need to figure out what happened and where he went wrong. He obviously underbid or mismanaged the job, the question is why?

Account Closed · Answer

This is a good opportunity to get to know more than one gc. I was ambivalent w the guy I thot was good N had history too. But I ignored all the lil signs and persisted in hopes the flop was a fluke. Talk about not seeing straight. I'll never ever put myself in that situation again in hopes for being just a fluke. He's not my son, nephew nor family I can't walk away from... why tie myself up to more risk and uncertainty?

Anyway, u can let him finish if that helps ur conscience, But you can't control the quirks that got him where he is today. Ur colleagues,assuming have similar or related complaints, may hint to a bigger pattern u may not b privy to.

My vote is to chalk it up to tuition. As for future work.. too risky to b the gc. maybe earn back his keep as a sub to a new gc. Anyway, sounds like u have a good opp to meet new gcs... don't stick to just one... diversify for backup purposes.

I'd give my family a second chance on a v short leash.. but that's bc its family and my guilt n obligation wud influence the more efficient route of finding another. But then again,if it were family, I'd probably already have a clue for propensities that wud let me know if they were a good fit in the first place for me.

Good luck. I just have awful flashbacks of learning the hard way. I hope u can spare urself any more unnecessary hard lessons.

BTW, convenient of him to ask u to save his ass.. I guess he has no friends or family to borrow from eh? A more honorable and commendable action wud b to minimize ur burden and save his mess up by seeking a solution outside of the mess he created!

Kevin Yeats · Answer

Jacob, this really appears to be a situation where his problems will become YOUR problems if you extend this loan to "Ed."

Bill Gulley · Answer

Fire his azz, never loan more to a looser, have the job completed by another and take you contracts to court, charge him with any additional money to finish the job. If you had a contract you stick it to him, never pay more toa looser, it;s on him. Good luck. 
;)

Jacob Evans · Answer

Ed doesn't have credit or assets.

Work for the next 30-60 days would be on my next few projects.

IF I opt for an "IOU" it will be with a very short leash stipulation and the IOU would come as a result of me paying for materials directly for this current job so he can finish up.

I'm finding that the more digging I do the more I realize how displeased my other colleagues are with Ed and how gloomy his situation truly is. Money still owed to Subs, other loans, other unfinished/behind projects, etc, etc. A $10,000 loan might not even bring him current with his current obligations, but I'm convinced (because it's really his only option at this point) that he is still very much interested in finishing my job to continue working with me for future income...  Not saying that that's the route I plan to go, but I think it's a real option. I'll make my decision Wednesday Feb 27th and let you guys know.

Thanks so much for the input so far :-)

Matt Devincenzo · Answer

Thanks I appreciate the edit to reflect the actual flow of the thread.

Aaron McGinnis · Answer

(EDIT: For the truly bored and attentive to detail, I took the liberty of condensing Jacob's post.)

Jacob - take the $3000 hit on the chin and accept that this guy is a lousy small business owner who has engaged in terrible fiscal practices and has dug himself into a deep, dark pit... which is probably a lot worse than he's letting on.

Upside down contractor. Loan to finish project?

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