How does a reputable contractor get paid?

Question

Hey BP fam,I’m wanting to dive into my first flip here in Nashville - I would use hard money to fund the purchase and rehab. I’m aware of all the costs of the loan and closings - my question is how would a contractor (at least one I would feel confident in) get paid? What’s a fair amount or percentage upfront? I would receive a draw upon completion, so cash needed to kickstart the project is where I’m most concerned! I know contractors are hard to come by in Middle Tennessee - that may play a role as well.Look forward to hearing your responses!Thanks,Peyton Clark

Bonnie Low · Answer

@Peyton Clark - unless you have a strong relationship with your GC, they're going to expect some money at the beginning of the project. Most contractors run on low cash reserves so they often need that $ to buy the materials to get the project started or, quite often, to pay their laborers from their last job (that's just the reality). Agree up front to a progress payment schedule. For the sake of round numbers, here's a recommendation. Something like 10% at start (don't over commit before they've done anything for you), 50-65% when the project is halfway finished - and this means permits up to that point are signed off by building officials. You can pay that in one payment or two. This now leaves about 25% remaining. Do not pay that until after your final inspection AND your punch list items are taken care of. Punch list items are the non-permit issues like paint touch ups, trim that isn't quite straight, a cracked tile (yes, this happens), a water faucet that is hooked up backwards so the hot water comes out of the cold handle and vice versa, etc. Many people will take their final payment all the way up to 90% but that remaining 10% is often not motivating enough for your contractor to get your punch list items done. If they don't walk away from the punch list entirely, they'll drag it out and that will cost you money. So make that final progress payment more substantial in order to motivate them to come back and get it completed. If you end up having to hire someone else to finish all those items it will always cost you more and the frustration is just not worth it. Whatever schedule you decide on, put it in a very simple contract up front so the contractor knows what to expect, agrees to it and signs off. Most contractors are not business people first and foremost so you should expect to have to lead on this. That is not intended to bash contractors in any way - we need them and they need us. Just understand that their priority and their skill set is building stuff - not managing business financials. Finally, if all that feels awkward to you, you might ask your lender to set the expectations about draws. That way you can say to the contractor "my lender will only give me X amount at X intervals." This allows you to convey to the contractor it's out of your control and those terms are inflexible.

Sue Hough · Answer

@Peyton Clark every contractor, until you have a long standing working relationship, will require a down payment. This is determined by the scope of the work and amount of money out of pocket. Typical is 30% on projects under $75k and 20% on projects over. Ask if your hard money lender would provide some funding at closing for initial start up expenses. If not, you will need to provide this out of pocket.Good luck!

Joseph Firmin · Answer

Most will want a % up front whether that is 25% or more. This is negotiable. Some will agree to only being paid for work inspected as complete. You can reiterate to them that in order for you to receive a draw for financing, the inspection must be complete. I would talk to your HM lender and ask for more draws than just one at the end - it is rare that a contractor (unless they are very well capitalized) to agree to just one payment at the end of the project. More than likely if you're using OPM, you'll need to have skin in the game and come out of pocket at the beginning to fund the deposit or first draw until you a reimbursed by your lender.

Matt M. · Answer

@Peyton ClarkUnless we have a good working relationship, 1/3 1/3 1/3New customers that won’t cough up a deposit, don’t get work done.

Caleb Parr · Answer

I don't typically pay anything to my contractors up front. About halfway through the rehab, I'll walk through with them to go over the work completed and then give them a 50% draw. The remaining 50% doesn't come until after they complete any touch ups/missed items and such and I sign off on the repairs.