How does a reputable contractor get paid?

[Peyton Clark]

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]

@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.