Unusual for client pay for equipment rental & not contractor?

Question

I am not sure this is the right forum. It's not a question about rehabbing or flipping but is a construction question on my raw land-to-be-rental property. Please let me know if there is a better place to post this question! I am new to this, recently selling a rental duplex that I used to live in, and am moving to short-term rentals on the new property.

I am doing some basic work to set up campsites now and then later build cabins. The contractor I am using prefers clients to pay his fee directly to him, of course, but all other payments-for equipment rental, materials, subcontractors-the client pays directly. The positive for the client, he says, is that there is no padding of these fees (though there could be a kickback to the contractor) but I think he also has a cash flow problem and the benefit to him is he doesn't have to front the money, which may not be atypical in this business.

My concern currently is around equipment rental. If the skid steer is stolen off my property, I am responsible for it because I am the one who rented it, even though it might be the contractor's guys who left the key in it overnight. Am I being unreasonable in expecting him to rent the equipment and me pay for the completed job or to reimburse him after the equipment is returned and there is no longer any liability for it?

I am also concerned about paying directly for building materials. What if his cash flow problem puts him out of business? Now I'm stuck with materials but no finished product. I would hope the next contractor can use those but whose insurance is now covering those materials sitting on my property as I am sourcing a new contractor?

Paying the subcontractors directly makes sense to me because that is for completed services.

What do you think?

Joe Splitrock · Answer

@Rae Stankowski there are several reasons they could be doing this:

1. They don't have sufficient credit or have historic payment problems that keep them from being able to contract equipment, supplies or subs directly.

2. They could be concerned with slow payment issues, so having you pay direct means "you pay they work, you don't your problem".

3. Could be over theft concerns. You would be liable for stolen equipment or stolen materials.

4. It could be liability concerns, not only theft but injury on the job site by his people or sub contractors. When you supply the materials and tools, you could be viewed as an employer. That is one of the big differentiators of employee versus contractor.

It is concerning that you don't know if they are licensed or insured/bonded. Call their insurance company and ask "what if" situations around what the insurance covers. I assume you also have the property insured, so talk to your own insurance agent too. Paying the subcontractors means you are hiring them. Do you have a contract with them? What if they don't perform as contracted? Who is pulling permits for the job? Who coordinates inspections? It sounds to me like you have a vision but no practical experience in how to execute. Blind trust in this contractor without any protections for you is risky. This is literally how people "loose everything" in real estate.

Rae Stankowski · Answer

@Craig Carlson I did learn from one of the guys working today that the equipment usually has a GPS so theft is not as big of a concern.

@Evan Polaski We did this small job with this contractor this week as a “test” and I think he’s failed.  I had to manage way too much of the work the guys were doing…I am thinking why I am directing them when you are the contractor?? I get that it may be cheaper to work this way but I don’t have time-literally-or the expertise to do this for anything more than cutting trees and flattening campsites🙃 so the next steps we need to take on this property are not ones I can help manage.  Better to find out now than later, I suppose.

@Joe Splitrock You sized up our situation very accurately and this has helped me see we are flying blind.  This contractor has expertise in a specific area that no one else in this area has, which makes him the best fit over any of our other options but we cannot afford to have a disaster, nor costly mistakes.  It would be better to consult for the expertise and have to “manage” that aspect and have someone who can manage the job itself.  Also, almost no permits are needed where we are building and it seems to breed a lax attitude with many contractors and builders we spoke with.

Rae Stankowski · Answer

We will likely cut ties with this contractor.  Thank you so much for all the comments.

John Mocker · Answer

Rae,

The situation you described makes me consider you the General Contractor for this Job.  You need to have a discussion with your agent about the Liability and Workers Compensation implications in your state.

For the Building Materials you should have coverage under a Builder Risk policy.  That type of coverage protects a building under construction and generally has limits for materials in transit and on site.

The Equipment coverage may be purchasable from the rental company.  You can also get an Equipment Floater policy that insures rental equipment up to a set limit.

Matt Groth · Answer

@Rae Stankowski I read through pretty quick, but cashflow problems means he likely won't be around in a few years, so no warranty for any of the work. A bobcat is a pretty basic piece of equipment for someone that has "expertise" in this type of work. You are paying for the machine if he shows up or not...theft is the least concerning part of this...

Lynnette E. · Answer

It seems like you would have to pay the contractors as though they were employees when you furnish the materials and tools, and direct them in what to do.  That means paying for the SS, unemployment, disability and all those other things.  You also have to deduct state and federal taxes, often paying someone to fill out the forms quarterly.  It adds up fast.  (I used to have nannies as household employees.)

They would not be your 1099 contractors but W-2 employees.  Its a whole different world for state and federal government requirements between 1099 and W-2.

Oh, and the big kicker--if they qualify for an unearned child tax credit, they can ask you for it upfront and you ARE REQUIRED to pay it to them.  They you get it back when you file in April of the next year.  So you end up subsidizing the federal government.

Mike Reynolds · Answer

I have been a contractor in Texas for decades. Now I work for one as I am not for hire anymore.

First, the money isn't due for 30 days for the contractor to the rental company. If he doesn't have enough credit to carry that then you don't want him.

Second, tell him you have no problem paying for the materials once they deliver them to the job. You can cut a check before they drop them from the truck. But put your eyes on then before you cut that check.

Third, tell him that you understand that he is skeptical because he may have been burned before by clients/ owners but you are willing to meet him halfway to gain trust. Tell him to order the materials and if you don't cut a check they don't drop them. No one is out any money. You as an owner have been burned too. And you need to gain his trust.

let me know if you need to find a better rental company. The are several that may not be on your area that will deliver to your job that not require all that red tape.

Brady Richard · Answer

The advantage to paying for materials and equipment directly is the suppliers will not have a reason to place a lien on your property for failure to pay.

Evan Polaski · Answer

@Rae Stankowski, based on what you say, I would actually be more concerned about a contractor that cannot control their cashflow.  While the liability is a real risk, and one that might be able to be mitigated through insurance, as noted.

From my experience, particularly with finances, the Seal saying holds true: "How you do anything is how you do everything". The contractors that were poor with their money also were the ones I had to fire, made many costly mistakes found after firing them, and generally were a PITA to work with.

Craig Carlson · Answer

As far as theft of major equipment, bobcats, tractors, that sort of thing, in my experience, the rental company tracks their assets with gps... When it was in law enforcement, I recovered more than one stolen rental tractor that way..

Unusual for client pay for equipment rental & not contractor?

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