How & When to Pay Your Contractors

Knowing how and when to pay your contractors is good for them and you.

I get a lot of phone calls from investors every week and I am happy to help whenever I can. Usually it’s a question about how to do something, how to go about doing something, or how something is supposed to look if it’s done correctly. If it’s a question about inspections, rehabs, or construction on single-family housing, I can usually come up with the answer or tell you whom to call to find out. When you are new to the real estate business, you need all the help you can get.

Frequent complaints about contractors, from paying before the job is done.

One thing I can’t do for you is get your money back after you have paid someone who doesn’t do the work. That’s the toughest phone call to take because you have few options in that situation so you really don’t have much chance of prevailing. Investors call me and tell me that they have paid the guy several thousand dollars and then the guy disappears and the investor can’t find him.

Another frequent complaint is that the contractor did partial work and the investor just paid him without inspecting the work. Another situation is that the contractor asked for money, the investor did not have the expertise to know whether the work was done correctly or completely, and did not find out until the house was inspected prior to closing.

How investors become former investors.

This is how investors become former investors. This is how investors lose their hard earned money; this is how you learn to reach into your refrigerator to pay for the rehab (that’s another way of saying that it is coming out of your pocket instead of the house paying for it.) When the investor tells me one of these stories, the only thing I can do for him at this point is to tell him that he is talking to the wrong Mr. Smith. He needs to be talking to Jim Smith, Attorney at Law. Those are tough lessons to learn.

What if there was a way to become knowledgeable investors & reduce the risks?

What if there was a way for you to become more knowledgeable about how to pay contractors so that you could greatly reduce the risk of doing the wrong thing? Would you make yourself available for that information? Would you turn your brain on for that? Well, press on, gentle reader help is not on the way, help is here.

Paying your contractor in draws as the work is completed and inspected.

Contractors can be paid in several ways for the work they do, but the most common method is to request a draw. A draw is a payment made for a part of the work done under an agreement. It works like this: the contractor and the investor decide what is to be done and how much is to be paid for the work. The next step is one that a lot of people either leave out or do poorly; and they wind up paying for the way they handled it.

Come to an agreement FIRST on how much you’re going to pay and when.

The next thing you do after you decide what is going to be done and how much to pay is how you will pay out the money. It is important to come to an agreement about how much money is going to be paid and under what circumstances. This is one of the most important things you will ever learn to do as an investor. Do this right and you will have a sane experience with your contractors. Do it wrong, and you will have a miserable time and probably lose money while you are doing it.

Pay when each agreed upon milestone is reached.

The easiest way to set up a payment schedule is by identifying milestones in the project and paying when these milestones are reached. Examples of milestones would be the roof is complete and the trash and nails have been picked up, the exterior carpentry has been totally completed, the exterior has been painted, the appliances have all been installed and are operating, or the carpet and vinyl are installed and the job is cleaned up.

Another kind of payment is a partial payment draw.

These are examples of completion draws. Some phase of the work has been completed satisfactorily and so the money can be paid out. The other kind of draw is called a partial payment draw, and it is basically a percentage draw. A partial payment draw is done on a by-guess-and-by-gosh basis because the contractor needs money to pay the men on Friday. It means that you get to try to figure out how much of a certain type of work has been done and what part of the whole job that it constitutes so you can pay the contractor and keep his men on the job. Fun? You bet! But it gets even better.

What do you do next week when it’s time for the contractor to put his hand out again? Well, you get to figure out what he did last week that you already paid him for and then figure out what else has been done in the meantime. Have you figured out which type of draw is my favorite yet? I always recommend the completion draw because I have been on both kinds of these draw payments for years and years and the completion draw is better.

Decide your milestones & payment plan first, give it to the contractor in writing.

Decide what the milestones are for your project, assign the proper dollar figure, and give a copy to the contractor. Tell him that he has to plan his work to get paid in time to pay his men. Make sure you tell him that you are dying to write him a check for the whole job and that you can’t wait until all the work is done so that you can do that.

Also decide who is going to pay for what materials first.

If materials are involved, decide who is going to pay for what, and when and how the money will change hands if you are going to reimburse the contractor for materials he purchased for your job. I prefer to have the contractor get all the materials and roll it into the job price. The majority of contractors I have met are not smart enough to jack up the prices on materials. Heck, most of them are not smart enough to figure in the time it takes to go to Home Depot every day to get the materials. That’s why they are fixing houses and you are buying houses. Get the picture?

Keep up good and regular communications with your contractor.

Keep talking to each other; it is the most important thing you and the contractor will do. Make sure he always understands that you are ready to pay him when the work has been completed. Do not let the contractor tell you a sad story about how his truck broke down or how it’s Thursday and he has no money to pay the guys on Friday. That’s why you tell him up front about how the payment is to be made; and make sure you tell him no exceptions. Make exceptions and you will watch your control over the project erode before your very eyes.

When the contractor does his part, pay him timely, don’t be late.

When the contractor asks you to come over and pay him for work he says is completed, make sure you get over there in a timely manner. There’s no “net 30” billing in make ready construction. These guys live from hand to mouth; and some weeks their hands don’t make it to their mouths. Please be prompt in responding to their call for draw inspection and payment  When you get out there to pay him, make sure you look the work over carefully. Look it all over, look every bit of it over. If there are things that are operable, operate them. Run the dishwasher. Check to be sure the water heater is lit and producing hot water. Check all light fixtures and outlets. Make sure you are getting what you are about to pay for. Look at the insides of closets for fresh paint. The contractor will respect you for it and will think that you are being fair.

Look to make sure that the whole job is done, that includes clean up. Tell the contractor you expect the place to be cleaned up and all construction trash be removed before payment is made. Tell him his mom called and said she missed her bus, so he will have to sweep up the mess himself before he gets paid.

Before the final payment spend extra time looking the job over well.

When it comes time to make the final payment, plan on spending some extra time looking the job over. Once the contractor has been paid, your ability to get him back to fix something you both overlooked is distinctly limited. Make sure you are getting what you paid for. Check the job often during the time the work is being done. It is easy to correct something when you catch it early; and difficult after you have put sheetrock, trim, and paint on top of it. Get used to checking the work every two or three days. Don’t go longer than three days between visits; the job can get ahead of you and away from you.

There isn’t room or time in this article to teach you all you need to know about keeping control of your job; but hopefully the information you have read here will make you a better project manager. Keep talking with your contractor and keep making sure that you both stay on the same page concerning the project.

By Kevin Smith, with contributions and edits by Joshua Berg

Article excerpts, contributions and edits have been made by HousesFast editors. While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur.