I'm not sure if this is an appropriate question for this forum. If not, I'll remove it. I need to have some work done on my house and the contractor has asked for 1/3 to schedule and pull permits, then another 1/3 on the day he begins. So, 66% before any work is actually done. That seems a bit steep to me. I've looked at the .gov site for my state, and they don't allow more than 50% down payment, unless more is needed to secure materials. Does anyone know if this is standard practice? I'm viewing the entire payment as a down payment, as it will all be paid before they even begin. Thanks.
It could be worse than the answers others have provided. I've personally heard of contractors that got in trouble (financial) on a fixed price project and were losing money. Then they tried to get out of the hole by asking for big up front down payments for cash flow on subsequent projects. Thankfully it's not been my personal experience, but it has been the experience of others whom I've helped. I think this is a more common problem with smaller contractors, many may be great craftsman, but not good businessmen.
For major projects involving contractors, I have been asked for proof of ability to pay and I have no issue with that.
I just managed a LARGE concrete driveway replacement for my mother and the contractor wanted 50% up front. I told him I wasn't comfortable with that and we settled on 25% to start and the remaining progress payments based on completed work. He was OK with that and it turned out well. Sometimes you just need to push back and negotiate. I could write a lot more here regarding this, but need to not allow the perfect to be the enemy of the good!
No you don't do this unless you are working with a company with a very good reputation that has real offices. Period.
If I am contracting someone to do work for me - and usually I know the person directly or come from a direct referral - I don't pay anything until some work is done. If there is a huge amount of work to pull a permit, like plans, engineering, or more than a half hour of paperwork I might put a specific budget on that.
I also suggest that you get billed for materials. I usually tell my contractors I will pay for materials on receipt plus 10% (this depends on job).
What is "normal" and what I would suggest - you pay for materials, materials stay at your house. When there are milestones you pay up to that milestone, never ahead or even, even. So if there are four walls to be framed when they are done with the first two walls you pay 1/3. If they finish the third wall you pay them 1/3 and 1/3 when they are finished.
No matter how little a contractor has left I would never pay the final 1/3 until it has been COMPLETELY finished. For some jobs I might say 1/2. This is because after you check things and find something that was done incorrectly or needs more work the contractor just may never show up if he is owed 1/10th of the contract. And if that work requires special tools or materials you are basically screwed and good chance, if shady, this contractor will word your issues as "new" things and you will be paying him more to come back.
So to answer your question - I have paid well over 100 contractors for jobs for my house and houses I was working on. I have never had a pay schedule like yours. I am not saying you need to be this drastic but if I were in your shoes and someone gave me a pay schedule like that I would not negotiate or talk about what I want. I would just cut ties. I have learned that from years in the business that people who are aggressive about being paid usually do the worst work and are the least reliable.
Note about Materials: I cannot emphasize how important it is to completely separate materials from the job when doing a home construction contract.
There are expectations and risks involved when involved with a contract. By separating the materials you are taking out a lot of loopholes for both the home owner and the contractor.
If something costs more, home owner eats it because that is what they wanted. If the materials are built in, and some materials costs more than contractor thought, the home owner has every right to say "That's on you." This starts the relationship off bad and often contractor will try to cut corners to recoup costs.
There is also the factor of materials changing. Years ago had a contractor doing trim work for me on a house - trimming the whole house, baseboards, doors, crown. Well I changed from pine to oak (you can tell this is years ago!)... That's it. Well the material cost went from about 3k to 4k - was a big house. This contractor comes back to me and asks for an extra 1k on top of the 1k extra I was paying for the materials (2k total) because of a wood choice change (the oak was actually a slightly easier install). His logic was that he gives quotes out based on time estimates and material costs. Yes completely illogical but some contractors think this way. It's like tipping your waiter when you had a $300 bottle of wine to go with a $50 meal. Pay for the materials separate - insist on it. That way if you want something extra (that requires little to no extra work) it is done or if contractor forgot something that was needed, he tells you and you pay for it - yea this sucks but its on you both.
(yes I paid the contractor the full 2k. He was doing a ton of other work for me and it was either pay this or sour relationship as the trim work was part of a larger contract.... Lesson learned)
I am pretty much in agreement with what everyone has already commented on, but being a retired contractor I thought I could shed a little more light on the subject.
As it has already been pointed out payment really depends on the type of construction being done, the size of the project and the length of time the project will take. Also depending on certain conditions, it was not unusual for myself to ask for 1/3 down, 1/3 on rough-in (approx. 50%) and 1/3 on completion.
It is really just a matter of risk and who is going to absorb it. A general rule of thumb is that in most cases the remaining 1/3 is normally profit and overhead. I believe that the contractor is asking you to absorb 100% of the risk. Leaving him with no out of pocket expense and no risk.
So projects are built with three costs involved not including overhead and profit, quoted material(major material that is nonrefundable), miscellaneous material (material that is used to install the quoted material), and labor. In general any contractor has credit lines from wholesalers that will allow him to purchase material and pay for it within 30 days of delivery. So it should not be any out of pocket expense for the contractor to buy at least the miscellaneous material if he is being paid within 30 days. That leaves quoted material and labor.
I personally would not pay for any quoted material until it is delivered to my site or I went to the vendor and bought it direct and had it delivered to my property. That way I have the material, which in turn reduces my risk. Also I would not pay for any labor until it is performed. Even if I have to write out a check at the end of every week to make sure the payroll is delivered, which in turn reduces my personal risk.
All that is left is misc. material which should be on a 30 day credit line which can be paid anytime within 30 days.
What I am trying to show is the movement of money to reduce both your and the contractor's risk so neither one of you is losing money and the risk is more evenly divided.
I would recommend that you sit down and talk to your contractor about your concerns. If he is an experienced and honest contractor, why would he have a problem answering your questions.
So ask him. Do you usually do business this way? Who else have you worked with in the area and can I speak to them? Do you have general lines of credit with wholesalers? What is your reason for having me pay for labor before any is performed?
An experienced and honest contractor has been here before and should have no problem with your concerns. I believe you should work out these details before any work or exchange of money happens, and if you just don't feel right about it, then don't do it. What both of you should want is a good business experience and don't think this isn't a business venture. It is for at least one of you.
One last comment. If you decide to do this as the contractor wants with 66% up front, then whatever happens do not let him come to you mid project or so and ask or demand he gets the final 33% so he can finish the project.
This is a private contract between you and the contractor, so the two of you will need to agree on a payment schedule that both can live with.
In general, however, you NEVER want to be overpaid. By that I mean you never want to have given the contractor more than the work and materials are valued at the current point of the project. Work out a schedule that meets his needs to pay for materials and workers but protects you in case he fails to deliver.
Also you should always keep a reserve, say 10%, to cover any contingencies at the end of the project. The contractor should only get that after all inspections are completed and there is proof that all subs and suppliers have been paid. The last thing you want is to get stuck with a lien from an unpaid supplier. If the contractor has sufficient bonding and you're satisfied that this will cover you, then you can do away with the contingency.
66% before work starts sounds very steep to me. Here is how I try to approach these projects.
First, it depends on the type of job. If it's mostly labor I would, ideally, pay nothing up front except for permits and then on an agreed to schedule as work is completed. If it's a larger job with quite a bit of material involved I would offer to pay for all permits up front and then for any material once it arrives on site. I would then pay for labor on a pre-arranged schedule with the goal of only paying for work after it's completed.
Where people get in trouble is by getting behind the curve on this - paying for material not on-site and paying for work before it's done. jwh20 is correct that if the contractor is hiring subs you need confirmation that he has paid them.
Now, the above is the ideal situation I strive for. It all depends on the market and how bad you want this particular contractor. Sometimes you have to bend your rules but always protect yourself by using bonded, reputable contractors.