How Much To Give a Contractor?

Preface:  There are tons of opinions out there on what percentage you should give a contractor before starting work in your home.  But, I’m the type of person who has to understand how the motor works in order to come to my own conclusion about things.  Hopefully, the following article will help homeowners make an educated decision about what to pay a contractor upfront.  After all, you are the boss.    

Recently I read an article suggesting that any general contractor asking for more than 10% or $1000 (whichever is less) as a deposit, could be considered a “scammer.”  The article went on to point out that this is the legal maximum in some states (poor small business owners in those states).

Now, I’m no fan of general contractors as a whole.  I’ve had more bad experiences with contractors than good.  It’s the reason I added the renovation project management arm to our business model.  But, I’m even less of a fan of those broadly dictating acceptable deposits as though they know the business model of every single contracting business across the country.  It’s irresponsible and harmful not only to small business owners, but to the consumer.

[jumping off my soap box]

So, allow me to give you a little behind the scenes look at what I’ve learned from building my project management company which, looks a whole lot like general contracting company, the difference is that we are full-service, focusing also on design and promising project completed on time and on budget (shameless we’re awesome plug!).

When I first started, I only designed and installed baby nurseries and kid’s rooms, I would ask for 100% of product and 30% of labor.  This gave me enough to order and buy the products that the client had agreed on and to pay half of the labor that I would need get the project started.  I would generally float most of the labor costs until I received final payment upon approved completion.  This meant that a minimum of 30% of the total labor costs came from my small business bank account until I could collect final payment.

In the last few years, we have grown from projects that average $7500 to projects that average $40,000.  And, we hope to eventually have 2-3 projects running a month.  That’s a lot more money to suddenly have to float.  Aka:  Lend our clients.  I could not imagine only being able to collect $1000 on the total budget.  I wouldn’t be in business.

Discussions with contractors have led me to understand that, if I don’t want to constantly be bugging my clients for more money mid-project, a practice that I find shady, I will have to raise my labor deposit from 30% to 50% or charge my clients more.  Charging clients more means fewer will choose my services so a 50% labor deposit is looking more and more likely.  In addition, I will open a credit line to cover me in the case of a slow-pay.

Part two of this particular article was warning about contractors without credit lines.  The author claimed that a reputable contractor should have strong lines of credit with every single vendor, implying that contractors without such credit were not to be trusted.   Though I am choosing a credit-line for my company and have credit with the companies I work with the most, I would never fault another business owner for not relying on credit.  And, in fact, you could argue that this is how small businesses get in trouble quick, making them more unstable.

In fact, by the author’s definition, Lowe’s and Home Depot are not to be trusted.  I’ve used their door department and had to pay 100% upfront, then wait six weeks for install.

What is the solution?

The bottom line is that you need to be able to hire a contractor you’ve deemed trustworthy.  Ask for references that you can call – don’t rely on online references. With as many people we have hired, most with glowing references online have turned out really bad.  Ask for samples of their work.  Ask about their process and what you can expect.  Make sure that labor costs, material/supply costs and product costs are itemized.

Once you’ve done this, it’s up to you whether or not you feel comfortable adhering to the payment policies of the contractor.

Considering the mutual risks involved, if it makes you feel more comfortable, you could suggest working with the contractor if they will agree to a certain pay schedule.  Give the contractor money for products that need to be purchased up front, then divide the labor into amounts to be paid in thirds or, for longer projects, each week.

Most effective is to have your contractor list exactly what will be done each day or week.  Then, at the end of the week, if everything they promised is done, they get their next labor installment.

Even for projects lasting as little as a week, splitting the labor costs in thirds helps you manage the project and make sure they are keeping on track.  How many times have you heard of a week long project lasting a month?  Understanding the layers of work being done and holding them to a timeline through incremental payments can prevent this.

Many contractors won’t like this kind of arrangement and will consider you a PITA (look it up).  That’s how they usually feel about us because, as an advocate for our clients, we are the ones holding them accountable.  In other words, be prepared to be rejected.  It might make your search for a good contractor more tedious and longer, but your chances of being happier in the end will be better.