How to Pay Contractors Without Getting Burned

How to Pay Contractors Without Getting Burned

Dealing with contractors can be tricky. While delegating the work is necessary, you’re depending on someone else to get quality work done without burning through your wallet.

1. What to Pay Up Front vs Later – We prefer to pay nothing up front. If you give a contractor money before they start, you don’t know where that money is going (ie. finishing a different job, paying their personal bills, etc. Yes, this happens all the time). So we pay after work is done. Perhaps one-third when that much work is complete, the next one-third when it’s two-thirds done, and the final third when it’s totally finished (including the punch-list). This keeps the project well-paced and makes for a good working relationship.

2. Understanding Your Payment Schedule – When you first come to an agreement, make sure all contractors understand your payment schedule so there will be no problems later. Once you’ve handed over their final check you have no more leverage and, unfortunately, they often have no more motivation to finish. Think about it, you wouldn’t pay the landscaper after he mowed half your lawn or your barber when he’s halfway through. It seems like common sense, but you’d be amazed how many people give out their money before the renovation is finished to their satisfaction.

3. Should You Pay for Materials Directly – One way contractors hike up the cost of a rehab is by charging for both materials and labor. Many investors think they make it easier and perhaps cheaper by buying the materials themselves. However, if you pay for the materials, you have a liability if there’s an injury on the job. The labor department may classify them as employees if you’re supplying materials for their work. If they turn in a claim and you have purchased the materials, the “independent contractor” classification is invalidated with the labor department.

4. 99 Percent Done is Not DONE! A contractor may ask for payment before he’s made the “finishing touches” and completed the punch-list, but don’t give in. Everything is complete when you’ve had the chance to approve their final work and signed off. This is the time to write their final check and not before.

5. Make the Agreement Clear from the Beginning – Clearly define when and how much work needs to be complete for them to receive each payment. Specific requirements makes payment easier and gives your contractors exact targets to work toward. If you have prepared an exact list of repairs, you’ll both know when it’s 100 percent done. There’s nothing more frustrating than getting a rehab “finished,” only to realize that not everything you expected is complete.

6. Cover Your Assets – One final piece of advice is to have your contractors sign a lien waiver as they receive final payment. This way they can’t come back later and claim that they weren’t paid.

Following these tips may be a bit more work up front, but it will be more than worth it when the house is finished.

What can you add to the list from your personal experience?

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2 Comments

  1. Thanks, Monika, for taking the time to leave a comment!

  2. Wow the lien waiver, never thought of that- even for work done on my own house. Great tip!

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