Let's talk about Contractors & Down Payments! I find this not only to be a very interesting topic, but also a very important one...

Before I get into my thoughts, I would like to point out that one of the initial reasons for starting The Playbook was to help investors with their perceptions of, and relationships with Contractors. I believe that I have a unique perspective on this because have seen the business from many different angles; I have been a PM for a development company, a Class A Contractor, a Consultant, and now a Developer myself. You may not agree with everything that I say, but maybe I can at least give you a different viewpoint. 

First of all, the decision to pay or not pay a down payment has many factors, including; scope of work, type of contractor, length of project, draw schedule, etc. There is no way that we can cover all of the nuance in one article, but I think that we can get pretty close. 

My position on Contractors and Down Payments can be summed up in two statements... but don't run away with this, they need to be elaborated on.

1. A Contractor should never be profiting off of a Down Payment. What this means is that if they are doing a labor-only job, then they should not be charging a down payment because they will not be putting money into your project. This also means that if the Contractor is providing material, then it is appropriate to charge a down payment, but the down payment should not be more than the cost of material. This also shows that I am less concerned with percentages for down payments, and more concerned with actual project costs.

2. A Contractor should not be putting significant amounts of money into your project, and if they do, expect to pay more. This is where I may lose some people. However I truly do not believe it's the Contractor's job to fund their Clients project. And if they do then they have the right to charge more, just like your lender is going to charge you for funding a project. My past Client's know that I have put well over $10k into their projects before, but that doesn't mean this is good for business.

So before I get the blowback, let me address the main two rebuttals that I will receive...

1. "But what if the Contractor runs away with my money" - This is an incredibly fair point. We have all heard the horror stories, and I am very close with people who have been taken advantage of. It truly breaks my heart every time. I have two responses to this;

• A Contractor is scared of not getting paid for their job, just as much as an Investor is worried about the Contractor running away. I will tell you a horror story on the other side of the aisle. I know a big Contractor in Richmond (if you live here, you have seen their trucks), who I bid against for a $150k job many years ago. I walked away from the job because the Client was asking for no down payment and limited draws. There was no way that I was going to put $50-100k into the job, so I walked. The other Contractor got the job and ended up calling me 6 months later saying that he was never paid, the client isn't answering the phone, and they have lawyered up. This is not to defend Contractors but just give the perspective that they are protecting their butts just as much as investors are. This understanding is important in bringing Investors and Contractors closer together. 
• What if you are scaring away good Contractors, by being scared of paying down payments. These payments structures are simply good business for Contractors. If I was to bid your job and provide material, I would be asking for a down payment. If we are not to agree on the payment terms, then you may have just scared away a good Contractor, potentially leaving you with a bad one. I actually have a theory that people hire bad contractors largely because they scare away the good ones. Again, just another perspective.

2. "Aren't Contractors supposed to be putting money into their Client's projects?" - My initial response, this is not a written rule. Every Contractor chooses to do business differently based on their cash flow, overhead, expenses, etc. Just because a Contractor is supposed to have cash-on-hand doesn't mean that it needs to be used for Client's projects. There are many different things that a Contractor needs to expense on a daily and weekly basis. So let me give you one main point on this;

• Let me be very clear, this is not better business for the Investor... this is better business for the Contractor. But that is a good thing! In repeat business (or really in all business), we should be looking for "win-win" relationships. Of course it would be best for the Investor to hold on to their money for as long as possible. Shoot, it would be great if we didn't have to pay draws or any payments until the very end. However we don't do that because it is bad business. If you want the best business relationship with your Contractor then you will make sure you are not engaged in lop-sided deals. You want a Contractor that is good at business, and managing their cash flow and expenses should be something that is encouraged. Again, this is a great way to scare away good Contractors. 

So let me sum it up with some more practical notes...

1. Purchase material to avoid down payments. Despite it seeming like I am defending Contractors, I actually hate paying down payments. I highly recommend doing anything you can to avoid down payments, and purchasing material is the best way. At the very least until you gain the necessary trust. If you are not confident in this, you can always call in to pay for the material that the Contractor orders. There are also ways to share store cards and accounts with suppliers. There are many options to managing material orders, it just might take a little more leg work. 

2. Pay down payments on the first day of the job. This is a great medium between the Contractor's and Investor's fear of being taken advantage of. When the Contractor steps on the job, give them their first check to cover the necessary material until their next payment. This shows at least some good faith on both parts.

3. Use referrals! This could not be a better time to re-iterate one of the most important points when hiring Contractors... use referrals. This allows you to talk to previous Clients about payment structures, and if they have had any issues in the past. At the end of the day, this topic is all about trust. Because if you trust a Contractor, you should have no issues handing over a down payment. 

Again, this topic has a lot of nuance to it, and I can not address every single scenario. However this gives some good rules and guidelines for the way that I believe business should be conducted between a Contractor and Investor. You may not agree with my thoughts, but I can at least say this... I have very, very limited issues with Contractors. I have luckily never had someone run away with money, and I honestly believe that it is because of my understanding of the business relationship.

Hopefully I have given you a different perspective, and I would love to hear your thoughts. I truly believe this is an important topic because the Contractor and Investor relationship is dying and that is not good for our industry. There are good Contractors out there, but many of them are being scared out of the industry or into flipping themselves. If we want to keep good Contractors around for our projects, then maybe it's time to re-look at the way we conduct business with them.