Hi,
I’m been working with a general contractor to build an addition on my house. Total cost of addition and renovation is in the $150,000 range.
From the beginning I’ve been upfront with the GC. I have told him we will be getting a construction loan and will be financing a large percentage of the cost. He says no problem.
The bank has 5 different construction draw schedules the GC can pick from. GC says that he normally gets 20% upfront before construction begins. GC says he needs money upfront to order materials. He is not confortable with the draw schedule which pays after work is complete.
My mortgage guy (who happens to be my brother) is telling me that the draw schedules are typical in the industry. He is telling me that a GC should be have a 30 or 60 day line of credit with his suppliers. He has done dozens of new construction loans. He is cautioning me not to give the GC any money up front. His experience is that when the GC is paid ahead of time he has less motivation to finish.
I have had a discussion with my builder and have tried to find a middle ground. I have given the GC $5,000 already and have agreed to give him a check for $10,000 when construction begins. I think giving him this much up front is risky to me. He is not being very flexible. He wants me to come up with $35,000. He says he will pay me cashback out of the final 2 construction draws.
I’m starting to get a very bad feeling. Those of you who are GC’s how do you normally get paid? I feel that a construction loan from the bank represents very low risk to the builder. If you where in my shoes what would you do?
Mike K
Amateur Home Remodeler in Aurora, Illinois
Replies
I think yuou're likely to get an earful on this one. Don't take it personally.
For starters, the GC accepts a lot of risk just by taking on a project. Getting upfront money is very normal.
Second - Being as I work for a supplier - I think the idea that we should finance the construction of anybody's house for 30-60 days is ridiculous. We aren't a bank, and don't have unlimited cash sitting around. We have bills too.
On the other hand - I wouldn't give a GC any money without a contract. I don't see where you've mentioned a contract in your thread.
No offense, but why would I build your house with my money? I have seen payment schedules and draws set up that way, but usually the homeowner has to come up with some capital to get started.
For instance, on a new home you usually have to be able to get the foundation in on your own dime, then the bank comes and checks it out and cuts you your first draw. Now you've got some money to work with... you use that money to buy your framing lumber and pay the framer, then you get another draw, etc, etc, etc.
In addition to credit, the contractor is going to need cash to get things rolling. Most of the time special order and custom items need either a heavy deposit, or payment in full before fabrication begins. What's the contractor supposed to do with your custom kitchen he paid for after your stocks plunge and you decide another loan isn't such a good idea right now?
Also, many subs won't work on credit and will need to be paid upon completion of work. Like me for instance.
Mike, as a contractor, I LOVE construction loans. There's very little risk to us, because the money is typically in escrow, & we know there's enough there to pay us for the entire job, short of change orders.
We do require special-order items like cabinets or windows to be paid for upfront. The reason is that these aren't commodity items like lumber. They're specifically made for each one of our projects, & if the project turns into a no-go for whatever reason, we can't return custom orders, & don't want to eat the items. If something like this happened, the special orders would be delivered to the customer, & he would own them.
It's also customary for us to require a deposit in order to schedule the job. This is usually only a couple percent of the project, & ensures that the customer is serious about proceeding. If they cancel before the job begins, the deposit would cover part of the expenses we've incurred up to that point, like time spent on material selections, ordering, writing the contract, etc. (To date, never had anyone cancel).
Most of the banks I've worked with during the course of a construction loan have been very accomodating. Is there an issue your contractor has with this particular bank, or const. loans in general? Is he asking for money for special order items, or for the lumber drop? What about the subs? How is their payment supposed to work? Thru the contractor, or thru the bank?
I'm not sure why this can be such a diffiiclt issue.
Think about it from the standpoint of one who works as an employee for another. Should this person expect to be paid for their labor prior to performing any labor? Of course not. But, on the other hand, should this employee be expected to pay out of their own pocket for materials that are required to do their job for their employer. Again, of course not.
So from the standpoint of transferring money, why would hiring a contractor be any different?
BruceM
Bruce,I think your analogy of an employer-employee relationship breaks down pretty quickly. The interplay of the payment schedule and terms should not merely focus on out of pocket material expenses and future labor expenditures. The schedule needs to be constructed so that it will allow the project to move along with no hiccups.The underlying tenet is that the contractor and client must have a level of trust sufficient to weather these issues. I feel that, absent this trust, the project will be prone to larger issues as things progress.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Mike,
Just because I could finance your project with my money doesn't mean there is any incentive for me to do so. In new construction draw schedules and playing with the loan officer is fairly common. Remodelers have to deal with this type of arrangement a lot less.
Could you possibly work out some solution to pay the suppliers directly for his big upfront costs? $5,000 should give him some room to work, albeit not enough to work for a month until the first draw.
I would not get into the position where you would be receiving cash back from the last two draws. You need to find a way to work out the draw schedule so that at 50% your special arrangement is completed.
Ultimately I think you need to hire a guy who you can trust. If he's doing $150k of work that will require a decent working relationship. If a reasonable solution cannot be agreed upon, I would start asking myself some serious questions. Either he is not the right guy for the job or your expectations are too high.
Make sure you get all your lien releases signed.
Jon Blakemore
RappahannockINC.com Fredericksburg, VA
>>He says he will pay me cashback out of the final 2 construction draws.
Just because of that one statement; Find another GC.
Illegal as heck.
SamT
I wouldn't think of staarting a job like that without at least ten grand up front, and more like tweny depending on scedule and how much custom stuff needs to be front ordered. A GC can have forty grand in commitments laid out before he even sets foot on a job easy.
but
That last bit about refunding 35K at end of job is one smelly fish on the table. If we understood him right on that - he is peddeling something foul. Don't buy it.
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I build custom homes and each project is funded by one of three banks that I'm qualified with. I've built a couple of homes with the HO paying out of personal funds.
While I have a line of credit, I ALWAYS take an advance of 10 to 12% at contract signing, in part to pay for initial work (site prep, utilities, surveying, etc), to cover labor costs with my own employees (a constant cash flow requirement), but also to establish a commitment from the client. (this advance is always plowed back into the project and is not a "signing bonus").
While each bank has its own preferred draw schedules, my experience has been to have the project broken into basic segments allowing for more frequent draws (foundation, 2 or 3 framing draws, electrical rough-in, plumbing rough-in, HVAC, insulation and drywall, roofing, etc.).
As someone mentioned, some subs operate on tight funds and expect fairly quick payments. Suppliers want to be kept current at 30 days, and start getting pissy after 60.
Sometimes, work delays caused by weather or an over-booked sub can stretch the draw schedule out....that's what I usually use my line of credit to cover....but if the line of credit repayment gets held up, it's an added expense to me.
Remodels can be a bit different since they're typically smaller, and for those projects, often the loans are refinances, or second-mortgages or second-mortgage lines of credit and, from the banks standpoint, the rules can be a little different.
But when I take on those projects, I usually insist on an advance against the project for reasons previously stated, especially if the project value is over $50K or so.
Now, to a homeowner, the amount of money required to complete a home addition or renovation may be a staggering sum, but the G/C is really only going to end up with a small portion of it and the effort, on-site and after hours to bring a project to completion can be staggering as can the risk, not to mention lingering warrantee responsibilities that may be mandated in state law.
On all bank financed projects, there are actually 2 contracts: One with the G/C and HO (as project partners) with the bank (this document is provided by the bank and is their own little boilerplate)and; a construction contract between the G/C and the HO that is specific to the project.
The bank will accept or reject the second contract if it is felt that it doesn't adequately define the responsibilities of either party (G/C and HO), potentially placing the bank at risk.
I have no way of knowing what caliber of G/C you're working with....my impression is that both of you need to hone your relationship and your communication a bit.
Interesting question here, as usual on this board. I don't have a lot of history with banks being involved, since I do remodeling and most projects are paid directly by the HO due to their smaller size. However, my current project is a little bigger than normal for me and the HO's mortgage broker found them a bank that is very easy to work with.
As the GC, I want to be working with the customer's money instead of my own. For this current project, I wrote the contract between the HO and my company and I set up the payment schedule. I asked for 10% upfront to get things started. This 10% allowed me to put down payments to my subs to get on their schedules and to have enough to order materials and to pay my employees. Then I scheduled the rest of the payments to reflect progress on the job at various stages, but I set the payments so that I am always about 5% ahead of my projected costs. That way I will always have the money in my account to pay my subs promptly and to cover materials, orders, etc. But, I am never so far ahead of the progress that the HO or the bank feels like they are out on a limb. In fact, I am never farther ahead $-wise than what my surety bond would cover if I defaulted.
I explained this upfront to the HO and they had no problem with it and the bank had no problem with me writing my own draw schedule, they approved it. So far, it seems like everyone is happy and everyone has a check/balance in the system.
The bank still sends a rep out to make sure progress is being made.
I am not a big company with deep pockets so I would feel very uncomfortable if I had to advance 60 days on materials and subs.
But, as was pointed out by someone else here, there is also a signed contract between me and the HO and it spells out what is being built, for how much and who is responsible for what.
Again, there are many here who have far more experience that I do, but it seems that if you and the GC agree on the terms and spell them out in the contract, that you would be o.k. And, as was mentioned more than once, trust in your GC is a big factor. I would agree that relying on the GC to pay back a sizable sum at the end sounds a little strange.
Brad
How did you find the contractor? Have you checked him out? He wants over 20% to start, that's a little high. He wants to give you money back at the end - no way. Get this relationship straightened out now, while you can. It's only going to get worse later. Look at the contract - what does it say? If you are still negotiating the terms, make sure you can't get hurt. You are spending 150K - consider spending a few bucks with a lawyer to get you set up right up front. Good luck.
I thank everyone for your imput.What I didn't mention with my first post is that we expect the total cost of the project to exceed our bank loan by about $15K. That is the $15K we would be paying before construction begins. I feel this amount should be enough to demonstrate my committment to the project.I also have agreed to pay cash up front for any extra items that add to the cost of the project. I have the cash in the bank and have shown my bank account statement to the GC to demonstrate our ability to pay. (Maybe that's were I went wrong!)Since we are closing the construction loan before construction begins seems like there is little risk to the GC not to be paid.The other reason I'm getting a funny feeling about my GC is the way the construction drawings were done. I drew my existing house on Chief Architect and designed the addition myself. I was not comfortable generating the working drawings due to the liability. My GC told me "No Problem" that he could do the working drawings from my plans and apply for the permit. He got the permit with the City. When I asked him for a copy of the working drawings he showed me the design drawings I gave him. He had simply marked them up with dimensions, electrical symbols, and structural symbols. It think he also provided the city a some standard section details. Not what I had expected.Mike K
Amateur Home Remodeler in Aurora, Illinois
Just trying to get a feel for the situation.
Why did you pick this GC? Money, quality, referrences?
We picked this GC because he seems to be honest. We got a feeling we could trust him.
We talked to 15-20 of his former clients and they all had good experiences with him. We visited a couple of addition he is currently working on and the workmanship looked good.
He started out as a siding contractor and expanded a few years ago to being a GC. Based on my dealings with him to date I think he may be a better builder than a business man.Mike K
Amateur Home Remodeler in Aurora, Illinois
"I think he may be a better builder than a business man."
That's not a bad thing. I'd just keep him on a short leash with the money. I wouldn't give him anymore than seems reasonable for special orders, and up front operating costs. If he has other big projects going he may need some money to finish those jobs up. Robbing Peter to pay Paul.
Mike,
>>. He had simply marked them up with dimensions, electrical symbols, and structural symbols. It think he also provided the city a some standard section details
That sounds allright.
But the $35K payback. No way.
SamT
A little off subject but some of you guys might get a kick out of this.
The township I live in sends out a newsletter about once a quarter. In the spring edition the Building inspector wrote a column on pick a contractor.
According to him " Any Contractor who needs a downpayment or start check is fly-by night and should not be trusted" and " no matter how big your job the contractor should have the financial respources to get it to the first draw"
I'll bet the guy has never earned one dime on his own in his life.
Generally concur with whats been said thus far. I also wouldnt start without a downpayment. How you get it isn't really my concern. People who think that I should fund their project I think need to find someone else. Pretty easy.
But banks - there is a difference between "customary" and possible. I guess this is an argument for any GC to have a good relationship with the bank or a banker. I don't usually have problems getting the downpayment from the bank before the project begins. I provide a copy of the signed contract with my payment terms outlined, the bank is providing the loan to my customer who signed . . . it's the homeowners money, sooner or later.
the kickback . . . yeah, what the heck is that all about. Even if it's not hokey, perception is reality. It looks like it stinks. Therefore it does.
"If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain
I have a question that fit nicely into this thread, so here goes. I am a carpenter (20years exp) and have been general contracting upper end kitchen renovations for about 2 years now. I have a potential client that wants to hold a 10% retainage for 30 days after the job is complete. I have only come across this issue once in my career and that was when I framed a large apartment building about 10 years ago.
I understand that it is common on commercial and multi-family projects. I've not known any of my peers that have come across this issue either. Is this common? Any thoughts about this issue in general?
I have a customer right now who asked to hold back a portion of the money for a period after the job is complete. It's fine with me. There are amazing stories out there about people taking money and disappearing, not finishing, not dealing with warranty issues, etc. I know our industry has a terrible reputation... we're worse than used car salesmen and almost as bad as eBay. I agreed that they could retain $700 (2% of the contract) for 180 days following completion. I thought for a minute about adding interest but decided against it.
I generally do whatever I reasonably can to generate good will, and this particular person has been very easy to work with. My suspicion is that the full amount will be paid when I invoice for it, because they will know me well by then and will have a different opinion of the remodeling trade.
A stupid question for you. Do you have a good construction attorney to check the contract that the GC wants you to sign. Does the contract spell out things like the quality of the construction how straight, how level, how flat, how plumb ? Who inspects for quality of the work done before he gets the draw? Does it have a way to deal with problems that come up in a timely manor.
You know don’t you the city/county building inspector don’t check for quality of how well the building is being constructed.
Have you checked out the person at county court house for filed law suites, judgments, leans. Have you checked with the state contracting license. Is this person general liability and is he bonded.
It adds a third party to the situation but an alternative would be to work through his supplier. The larger the better. Most will essentially set up a pre-paid account exclusively for this job in the GCs name with him as being responsible for payment beyond the initial buy-in you are providing.
It could be arranged that both he and you get an itemized accounting of what is bought through this account. The volume and established account discounts, they go by various names, that the GC has earned from previous business would, I think, apply to this so the supplies shouldn't cost more because the supplier doesn't know you. Normally a low volume or unestablished purchaser would be charged the 'fall-back' price or lesser discount. Sometimes 50% more.
This plan limits your exposure. Sure an unscrupulous GC could pick up building supplies and sell them or add to his own home but the return on that sort of dirty deal would be both low and too much like work.
For a GC a paid account from the supplier is almost as good as cash. It won't pay for labor or gas for the truck but it should free enough cash so he can swing the job.
Of course the GC might not go for it. Actual pricing of materials is often seen as a hidden profit center and discounts proprietary information. And the suppliers account would tend to limit who he went to for supplies. He might also see the reluctance to give up cash and let him handle the situation as too controlling. Possibly even insulting.
I have worked for a few smaller contractors that had some version of this. At least one contractor liked it as it saved him a lot of paperwork. He was new to the area and it gave him immediate standing with the supplier even though he was new to the area. He had been a contractor for a decade but on the left coast.
I don't think I'd go for a deal where I prepay a supplier so that the contractor can order (if I'm reading you correctly and that's what you're suggesting). There's nothing to stop the contractor from buying there and taking stuff to another job. If I were concerned I would simply buy the material myself and have it delivered to the jobsite.
Then all ya gotta do is hope the GC doesn't pick it up and take it to another job.
There are definitely problems with what the GC is suggesting. He does not have the working capital to do the job and should just be up front about that. His suggestion that he will refund money out of the final draws is a complete scam, set up entirely in his favor. The owner would be depending on him to write a refund check... too risky.
At this point, with this GC, I would do a labor-only deal, pay the materials and subs directly, and pay the GC for work completed. Take most of the money out of the GC's hands.
"There are definitely problems with what the GC is suggesting. He does not have the working capital to do the job and should just be up front about that. His suggestion that he will refund money out of the final draws is a complete scam, set up entirely in his favor. The owner would be depending on him to write a refund check... too risky."In some circumstance it could be done and in a way to protect the HO and it is not neseccarly a scam.If the HO was getting 100% finacing for the addition (which is not this case), but the contractor needed upfront money (leaving out whether he should or should not get it, but think about special orders where he would) then the HO would have to pay up front and whould end up with money back at the end when the bank makes the final payment.However, it would be structured so that either the HO get a separate check from the bank or the bank issues the check to both the HO and contractor.
I would do a labor-only deal, pay the materials and subs directly, and pay the GC for work completed. Take most of the money out of the GC's hands.
Good luck ever getting any GC to go for that. Pay the subs and suppliers directly? What's the GC doing now, working for wages?
While I agree that the "cash back at the end of the job" deal is ridiculous, it's only as ridiculous as me letting a homeowner cut out my markup and profit on subs and suppliers by paying them directly. If they want to do that, apparently they are their own GC and certainly don't need me. I'm going to just give away MY pricing and MY established relationship with my subs? Not on the coldest day in he11.
EDIT: for my horrendous spelling mistake!
Edited 7/2/2005 6:21 pm ET by dieselpig
No GC that has their stuff together would go for the deal I'm talking about. I know that I sure won't (actually... I will let you buy stuff, but I'll mark it up the same as if I buy it). That said, a lot of GCs don't have it together, and are working for wages whether they know it or not. There are plenty of places in this country where you can hire a guy to build your house and pay all of the materials and subs yourself and he's happy if he has a modest check for himself at the end of the week. If the original poster thinks that his contractor is a good builder and a lousy businessman, he should propose this kind of deal. Maybe the GC will be happy to be free of the bank draw schedule and the responsibility for paying the subs.
Dave, I guess what I'm trying to say is that I think it's kind of irresponsible for a contractor like yourself to suggest or imply to a homeowner (OP) that this sort of payment arrangement is "normal" or acceptable to most GC's.
I'd be pretty ticked off if I was in the process of "courting" a homeowner for a 150K addition and he/she showed up with a computer print out of a thread on the internet where a contractor told them that this was an acceptable arrangement. Not really fair to the rest of us. I'm not trying to be antagonistic with you, I'm just suggesting that you may be misleading the homeowner.
The following isn't really directed at you, but more to "ALL" : I never really got the vibe that the GC in question is a hack. That seems to be snowballing from the "36K refunded at the end of the job" part of the OP. Now while that is obviously a bad arrangement for the homeowner, I'm thinking it may be a misunderstanding or even an attempt, albeit not very thoughtout, by the contractor to just make the deal work somehow. Who in there right mind would run 37K through their bank account that they could not keep or weren't going to spend on the project?. A nightmare in April for sure.
Some are also suggesting that the GC should finance the job, but can't. I never saw it posted anywhere that he can't. Maybe he can, but rightfully doesn't want to. He just wants a good size start check. None of us have seen the specs. Maybe his downpayment is totally in line given the amount of custom products that need to be ordered.
I'm just suggesting that we all be a little more responsible in what we're throwing around here and filling some chap's potential client's ears with. It's not fair to the GC or the homeowner to trash this guy without knowing more about the situation.
Let's stick to the facts, is all. The speculation isn't helping anyone.
Edited 7/2/2005 6:57 pm ET by dieselpig
"a homeowner for a 150K addition and he/she showed up with a computer print out of a thread on the internet "
I think that is the key to this situation. It's impossible to establish fact from fiction with a 2 dimensional, one sided account of a conversation. We may be loading this homeowner with ammunition to shoot one of our own(unlikely, but possible).
This is my biggest problem with internet sites like this one. It's great for fact based opinions on materials or tools. That said, when anyone comes for advice on a situation, all of the posts are based on the subjective point of view of the poster.
This situation for example. The GC could have meant something totally different, and the homeowner interpreted it as "Give me $30k, and I'll kick the the last 2 payments from the bank back to you."
I definitely do not want to encourage anyone to try to undercut a legit contractor. Truth is, though, there are tons of people in our business who are operating as 'contractors' and are not very solid. They get a certain part of the business, and generally they get it from a sector that I do not serve. Most of them will not last as businesspeople and a few of them will. There will always be homeowners looking for tradesmen in that bracket and they'll always be there, ready to bid half of what you or I bid. In a lot of cases they will burn homeowners, burn themselves, burn their subs and suppliers, burn their other creditors, etc. etc.
To the original poster... based on what very little I can glean from your post, you would probably be much better off finding a solid contractor to handle your job. Those of us able to handle a bank draw schedule either have credit lines to bridge the schedule, or we have substantial working funds, and will use them to make your project happen. Your guy sounds like he's got a problem there, and as such is not qualified to handle your job in a professional manner. Call a few residential architects, and a few salespeople at the local pro lumber yards, and ask for referrals to good small companies that do what you want done.
Anyway, lemme turn this soapbox off... where's the switch?
Actually I was thinking that the account would be in the contractors name. The initial installment from the HO would go into the account but beyond that the contractor would be responsible for the payments. This would further limit the exposure of the HO in that the most he would be risking would be the initial offering. Seeing as that the CG would still have responsibility for both the building progress and the account with the supplier would dim the chances of materials going too far astray.Especially seeing as that large suppliers have resources and the ability to legally extract money and pain, in the form of legal proceedings the GC may feel more restrained not less.
As a GC I run into this from time to time. It seems the big dog always gets the bone,some banks want me to finance the project, take all the risk and then they'll be happy to reimburse me when their inspector says everything is ok. For this service they collect interest from the home owner and take little if any risk.
I of course don't get interest on any monies I've spent to keep the project on tract and everyone satisfied.
Could I finance a $150,000 project without down money? The answer is yes , but why should I ? I have 5 projects under way right now, all in various stages of starting and completion.
I take only a small deposit when my contract is signed ,a retainer so to speak,I take a larger amount when we actually start the project. The draws from there vary depending on the size,bigger more draws, smaller less draws.
My feeling is it's not up to me to worry about how the home owner gets the money.
Get another bank or get another contractor whichever is in the home owners best interest. But if they want me, we do it my way.
In this home owners case I would have made the 35,000 payment into two payments a smaller one at signing and a larger one when we start.Vince Carbone
>At this point, with this GC, I would do a labor-only deal, pay the >materials and subs directly, and pay the GC for work completed. Take >most of the money out of the GC's hands.If I wanted to be the GC I won't have hired him. Why would I want to babysit the Contractor?? Either he can work with a bank or he can't. I will be meeting with him this week to find out.Thanks for all your advice, guys.Mike K
Amateur Home Remodeler in Aurora, Illinois