Why Contractors Ask for Money Up Front
Why Contractors Ask for Money Up Front.
The homeowner sees a payment. The contractor sees materials, labor, subcontractors, equipment, suppliers, fuel, scheduling—and a whole line of people who expect to get paid.
There is something homeowners and contractors have argued about forever:
Why does the contractor need money before the job is finished?
And I understand why somebody asks.
You're handing another person thousands of dollars.
You want to know where the money is going.
You want to know the work is actually going to happen.
You don't want somebody taking your money and disappearing.
That's completely reasonable.
But there is another side of construction that homeowners don't always see.
The contractor isn't just collecting a check.
The moment a project starts, money starts going out.
There is no one deposit that fits every job.
A lot of it has to do with the project and what we're actually doing.
Are the materials expensive?
Is the labor up front expensive?
Is it one trade?
Is it multiple trades?
Do I have two guys showing up?
Or eight?
Am I ordering concrete?
Are there specialty materials that have to be purchased before anybody can start?
All of that matters.
If the materials are expensive and the labor required immediately is expensive, I'm going to ask for a fairly substantial payment up front.
That doesn't mean I think every contractor should demand the entire project price before doing anything.
I don't.
I like the money to follow the work.
But the contractor shouldn't have to finance the homeowner's entire project either.
Sometimes I let the homeowner buy the materials.
I've done this a couple of different ways.
Sometimes I'll put together the material order, get the homeowner a purchase ticket, and they pay the supplier directly.
That's fine with me.
It gives the homeowner a lot of transparency.
You know exactly what was purchased.
You know what the material cost.
And I don't have to ask you to trust me with that portion of the money.
I'm pretty transparent about costs anyway.
I'll tell somebody:
Some homeowners prefer buying materials themselves.
I don't necessarily have a problem with that.
The problem sometimes comes afterward.
Once somebody separates the materials from the labor, they start looking at the labor like that's the only thing the contractor is charging for.
And then the negotiation starts.
“Well, the material only cost this much.”
Okay.
But labor isn't just a guy standing there with a hammer.
You're paying for people.
Scheduling.
Tools.
Transportation.
Supervision.
Experience.
Equipment.
Coordination.
And responsibility for actually making the project work.
A PAYMENT IS NOT PROFIT.
AND MONEY IN THE ACCOUNT MAY ALREADY BELONG TO THE JOB.
Concrete is a perfect example.
Concrete is probably one of the easiest trades to use to explain why construction money has to move when the work moves.
When the truck gets there, everything starts happening at once.
You've already got guys on site.
You've got forms.
Reinforcement.
Equipment.
Concrete being delivered.
Finishers.
Maybe a buggy.
Maybe a pump.
Maybe several guys whose only job is making sure that concrete gets where it belongs before it starts setting.
Concrete guys normally want to get paid pretty quickly.
And I understand why.
If you want good people and you want them to keep answering the phone when you call, you don't make them chase their money.
So if we're pouring concrete, the payment schedule needs to reflect that.
The crew may come back later and strip forms.
There may be cleanup.
There may be another phase.
But when the major production is complete, the people who produced it expect to be paid.
And they should.
On bigger jobs, I want progress payments.
On larger projects, I don't like one giant deposit and then one giant final payment.
I like progress payments.
Break the project into phases.
Put it on a schedule.
Put it on a Gantt chart if the project is big enough.
We complete this.
You owe this.
We complete the next phase.
The next payment becomes due.
Everybody knows what the milestone is, and everybody knows why money is changing hands.
Personally, I don't like leaving a giant amount of money at the very end.
Depending on the project and the agreement, I'd rather leave something like five or ten percent for final punch work than leave enough money outstanding that the final payment becomes leverage over everybody who already did the work.
Because that doesn't just affect me.
It affects everybody underneath me.
I've learned what happens when a payment gets delayed.
I had one homeowner decide she wasn't going to pay me when the payment was due.
I let it drag on for almost a week.
Meanwhile, my guy had already done the work.
And he's calling me.
And calling me.
And complaining.
I kept telling him to wait.
He eventually got paid.
But what kind of damage happened in between?
That's the part people don't always see.
The contractor may not be asking for that progress payment because he's trying to take the money home.
Sometimes that money is already spoken for.
The subcontractor expects to be paid.
The next material order has to happen.
Another phase has to start.
Equipment may have to be rented.
And a delayed payment can stop the entire machine.
DELAY THE CONTRACTOR.
IT CAN DELAY EVERYBODY BEHIND HIM.
Insurance work is a different animal.
Insurance restoration has its own payment cycle.
On those projects you're dealing with insurance proceeds, deductibles, documentation, invoices, supplements and proof of completed work.
On water restoration, I may collect the deductible up front.
There may be an initial insurance check.
Then additional money gets released as work progresses and documentation gets submitted.
And there's something homeowners don't always realize about insurance work:
There is a paper trail attached to the money.
Scope.
Estimates.
Invoices.
Photographs.
Supplements.
Documentation of completed work.
The contractor has to document what was performed when seeking payment for covered work.
That doesn't mean insurance jobs never have disputes.
They absolutely do.
But the money and the work have another layer of documentation around them.
Roofing can create a hell of a cash-flow gap.
Roofing is a perfect example of how a profitable project can still create a cash-flow problem.
The roof goes on.
The roofing crew wants to get paid.
The supplier may have extended credit.
The contractor has a bill coming due.
Meanwhile, the insurance company may still be processing supplements or depreciation.
Even when the insurance company releases the money, that doesn't mean the check is sitting in your account that afternoon.
It has to arrive.
It has to be deposited.
Sometimes funds have to clear.
Meanwhile, the roof is already on the house.
The roofer already worked.
The supplier still wants its money.
That's why I got into the habit of getting documentation moving immediately.
If I knew a roof was going on Monday, I wanted the invoice and documentation moving Monday.
Waiting until the very end to start collecting can add weeks to a payment cycle that is already slow.
The finished product hides all of this.
This is one of the weird things about construction.
When the job is finished, most of what made the job difficult disappears.
You don't see the phone calls.
You don't see the material order.
You don't see the scheduling.
You don't see the guy who drove across Houston early in the morning.
You don't see the equipment cost.
You don't see the subcontractor asking when his check is ready.
You don't see the bank hold.
You don't see the insurance supplement.
You don't see somebody figuring out when the truck needs to arrive because another trade has to finish first.
You see the slab.
That's what you're supposed to see.
That's the finished product.
But everything underneath it still had to happen.
The other side of this is trust.
I'm not saying homeowners should blindly hand somebody a huge check.
Absolutely not.
The contractor has responsibilities too.
Explain what the money is for.
Put the payment schedule in writing.
Explain the milestones.
Document changes.
Communicate.
Show up.
Produce the work.
And if something goes wrong, tell the homeowner.
I've learned that lesson the expensive way.
Transparency matters.
If I need money because I'm buying materials, I can tell you I'm buying materials.
If a crew needs to be paid after its phase is complete, I can explain that.
If something changed, I can explain what changed.
There's no reason to make construction money more mysterious than it already is.
THE ENTIRE PROJECT UP FRONT.
THE CONTRACTOR SHOULDN'T FINANCE IT EITHER.
There has to be a balance.
That's what progress payments are supposed to accomplish.
The work gets completed.
The money follows it.
Both sides still have something at stake.
And yes, I've had people use money as leverage.
This happens too.
The project gets toward the end.
The hard work has been done.
Roofing.
Framing.
Mechanical work.
Drywall.
Then somebody starts thinking:
And individually, I understand why somebody thinks that way.
Everybody wants to save money.
But from the contractor's side, the project may have been priced as an entire project.
Profit isn't necessarily distributed evenly across every trade.
Some phases are expensive.
Some are risky.
Some carry better margins.
That's part of how the entire project works financially.
If you let the contractor perform all the difficult, high-risk work and then start cutting profitable pieces out at the end, you can fundamentally change the economics of the agreement.
That's why scope matters. Contracts matter. Change orders matter. Payment schedules matter.
A lien isn't the magical solution people think it is.
I've had people tell me:
Okay.
Sometimes that's necessary.
But a lien doesn't put money in your checking account Friday afternoon.
I've dealt with that before.
By the time a contractor goes through notices, paperwork, deadlines and whatever collection process follows, he may have completed twenty more houses.
Meanwhile, the subcontractor who worked on the original project wanted his money months ago.
Legal remedies matter.
Contracts matter.
Lien rights matter.
But none of those replace healthy cash flow.
ISN'T THE PROFIT.
This may be the biggest misconception.
A contractor receives $10,000.
Somebody sees $10,000.
The contractor may see:
The figures above are an example only. Actual project costs and payment structures vary by job.
That's the point.
The deposit isn't automatically income the contractor gets to spend personally.
A lot of that money already has a destination.
A DEPOSIT IS NOT PROFIT.
AND A CHECK ISN'T AVAILABLE CASH UNTIL IT CLEARS.
What I believe now.
I believe contractors should explain their payment terms.
I believe homeowners should understand what they're paying for.
I believe subcontractors should get paid when they've done their work.
I believe materials should be funded before contractors are expected to buy thousands of dollars worth of somebody else's building materials.
I believe large projects should have clear progress payments tied to actual production.
And I believe enough money should remain at the end to make sure the punch work gets finished without leaving so much money outstanding that everybody underneath the contractor is financing the project.
Most importantly: put it in writing.
What gets paid.
When it gets paid.
What milestone triggers the payment.
Who is buying the materials.
What happens when the scope changes.
What remains for completion.
Then everybody knows the deal before the trucks show up.
That's why contractors ask for money up front.
It isn't supposed to be:
It's supposed to be:
That's a construction payment schedule.
And when it's structured correctly, neither side should be carrying all the risk.
The homeowner isn't writing the entire check on day one.
The contractor isn't building the entire project out of his own pocket.
The work moves.
The money follows it.
The guys get paid.
The materials get bought.
The project keeps moving.
And everybody knows what happens next.
THE MONEY FOLLOWS IT.
That's the part of construction nobody sees in the finished photograph.
But it's a hell of a big part of getting to the finished photograph in the first place.
Why we're talking about the money.
It's easy to build a construction website full of perfect finished photographs.
And we're going to show those too.
But that's not the whole business.
The Contractor Journal exists because I think the rest of it is worth talking about.
The jobs.
The crews.
The problems.
The contracts.
The payments.
The mistakes.
The systems.
And what it actually takes to get from an agreement on paper to finished work in the field.
That's part of construction too.
Show us what you're working with.
Send Master Builder Construction TX photos of the project, the property location, and a short description of what you want done. Real photos tell us a lot more than “How much would something like this cost?”
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