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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Why Should I Make a Down Payment?

by Michael Stone

An earlier blog post elicited the following comment.

" . . . I would never give a downpayment to somebody working on my house."

Because there are other homeowners (and contractors) with that opinion, I need to respond.

First, as Greg reminded us with his comment, "Money changing hands means a commitment has been made." A contract happens when an offer is made, the offer is accepted, an agreement that outlines the offer is signed, and a down payment is made. Now, it is possible to complete a job without a written agreement or a down payment, but doing that leaves somebody (guess who) wide open to being used or screwed out of their money rightfully due. At least once a week we talk to contractors losing money because of the lack of a written contract or a down payment. It's not pleasant for anyone.

As a homeowner, it's easy to talk to someone about making changes on your home. It's easy to have them start work. It's tough to write a check. As a contractor, you need to know that the homeowner is both able and willing to pay for the work being done.

In my experience, there are four kinds of contractors.

"A" contractors run their business like a business and make good money.

"B" contractors run their business like a business most of the time and make a living most of the time.

"C" contractors run their business like a hobby, make a living some of the time, but often (like today's market) take a second job so they can keep their bills paid. If they are married, their wife's income is usually the primary means of support.

"D" contractors are the ones we hear the most about even though I believe they are the smallest group. They are either con artists or complete flakes, the guys that cause over 90 percent of all the problems in this business.

"A" contractors will not work without a well-written signed contract, will not make changes without a change work order written and signed up front and will not start any job without a down payment. There are exceptions of course, but not many. They start and finish jobs as promised, communicate with customers in good times and bad, and pay their bills on time so their customers don't have to worry about liens or any other problems. They will not be the lowest price contractor, but if your contractor is an "A" contractor, you can sleep at night and not worry about the investment you are making in your home.

"B" contractors do most things right, but still fall into the trap of "trusting" customers to "do the right thing" and often don't get change work orders signed, have poor payment schedules on their contracts, let owners dictate payment schedules, and suffer the results more often than not. Here again, there are exceptions, but not many. Many "B" contractors, when they get tired of losing money or they get taken one too many times, tighten up their business practices and become "A" contractors. Most "B" contractors start and finish jobs as promised and communicate with their customers well, but if they are getting taken by a customer on one job, the financial problems it can cause in their business might impact other jobs. The price from a "B" contractor will probably be fair, but might be too low for them to survive financially. If your contractor is a "B" contractor, your job will probably proceed well but problems with another customer can put your investment at risk.

"C" and "D" contractors almost always will quote you the lowest price. Most "C" contractors are honest people who mean well, but they haven't yet educated themselves well enough in their business to be successful. They often do outstanding work, but if they are losing money they get tired of doing outstanding work for no return. Who wouldn't? Some "C" contractors find help and become "A" or "B" contractors - the rest go out of business, usually deep in debt. Although they have no intention of hurting any customers, if you are one of the last customers, you can lose.

I won't waste your time describing what "D" contractors do or don't do to cause themselves and their customers problems. You can watch it on the news.

Where I am going with all this is that when an owner refuses to give the contractor a down payment, they eliminate their ability to hire an "A" contractor. They might get a "B" contractor, but more likely they will have to hire a "C" or "D" contractor. I personally don't know a single "A" contractor who will start a job without a down payment of some kind, and strict payment schedule language in the contract that gets them paid promptly for work done. I don't mean payment in 30 days or whenever the owner gets around to it, I mean within a few days.

Many who read this will not believe getting paid upfront is possible, that you don't have to wait 30 or 45 or 90 days to be paid. Beliefs are based on our own experience and the experience of those around us that we know and trust. If you are a contractor and you are not getting paid on time for your work, if you are not getting down and progress payments for the work you are doing, then maybe it is time to educate yourself on how "A" contractors get this done.

If you are the homeowner, what's your criteria for picking a contractor?

Comments

Every since finding this blog a year ago, I have learned more about running my contracting business here than anywhere else. After I read the comment on the last post about not giving a down payment, I was shocked. I don't know about the next guy, but I am not a bank, nor do I have the resources to act like one. I always explain to my customers that the payment system works for both the customer and the contractor, protecting both during the construction process. It gives me the money I need to run the job, and it gives the customer the leverage should they not accept my work, although that has never happened. (and I hope never will). The most important part of this business is cash flow and I believe the payment schedules outlined in your books is by far the best I've seen. The person that left that comment is just the type of person we are warned not to work for. I hope they don't live in my town. Thanks for clarifying the issue...

Noel (not verified) /

When I read the comment about not giving a down payment I was shocked as well. I second Michael & Patrick's response on this (Great Job) ! I also think it is very important to get a down payment & keep a payment schedule even if you are in the commercial construction field.

I wholeheartedly agree! We will not do work without a down payment and progress payments. I have had other contractors who are surprised that we ask for and recieve this even on commercial projects, but what we have found is if they want to hire you, then they will be willing to pay you in a fair manner.

We do Garage Floor installs that take a SINGLE day, and ONLY on rare occasions get questioned on our 50% down payment policy. Since implementing a 50% down payment REQUIREMENT, I have only lost ONE sale out of nearly 200 completed ones. GUARANTEED that one if I had "bent" on that policy would have been a MISTAKE.

EVEN large corporations such as Wells Blue Bunny ice cream and others are REQUIRED to make the 50% down payment. They "Squeal" a little bit but if they want US to do the work, They PAY!

On these larger companies it is not even so much a matter of trust or them not paying BUT, I have heard of contractors having worked a deal EVEN had a SIGNED contract, but when attempting to collect on SMALLER projects, the guy they worked the deal with was "no longer with the company" AND "had no authority to make the deal". THERE you sit NO $$ and NO where to go!

I WILL NEVER DO ANY WORK FOR ANYONE WITHOUT A DOWN PAYMENT!

I must say the only way to be confident during our construction or flooring projects is to get a deposit and receive fair progress payments as the work progresses. I have been at the point where we had more than 3 or 4 projects at a time and you really can't trust anyone even though you know you can be trusted. I've been burned and I have to be the A contractor for now on.

 

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