Tips on How & When to Pay a General Contractor, Subcontractors, or Contractors on Your Next Project

Pay a General Contractor

Besides selecting the right General Contractor, subcontractors or contractors for your project, the next most important aspect is how and when to pay them. 

There are several horrendous stories of contractors insisting on cash transactions or “under the table” payments, only to do a shabby job and abscond with their payment. 

The best way to ensure you have a seamless project with your contractors is to refrain from any form of cash transactions or unnecessarily large upfront payments. While some contractors insist on deposits, it is important to note that this should be at a reasonable percentage of the project cost. Typically, the deposit is 10% of the total project cost, or $1000, whichever is less. This usually does not vary based on the size of projects.

So, how and when should you pay a contractor? Read on for some tips that will be helpful on your next project!

The First Commandment: No Cash Payments

A true contractor is a licensed professional who can legally sign a contract. However, there are some contractors on the market who offer an unrealistically “discounted” price to work on a project, but insist on a cash payment. They are better known as ‘unlicensed professionals’.  Usually, this ends in a below-par job that will need to be redone, and the unlicensed professional is under no legal obligation because it was an upfront, cash payment. Put everything in writing, and make sure to work with licensed contractors on your future jobs. 

In selecting the right contractor, pay attention to a traceable work history, references and reviews. Angie’s List and Yelp are two great resources that typically have credible contractors for hire. Thumbtack and HomeAdvisor are also great places to start when conducting your initial online search. Referrals are also very common in the construction and contractor world. BiggerPockets has local real estate forums where you can reach out to investors, house flippers, and developers directly to network and ask for contractor referrals.

Reviews and testimonials are everything. A good strategy is to look at several of the contractor’s top reviews and bottom reviews. After reading both, would you still trust them to fix up your mother’s house. Ok good! You can take it a step further and ask for references from their previous projects. Additionally, I recommend asking for photos of their previous projects (depending on what they would be renovating/repairing for you) For example, if you’re getting your kitchen completely redone, it’s not a bad idea to see photos of other kitchens they’ve renovated. Do background research to ensure you’re working with a genuine and honest contractor for your project. Such contractors are unlikely to require cash payments, as they are also looking to protect their business. 

Stick to a Contract

Perhaps it is only a coincidence that the word “contract” makes up the majority of the word “contractor.” But the fact remains that in order for the project to be mutually beneficial for both parties, a written contract is necessary.

It wouldn’t be fair to the contractors to receive the full amount at the end of the project, nor will it be favorable to pay the full amount upfront as a homeowner. The contract should include terms such as the conditions of payment, project milestones, project inspection and a schedule of values. 

Do not underestimate the importance of documentation and taxing in paying your contractors on your next project.

Project Milestones & Payment Schedule

Divide your project into milestones, and let it be clear to both you and your contractors when and how much will be paid after a particular amount of work is completed. 

The Payment Schedule is a form that summarizes the overall cost of the project as well as a breakdown of the cost of specific areas of work. Have this clearly defined. 

Take Note of Materials and Labor Cost

Contractors give a quote based on both the cost of materials for the project as well as the cost of labor. Unless you are a professional, I recommend having your Contractor handle the purchase of materials for your project. Provide your contractor with a specified list, including every detail that you can think of, for the materials you’d like to have used. Especially when dealing with the finishes and small (yet important) details of a project, you want to clearly spell out exactly what you are looking for (size, shape, color, texture, durability, etc.) to avoid change orders for the project later on. It is extremely important to have all finishes sorted out at the time of the contract signing.

Paying Subcontractors Through a General Contractor

For your construction project, it is easier to get a General Contractor who will then subcontract most of the work to other contractors. 

This is a common practice because General Contractors can’t do everything themselves. For instance, plumbing or wiring, if it is beyond their scope of work. Their job is to oversee the entire project and other subcontractors. 

A best practice for delegation of the project is to specify in the contract all of the work that will be subcontracted by the General Contractor to complete the project. Additionally, it is ideal to have all subcontractors listed in the construction agreement with their contact information.

Knowing when and how to pay a contractor will help protect your project from ending badly. But always remember, do your homework on the General Contractor and/or Subtractors before hiring them for your next project. 

Documents & Resources