Free Ebook.


Enter your email address:

Delivered by FeedBurner

« How to Find the Perfect Home: Condition | Main | Asking for a Raise Can Yield Big Financial Results! »

August 29, 2007

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

I would have to argue against paying sub-contractors. I've worked in the past as a freelancer and the concerns that you mention about them not doing a good job are valid but as a sub-contractor without something down who's to say that the person hiring you has any money?

If you pay only a small portion down say 25% the contractor needs to do the job to get the majority of their money. Also that down payment often goes to paying for the materials (assuming they're not separate to the cost)

Winner today?

Please enter me again.

Thanks.

.

Entering contest.

I'm in again..wish i'm lucky this time

Lucky #7? Please enter me again today. Really enjoy the blog and have passed it on to several friends/relatives.

Trying again.

trying again

From Matt: "I would have to argue against paying sub-contractors. I've worked in the past as a freelancer and the concerns that you mention about them not doing a good job are valid but as a sub-contractor without something down who's to say that the person hiring you has any money?

If you pay only a small portion down say 25% the contractor needs to do the job to get the majority of their money. Also that down payment often goes to paying for the materials (assuming they're not separate to the cost)"
Posted by: Matt | August 29, 2007 at 07:39 AM

Carl, author of the "give away" book says:
Matt's logic, paying subcontractors any money in advance, is the #1 reason you hear horror stories about being your own General Contractor.Never pay subs in advance!
You pay only as the work is completed...it can, however, be in statges.
You, the GC, usually, buy the materials. But if, for example, we are talking about an electrician supplying the wire and electrical rough-in boxes, if the electrician doesn't have credit with his (or hers)supplier, I don't want to do business with him.
Let somebody else hire him.
When you pay in advance,you destroy the incentive to get YOUR job done (or even started).
Also, what happens to your money if the sub gets hurt before actually starting your job?
There are more reasons. Read my book. I made about every mistake that can be made. That's why I wrot the book...so you wouldn't have to make the same mistakes.
Carl Heldmann


Pursuing a dream (house)!

Comments:

Trying again.

Going to be a winner today!

Book me, Danno!

Trying for the book again. Keep up the good work!

Giving it another shot...

I haven't read the book and I've never been a GC, so I know there is a lot of information I do not know. But this seems like quite an extreme absolute.

I'm sure there are numerous sub-contracting jobs who do work with no money down and 100% upon completion. But I work at a cabinet shop and there's no way we'd do a $10K-$50K+ job for a kitchen or full house with no money down. The money is used to buy the materials (even if we do have credit with our suppliers) and pay for the planning, designing, and beginning labor. There probably are cabinet shops out there that don't take money down, but I don't know any.

And I also I don't understand what Carl says about the GC buying materials. Does he mean that as a GC you'd buy a bunch of concrete and whatever other materials are needed and have them on site and hire a concrete guy and say "Hey, here's your stuff, go to work."?

I don't mean to sound too combative, like I said, I haven't read the book and haven't been a GC before, but I'm not quite understanding this.

This is interesting - trying again for the book. :)

Custom made cabinets are not the same as paying a sub to come and do your job. Still, cabinet shops have gone out of business (o.o.b.) and left the builder (GC) s.o.l.for the deposit. If you remember Color Tile, Inc of not too long ago, they went o.o.b wit hundreds of stores, and all the customers deposits went bye,bye...except those who had made their deposits with a credit card. That's the only way I will do a deposit for a special order. Visa & MC will both protect your deposit.
And yes, I do pay for every drop of concrete that goes to my jobs. My subs call (from their cell phones)my supplier when they want delivery. This is not rocket science, but there are things that were learned the hard way. Remember the axiom; "those who do not study history (my book), are condemned to repeat it".
Carl Heldmann

Please, let this be the time.

comments worked again!!!!

Pick me!

should get lucky, one day it's always worth a try !!!!!!!!!!!!!!

Thanks in advance!

It's getting tougher (only 3 copies left)! On the other hand there's always the public library. Still, count me in!

Situations like this, especially when LARGE sums of money are on the line, are why escrow accounts exist.

in for the win

Count me in!

Let's try again...Pick ME!!!

Here's hoping...

Let me respond with my rules for hiring subcontractors:

Rule 1: Facts trump armchair psychology. Pseudo-economics like “financial incentives for excellence” are nothing but guesses into the psychology of a worker; absent any other information, incentives are more helpful than total ignorance. But if the subcontractor is highly skilled, the subcontractor may be able to command a down payment (depending on the market). The incentive to get the job done quickly and with excellence is far less impressive than having done so repeatedly. Trust referrals, not guesses into someone else’s responsiveness to payment. Of course, among the facts you should trust is the fact that you’ve got judgment, which is based upon a variety of observations. If you don’t trust your own judgment in this, hire someone with judgment you do trust. But bear in mind when weighing the risks that the cost of remedying a poorly done job is far, far greater than that down payment.

Rule 2: Recognize that facts play on both sides. Many of the best subs adopt a partial payment upfront rule in response to experience getting burned by a prime. A seasoned, experienced sub may well adopt an upfront partial payment rule in response to experiences having been burned. A lousy sub may also have adopted an upfront payment rule too, in response to not getting paid for poor performance. Thus, go back to rule #1 – facts outweigh speculation every time.

Rule 3: Craft a better contract. If down payments bother you, then you may want to work on your knowledge of the field first - you could be too ignorant to make sound decisions. Are there reasonably inexpensive ways to recover a lost down payment? Could you, say, put up half the down payment in the form of a performance bond or other bank guarantee? Does your sub even know what a bank guarantee is (which helps provide additional facts). If banks are too expensive, what about holding tools as collateral (though watch out for breaking rule 10). Check with a lawyer if you’re really worried. You live in a country with a good legal system (believe it or not) - show me a billionaire who didn’t depend upon lawyers, and I’ll show you a trust fund baby who is losing someone else’s wealth.

Rule 4: Think of the market conditions. Unless you are the entire market in the area, it makes a difference. How many other subs are there in the area of comparable competence? Are they available? How long before they can complete the job? Moreover, think about how the market operates for the subs themselves: since you know little about the subs financial position before he takes your job, an upfront payment can mean the difference between his having enough cash to get to work, to eat, and to use the best tools. It can be tough out there for a sub. Withholding payment for an otherwise competent sub because you want to play armchair economics-psychiatrist and gauge incentives is baseless and petty. Worse, it’s not going to save you anything in the long run.

Rule 5: Think economically. If a 25% down payment “eliminates incentives,” then you’re (a) dealing with the wrong sub, (b) dealing with a bad contract, or (c) not thinking economically. From an economic perspective, it’s not the “gross payment” at the end that matters, but marginal returns on investment (in this case, the contractor invests sweat and skill). But bear in mind, ordinarily, your marginal returns must balance against his marginal returns. If a contractor receives 100% up front, then that contractor has maximized his marginal returns before delivering anything; if the work owner pays 100% at the end, then the owner has maximized his marginal returns. Logic suggests that negotiations should lead to some intermediate point (not 50/50, mind you - the actual outcome will reflect other market conditions). The only time you’ll ever have 100% of the power in the relationship is if the “contractor” is actually a slave - or one party is lying to another.

Rule 6: A sub is an independent contractor, not an employee. Don’t mix them up. An employee seldom works for payment in advance; wages come after performance, and the relationship is based on an expectation that it will continue past the first payment. A decent independent contractor expects positive referrals, but little more from the relationship. If you treat an independent contractor like an employee merely because he is receiving money from you, then your lack of respect for him bodes ill for the relationship.

Rule 7: Greater complexity merits greater down payments. How complex is the job? Even the best waiters don’t earn their tips in advance, but even the worst lawyer won’t work without some kind of retainer (unless the lawyer is performing routine duties, like wills, trusts, and divorces, in which case, they’re not all that different from a waiter). The more complex the project, the more appropriate some advance payment becomes.

Rule 8: Down payments should vary depending upon the size of the job. How much is at stake? If you’re worried about 25% down on a $10k job the same way you’d worry about 25% on a $200k job, you’re not thinking very clearly.

Rule 9: A contractor’s estimate is a service rendered. A contractor is not some salesman making a pitch - how much was the initial estimate worth to you? A contractor who comes to your site, examines the project, and prepares an offer based on appropriate calculations of the cost, labor, and time, has provided you information you didn’t already have. That information has value, which you ought to be willing to pay for, unless of course you’re a cheapskate, in which case, there’s Rule 10.

Rule 10: Treat a pro like a pro, or be a chump cheated by chumps. How you treat labor has at least as much effect upon their productivity and work ethic as how (and when) you pay them. This rule has two sides: treat labor with as much professionalism as you would have them work. Never be afraid to pay someone well for doing an important job well; what you gain from stinginess, you lose from lost reliability. Remember: “Do unto others…,” not only because it’s nice, but because it’s effective. But bear in mind, the best financial incentives are no replacement for failing to manage and monitor performance. You want your sub to be professional, exercise professional oversight. Can’t do that? Find a professional to do it for you. “Lo, and I shall be with you even until the end…” of the job.

Ok, I'm ready

Hi FMF - not ready to buy a home yet, but here's my comment!

This giveaway is now closed. The winner is Scott Kustes who posted at 7:40 am yesterday. Congrats!

Scott, please email me (see: http://www.freemoneyfinance.com/2005/04/free_money_fina_4.html ) and we'll arrange to get you your book.

To the rest of you, stay tuned. I still have two copies to give away!

The comments to this entry are closed.

Start a Blog


Disclaimer


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.

Stats