A question for the smaller contractors out there.
Quick background: We’re a two-person partnership in the trades for a combined 20 years, in business ourselves for one year. This will be our first project financed by a bank loan.
My question is, will a lender finance a construction project that is based on Time and Materials. The way I’ve drafted this contract for a straight-forward addition is like this: Scheduled payouts of set amounts linked to particular milestones. The final payment is for the balance of actual time and materials expended of the project. I’ve included a time and expense cap on the project to ensure things won’t go off the rails.
The main reason we’d like to avoid making it a fixed bid job is to save the clients money. They are good friends and we want them to pay us a fair rate for our time and nothing more.
Thanks in advance for the help!
Matt
Replies
Well,
Over my years in business I’ve done a lot on T+M and cost plus %. I don’t remember how many but there were only a few requiring bank loans . Most were remodels with maybe a dozen additions. It’s been 50 yrs so don’t quote me.
Working on referrals only I’ve never had a problem. People who referred knew not to just send me jobs.
Never had a problem with payment nor quoted draws. Special order materials were deposited in advance of delivery.
Now, over the years I’ve seen both the loss of “friendship” and hard feelings othèrs have had doing business this way. I think those were because the builder as estimator gave a low first number because they were “friends”. Better to give them the real (bad) news up front. You come up lower, your friendship just got better.
Perhaps poorly worded but I hope you get the idea.
Best of luck!
As to the bank……..
Usually the client has a portion of the job $’s and need the bank to fill the bill. With your client and you to word it properly, I’d think you might pass muster with the bank.
From my experience with bank loans t&m doesn’t fly. The bank wants to know fixed costs. It’s usually on 5 draws. Write very specific things into the contract for each draw so it’s easy to justify to the bank’s inspector that the phase is complete when they visit the job site. I feel like some jobs the bank issued me a check directly and some gave the homeowner the funds to pay me. Try to get the bank to pay the homeowner. Write a ballpark estimate you know you won’t go over and have the homeowner keep any extra cash if you don’t meet your budget. Also remember that it will take the bank forever to process your draw once you invoice like 1-3 months which can really be stressful if you are a small company and there are lots of material and labor costs.
From my experience, many lenders do offer construction loans based on Time and Materials. It's all about structuring your project and contract in a way that makes sense to them.