Repairs - How do you NOT go over budget??

Question

When you buy a property that needs some work, how do you protect yourself from going over your rehab budget (or from the contractor exceeding his estimated cost)?  Do you include specific language in the repair contract?  For example, "buyer will not be liable for any costs that exceed this estimate or for additional time needed to complete repairs".

I am buying a property and did a walk-through with a general contractor who gave me his repair estimate.  Before signing his contract, I want to make sure that he will stay within his repair estimate, and not exceed the approximate cost or take longer than he projected (I already told him to give me a high estimate to be safe, so there is a lower chance of going over budget).  I do not want to end up paying more than what he said it would cost in his estimate.

Also, I remember a webinar where Brandon talked about not wanting to be held responsible if the contractor's team takes longer than expected to complete the job (e.g. because they did not show up to work on some days for whatever reason - like they were out partying the previous night, forgot to show up, etc).  In other words, the investor should not have to pay extra if the contractor cannot manage his own team properly.

With that in mind - what language/terminology can I include in the repair contract to protect myself from the contractor going over budget?  Or do you propose any other solutions?

Jim K. · Answer

@Matthew Paul

You know how it goes, Matt. We're always just uneducated poor trash, there to be daintily wiped off the Allen Edmonds of the investors after they're done with us. Manual labor is for menial minds. In America, everyone is equal but some are more equal than others.

Ned Carey · Answer

A nationally known rehabber told me once every job he has done has gone over budget. On the other hand I know of rehabbers that sometimes come in under budget. That is because they do LOT of budgeting ahead of time and have a detailed scope of work.  J Scott's 2 books on rehabbing and estimating costs should help. Available here under the book store tab

Frank Wong · Answer

Hi Fredrick,

Every rehab property I have done I have always gone over budget.   Something always comes up that you don't foresee or you change something that you didn't think of before.  The original bid on the contract was the same.  The contractor did not change prices on me once the project got started. It was purely the add-ons.

As for keeping them on schedule.  I think that has a lot to do with who you hire and how involved you are. Being on site makes a difference.  It's also about relationship building.  They know if they take care of me I'll take care of them.

Matthew Paul · Answer

@Fredrick Hock what makes you think contractors are out "partying " .   If you are hiring drunks and druggies to do your project thats fine . But professional contractors are not drinking it up every night .  We are usually staying up late working up proposals . On the phone scheduling subs . And sending change orders to customers .

The contractors I am involved with , when the weekend hits , they are out in their Motorhome with their family , quite a few take their boats out and do some White Marlin or Tuna fishing , and others head to their beach house .

Most of the time projects run longer than planned , lots of time its due to the customer changing their mind or not making a decision fast enough .

Matthew G. · Answer

@Fredrick Hock Your contractor is giving you just that, an estimate. The reason he might not be able to give you an actual fixed number is because in construction there seems to always be something unexpected once you start opening up walls. He could give you a quote for doing specific work, but there is always the chance that something else needs to be done that isn't part of his scope that he would just create a change order for.

You can't protect yourself from going over budget due to unforeseen circumstances, you just have to add a percentage for contingencies.

As far as keeping a contractors team on schedule, make sure you thoroughly vet your contractor. What jobs is the GC currently working on? How many in-house workers does the GC have? What work does the GC subcontract out? If your contractor subcontracts out most of the work, then he can have an issue staying on schedule because he is at the mercy of his subcontractors especially if he is hiring the cheapest labor to stay within budget. If he has an in-house team that is large enough, he can easily add more workers to speed up the project as long as he isn't spread too thin because he is working on multiple jobs.

If you hire a good contracting team that you can trust, you won't have to worry about micromanaging them. Don't hire on price alone, their price is usually the lowest for a reason.

Ryan Proffit · Answer

I would think before you have a relationship with contractor, you would have to spell out every last detail, and have them call you constantly if anything is going outside original scope.  Once you build trust and a relationship, you would give them the authority to proceed without calling you all the time.  I haven't even started my first property yet, but if I was you, I would be trying to find contractors you trust before you get started.

Ryan

Fredrick Hock · Answer

@Frank Wong and @Ned Carey thank you so much for your insight!  It seems like going over budget is normal, and I should plan to have enough funds to cover unforeseen expenses.

I will also do my due diligence in finding a contractor who I can work with long-term.

Thanks!!

Fredrick Hock · Answer

@Matthew Paul duly noted!

Fredrick Hock · Answer

@Matthew G. and @Amanda G. thank you so much for your thoughts & advice!!  I found your feedback very helpful.

Amanda G. · Answer

I haven't done this yet, myself, but the advice I have received is to have a date for completion in the contract. Then add five days. After five days there is a penalty to the contractor for work not completed- $500 per day, or whatever is reasonable for the size of the project. For the time BEFORE the deadline, there is a bonus for completing 2,3 or however many days early. Again, whatever amount makes sense for your size of project. I hope that helps.

Repairs - How do you NOT go over budget??

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