My contractor's overheads are too high. Any suggestions?

My contractor's overheads are too high. Any suggestions?

Jarrid Dotterer

Saint Petersburg, FL · Member since 2015 · 4 posts · 0 votes

HI all,

This is my first post for info. So I am excited to read the great responses that I know I will be receiving. Let's get started:

My business involves buying cheaper houses that need a lot of work and rehabbing them to specific standards to create a cash flowing rental property. These are not high end, and the margins are pretty tight all the way around. I have just come across a great opportunity which will force me to ramp up significantly in all aspects of my business. Starting with buying more properties then rehabbing etc. I am excited to take this opportunity and run with it.

My problem is for me to ramp up to scale, I will definitely need a contractor who can handle the projects. My best friend is a newly licensed GC, here in Florida, and is running a successful business already. So it's not an issue of knowing someone. It's an issue of keeping his overhead costs low enough to work for both of us! He says that automatically 40% of every dollar he pays his guys goes to workman's comp. With that factored in to his bids, he puts himself out of the running. The thing is, other contractors can come in at the right prices, so why can't he? What are the other contractors doing to be able to come in at the right price? Is there a legitimate way for him to cut his costs?

I know that investors and contractors can have a great working relationship but I'm not doing one house with a 50K profit, at a time. I do more houses with a 10K profit. So rehab budget is significantly smaller per house. This is where we are having trouble trying to figure out the numbers... Anyone have any ideas?

50 views

Most Popular Reply

Contractor · Atlanta, GA · Member since 2008 · 978 posts · 985 votes

11y

If he's counting all labor as framing and has a bad experience rating, 40% isn't out of the question for WC rates. Bear in mind that rates vary state to state.

Most likely the other contractors you're talking to don't have insurance at all.

See this reply in the discussion

29 Replies

Jump to latestLatest

Sort by

Ryland Taniguchi
San Francisco, CA · Member since 2015 · 786 posts · 717 votes
11y
Originally posted by @Manolo D.:

Originally posted by @Ryland Taniguchi:
Originally posted by @Manolo D.:

@Ryland Taniguchi Step 6: It's irrelevant what your friend's overhead is. Create your scope of work from Steps 1 to 5 and build a detailed materials list. Build a bid form from your scope of work and material sheet. The general contractor gets 15%. Period. End of story.
LOL, it's not the end, I won't do any contract if it is less than 3k, and 15% is only my supervision, there is no way that I am doing a rehab job with only 15% profit, why should I? I carry all the risk on materials, labor delays, and most especially, clients who don't pay.
Are you saying that your not pricing your materials and labor delays into your construction estimates? It's exactly why I do this... To vet the contractors out that can't estimate and project their materials and labor costs accurately. Why should a flipper pay for errors in a contractor's material and labor estimates? Everyone on this forum would agree that the biggest risk for flippers is contractors who are not on time and not on budget.
Read J Scott's book on Rehab Estimating. The 15% number comes from that book.
Personally, I don't work with general contractors beause we a better job managing the project than our general contractors. I don't pay for a 15% markup for some contractor making excuses why they are late and over budget.
I'm saying I won't work with only 15%. I don't make errors on my estimates on labor and material, I build enough buffer to cover the things I miss. In my 9 years in construction, I missed 2 project deadlines, out of 80 - maybe a little more, most of them have 4-6 month with 20-30 workers at a time, I say I'm pretty good at running the projects, I might not be as good as you though, hats off to you. On investors side, contractors might be the biggest risk, but on the contractors side, our biggest risk is the opinion of the owner/investor, the moment they say "can you" that's a labor delay, can you count how many "Can you"s there are in your projects? This is the reason why I don't work with investors who don't know what they want. I deal with plans -pure black and white- with specifications if necessary, either that or labor only contracts where change orders are on time & materials at 70/hr, that way I avoid the Can you's. I don't care if a client pays me 10 times to paint a wall just because they changed their mind, as it will mess up my schedule for another client. Why would you pay anything for delays and errors? You should be imposing penalties, not paying for them.
I think we can agree that a detailed scope of work and materials list with SKUs saves money and time for both the contractor and the flipper. If a flipper changes their mind, then they should pay for a change order. If they don't know what they want, then they will end up paying more.
Also, as a contractor I wouldn't work with flippers who don't have their funding lined up. If they are a newer investor, I would want them to get their funding from a hard money lender who funds both the acquisition and the project.
Best is for a flipper to prepare a detailed scope of work and a detailed materials list and have three contractors bid. Take the middle bid. On the lowest bid, often you get what you pay for. Check to make sure they are licensed and bonded.
I think many contractors think the flipper is making a killing in profit. 10% of the final price goes to closing costs. 5% goes to holding costs. Not as profitable after all is said and done.
In any case, the more prepared up front the easier the project for everyone.
0 Reply
Manolo D.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
11y
That's the thing, investors think it is ok to change their mind on something. I wouldn't go as far as SKUs, but I put a cap on my finish range, IE I would put exclusions like Tile floors limited to 3/sf or appliances limited to 700/appliance, anything above that, they would have to pay the difference, and at least 2 day notice. Just like a flipper that doesn't tweak their purchase price, I don't tweak my numbers to make the deal work or to get the contract. Some contractors (mostly "the guy with a truck and tools" type) who doesn't understand their client aren't the best ones. Not all investors know or have the experience to build a scope, but to a broad minded contractor exposed to multiple standards, scope creep could be as freightening as walking on fire. I would have to agree on a detailed scope of work being created before inviting contractors, but 70% of investors might not know how to do that.
1 Reply
David Nolan
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
11y
@Jarrid Dotterer It appears to me that you are asking your..."best friend is a newly licensed GC, here in Florida, and is running a successful business already." to be more competitively priced to help you grow your business. Why would he want to do that if he is already running a successful business? Is this issue really about him being able to reduce his cost base to benefit you, when he is already making a profit, if we can assume running a successful business means making a profit, which I believe is one of the key components of business success, or about you wanting him to work for you because you know him?
If he is running a successful business as you suggest and he reduces his margin would he not be better off applying those savings to his current business which would mean he would make more profit than if he reverts to working with you for lower margins?
Why would you want to stop your best friend from making more profits by working with you? I admire that you want to help your best friend become more profitable by reducing his costs, but surely you would want him to make more money for himself when he does that. This probably means not working with you.
Perhaps you friend is happy with his current margins and you would be better served finding a contractor who wants the kind of work you are offering. It has been my experience that different contractors have preferences for different kinds of work Some like volume and work on low margins and others like less volume and better quality jobs so they can charge more for their skills.
I would also suggest that you give a lot of consideration to "ramping up" on this opportunity with what appears to be your limited experience in this field. Working on slim margins takes a great deal of skill and experience if you want to succeed. Business is about risk and reward and when the rewards are low and the risk is high, especially in this industry, there can be lots of dangers that will take away your profits and turn them into losses before you can blink.
One final note for your consideration if I might be so bold. Be very careful going into business with your friends. If there are problems along the way you not only have to deal with him as a contractor but you may lose a friendship at the same time. Is that worth it? Money causes all manner of problems in relationships, especially in business.
Good luck with your deals and happy investing!
2 Reply
Cagney Moreau
Contractor · Signal Hill, CA · Member since 2013 · 69 posts · 11 votes
11y
your friend is politely saying no thanks
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free