How to Handle Contractors throughout the Rehab Process

[Juan Diaz]

Congratulations! You’ve found yourself a contractor to do the work on your flip. Now your work really begins! Because every contractor, as good as they may be, they will still require active management. To begin with, never give your contractor all their money upfront. If a contractor receives all the money for a job upfront, there’s a small chance that they will run off with the money. Beyond that risk, there’s also little incentive for them to do timely work on the property. Once they’ve received the money, any more work that they do will not earn them any more money, and they’re likely to gravitate towards completing other jobs that will earn them a cash infusion. In that scenario you’ll constantly have to be calling your contractor, urging them to come work on your house.

By splitting the payments up you give the contractor a monetary incentive to continue work on the property and protect yourself from the contractor leaving the job with your money. It’s also a good way to tie satisfactory performance in with pay.

You remember that bid sheet that you created at the beginning of this whole process? Well when your contractor gave you a bid, he wrote it down on that bid sheet, along with anticipated completion date. Since each item has a dollar amount associated with the work, you can pay him for each item as he finishes them. This way you can make sure that each item is done to your satisfaction before he gets paid. But make sure that you communicate this information with the contractor before you begin!

For almost all jobs, such as paint, the contractor will need a deposit on the job to acquire the materials needed to do work or to signal your good faith. It’s a good policy to split the payments for each item up into 2-3 payments. If it’s a small item, give the contractor half at the beginning of work and half at the completion of the work. For a larger item ($1,500 or more), you can split the payment up into thirds and pay at the beginning, middle, and end of work.

It’s important to keep to these payment schedules. Sometimes your contractor will agitate for a payment when they’re not ready for it. When that happens, it’s important not to give them the full payment. Sometimes they will be experiencing legitimate money stress, in which case you can advance them a portion of the payment, but don’t give them the full payment. This is your insurance against them deciding to quit the job without finishing and taking the money with them.