Construction Rehab Contract Terms and Clauses

[Bryan Greenwood]

I would like input from the group on how you might structure a real estate construction contract with your contractor to do a rehab project for you in the area of time management of the project. Specifically, what you might consider a reasonable project time to completion, incentives on completing job on time within budget as well as penalties for not completing on time.

[Bill Gulley]

Welcome to BP Bryan!

In short, whatever you get them to agree to!

It can get pretty involved depending on the scope of work.

Weather days, need to allow time for weather when work can't be completed, this depends on your region and season. There are software programs used by contractors and others that track weather and give averages for bad weather within time frames.

Material shortages, not at fault of the contractor, things happen. If there is a labor strike that slows shipping, or a manufacture supplier has a fire or other matter, they may not be able to supply materials.

Governmental police actions (police powers as to  RE, not the cops raiding the place) work can be stopped for inspections, stop work orders can be given, building permit snafus, all may be beyond the contractor's responsibility, then again, a contractor that screws up can cause a stop work order, so define it "police actions not arising from contractor's negligence or failing to remain in compliance....."

 Insolvency, loss arising from a contractor going broke, bankruptcy, death, incapacitation or failure to remain in good standing, can certainly delay work and such is at the expense , of the contractor. This aspect may be covered under other covenants, assignment of work in the event the contractor fails to perform or with a hold harmless and indemnification clause.

Penalties can be whatever you agree to, most contractors will be very gun shy with stated penalties especially if the lack business law knowledge. I have simply included actual and consequential damages arising from default, including but not limited to costs of collection and court costs.

Collecting from some contractors can be a real pain if you get hung, you may well end up in court for larger jobs, for small jobs, it's often better just to kick them out and move one.

Actual damages can be sought, if a contractor walks off and you let a new contract the difference paid from your original contract and the new one can be passed on, after default, material cost increases (which generally aren't agreed to be at the responsibility of a contractor) can be passed on. It's the inclusion of consequential  damages can really nail the contractor, loss of rents, sales, interest expense, cash flow interruption, costs of letting new contracts, bid expenses and inspections, if you can't move in, such might include living expenses and a motel bill.

This all being allowed by law and local custom. Since contractors can be hammered so well from default or negligence, I don't argue much as to penalties but after 30 days or so (about 25% more time past grace periods or fudge factor, whichever is longer, they can pick up interest expenses).

Which leads to incentives, if the contractor saves me money, interest expense, they can earn that finishing prior to the estimated completion date. I've agreed to pay an additional 10% of their fee as well. If the project remains on time and on  or under budget the incentive can accrue to the end of the project. I retain accruals of incentive pay and break down the time frame to the week worked. This is more of an incentive than a job completion date, each week earns the incentive.

Weekly incentives can also go to workers, this , I believe does more than trying to motivate a GC, I can do this informally with a worker. I may or may not say anything to workers in the beginning, week one they are usually motivated, if they just have a check from me as an "atta boy" it is appreciated much more I think as a surprise. I might tell a worker he's dragg'n azz, but, I don't micro manage workers or circumvent the GC, it's more of being around a job site, walk'n and talk'n.  

Additionally, I've been know to order pizza, keeps them from running off at lunch, hitting some bar and not getting back! LOL There might be a case of Bud on ice in the truck at times. I try to keep a contractor happy and their workers happier.  Certainly don't put that in a contract.

If I'm selling the place, I may agree to split a % of the sale price or estimated price, this becomes more of an equity partner than an employment contract.

Your payment structure should withhold earned fees weekly to pay workers. Half of a contractor's fee can be withheld to the end of the job. Small jobs the can be withheld until a final payment date. You need to withhold enough as a contingency to a contractor "walk-off" but I tell them it's for a drop dead contingency, anyone can get hit by a bus.

Just a note.....get a lien waiver before you hand anyone a check! :)