Contractor contracts with a share in the profit

[Jennifer Handlin]

I flip homes and have been the GC on the projects, I would like to find a contractor/partner to share in the profit and in exchange manage most of the GC work, while foating his labor until the house sells and receiving a % of the profit. I will still be part of the project but not have to be on site everyday. Looking for a contract that provides both parties with expectations and legal verbage. Any experience/recomendation?

THANKS!

[J Scott]

Hey Brian -

First, a lot of my ideas around bonuses and penalties comes from my wife, who ran internal marketing for one of the big-name technology companies for a long time; a large part of her organization's job was doing employee motivation and retention stuff, which is pretty tough job in that industry. But, that's where a lot of my perspective comes from.

That said, most of the "bonuses" we offer are based around long-term motivation as opposed to tactical rewards; in other words, keeping the crew happy in general as opposed to rewarding them for a specific task or job.

If you can do enough properties to keep your contractors fairly busy throughout the year, a lot of this motivation will come naturally -- good contractors who know that performing well will generate a lot of extra work will tend to do the right thing because doing so will mean lots more work in the future.

But, there are plenty of other things we do to ensure that our contractors would rather spend time working for us (and doing a great job for us) than working for someone else or not doing a great job for us:

- In terms of financial bonuses, we like to mix it up and keep our contractors hoping -- as opposed to expecting -- incentives. What we'll typically do is, if we make more on a project than we expect or sell a house very quickly, I'll give my crew bonuses that are based on the unexpected profits. I don't tell them that they're getting the bonus because we made more money or sold more quickly than expected; I just let them think it was a "random" thing, and I believe that helps keeps them motivated, as they are always hoping I'll just hand them a check when they come to work;

- Most importantly, I'll make sure they know that doing a good job for me will get them plenty more work than just what I have to offer. My contractors know that my standards for recommending them to others is actually higher than my standards for using them myself. I would recommend most -- but not all -- of my contractors to other investors, and because I get asked for LOTS of recommendations (my cabinet guy jokes that we should be on his payroll), this is very much an incentive for my contractors to be reliable;

- For my best contractors, I'll give retail referrals as well; I actually have much higher standards for referring my contractors to friends and neighbors, but the contractors who get these referrals tend to make some good money. I live in a neighborhood with some very high-end houses, and while I don't like most of my very pretentious neighbors, my contractors tend to love the profits that come with the high-end jobs. And again, while I don't like most of my neighbors, I don't want to soil my reputation or my contractors reputations, so I only refer those contractors who consistently perform at the highest level;

- Along with the last point, last year I put an ad in our subdivision's monthly newsletter for our painting crew (with me as a resident reference that people could call). They've done probably a dozen jobs in my neighborhood since then, which I'm guessing added about $100K to their gross income in the past year; the ad cost me $400, and my painters will reap the benefits for a long time to come. Come to think of it, I need to be doing much more of this...contractors appreciate it and it's not that expensive...

- Then there are the little things -- for example, my project manager has full authority to bring in lunch for the crew at random times (though I encourage him to do this when there is a lot of work going on and we want to keep the crew on-site) and to buy a case or two of beer every Friday for the guys to take home.

These are the kinds of things I prefer, as opposed to writing in bonuses into the contract which will only motivate them for that one job -- I prefer the longer-term motivation instead.

As for penalties, I'm typically pretty lenient as long as my contractors and employees strive to "do the right thing" -- I'm not going to fault someone for making an honest effort and failing, and I'm definitely that way when it comes to schedules. While we write penalties into the contract for missing deadlines, we're very lenient and I don't think we've ever had to impose them. The only reason I would even impose a penalty is if a contractor didn't make an effort to do the right thing, and if that happened, the penalty wouldn't really matter, as I'd fire him.

All that said, if anyone needs contractor recommendations in the Atlanta metro area, let me know! :)