How to protect yourself against contractors when flipping...?

Question

So I remember in the podcasts a few guests talking about learning the hard way when dealing with contractors. Losing money, dealing with mechanics liens, etc. They all mentioned that the more signed documents you collect before the project begins, the safer you are in the long run.

Does anyone know where or how to find these types of documents to have on hand when picking my contractor? And exactly what documents I should have? Do I need to get an attorney, or is there a simple template I can print off the internet?

Also, does anyone have experience with contractors giving you a hard time signing these - If that comes up, how should I handle the contractor?

I'd like to have this all prepared before going into my first deal.

Thanks!

JD Martin · Answer

You can either structure the retainer off the total of the contract, or as a reduction of the final draw. Example: $24k contract with draws at thirds (1/3, 2/3, complete) with a 10% retainer:

Draw 1: 8k; Draw 2: 8k; Draw 3: 5.6k (10% retainer); retainer: 2.4k = $24k

OR:  Draw 1: 7.2k, Draw 2: 7.2k, Draw 3: 7.2k, Retainer: 2.4k = $24k

Most of the contractors I know prefer method 1, because the time period between the last draw and the retainer is/should be next to nothing, whereas in method 2 you're holding the percentage as you go. All the retainer is for is to make sure they come back for the punch list items, they cleared permits, released liens, etc.

JD Martin · Answer

The only contractors I ever work with that I provide materials is the few guys that I have long relationships with that I do reimbursements for on materials, i.e. they essentially are only working for labor and I pay what they pay on materials. Beyond that, anything we bid the contractor is required to supply their own materials as part of the bid. The draw includes materials, so it doesn't matter if there's more material cost on the front end - the contractor is (or should be, unless he is a week to week crisis worker) is floating these costs with the supply house/wholesaler anyway, so he's not out any money. The draw is whatever you agree, but 3-5 draws are common - 25, 50, 75, 100 with a retainer (2%, 5%, 10%, whatever) to make sure the punch list stuff gets done. The retainage is (usually) most of the contractor's profit, so that's your guarantee they finish out the job.

Getting materials on your own, in my experience, rarely saves any money because any good, busy contractor is getting a better price than you are already, and the profit they add in is what you would have paid anyway. And when they ruin material or mishandle it or run short, it becomes their problem, not your problem.

Dan Bryskin · Answer

@Ben Valentin

Here is what we do: Scope of work, pay schedule  and signed contract. Contract includes scope of work, all required inspections and time / pay schedule. Little money is paid every week as progress payments with the bulk paid upon completing inspection. We have incentive to complete work on time and per day penalty for going over. Upon receiving a payment, contractor signs a lien release. Template - get it locally as it is defendant on local law.

Angelo Mart · Answer

My investors have a legally binding contract that was drawn up by an attorney for a few hundred dollars. The contract specifically states that the investor needs all the contractors information such as insurance, license etc and that If the contractor does not abide by the contract they will BE taken to court

JD Martin · Answer

Hi Ben, not off the top of my head, but usually these things are kept pretty simple. Next time I'm at the file cabinets I'll see if I can pull a draw contract, but in my neck of the woods they're usually one page and calls for some meeting of the mind on what constitutes percentages, ie none that I have used are so specific that there's no room for interpretation. If the project is going well, it should be relatively obvious where you're at, more or less. For example, let's say you were having an addition put in. 25% might be roughed in, 50% might be all electric, plumbing, mechanical, insulation in walls, 75% might be top finishes in place (drywall, trim, etc), 100% would be complete. Most contractors worth anything are going to be moving along so steadily that you may be paying only once or twice, i.e. you may pay at 50% and complete.

Ben Valentin · Answer

@Jd Martin I wasn't aware of the retainer - that's great info! I appreciate that! Do you know if there's somewhere I can find a sample contract with all of these details laid out for me to take a look at? I do well with visual examples to learn from. I'm confused a bit with putting together a scope of work and how to get the proper contracts drawn up.

Thanks again!

Terry Dunn · Answer

I would include to all the comments above, when you pay them get a "Full unconditional" waiver signed.

Allende Hernandez · Answer

@jd

@Jd Martin would you mind elaborating more on the draws and the retainer? How does the retainer play with the draws and the total?

Mike Reynolds · Answer

i agree with JD here. All of the above. Especially the retainage.

How to protect yourself against contractors when flipping...?

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