How to incent a contractor

Question

Does anyone have any proven best practices to incent a contractor to deliver a project on time and at or under budget? I have a contract in place with a payment schedule, but would like to incent him to go above and beyond to ensure that it's hit or that money saving recommendations are provided.

I'm thinking about some kind of bonus back to him. Say, 50% of the savings he'll earn on top of the contract?

Thanks for your input!

I'm thinking about some kind of bonus back to him.  Say, 50% of the savings he'll earn on top of the contract?

Thanks for your input!

Doug W. · Answer

In my experience, the easiest things to do are:

1) Be a nice guy. If you are a constant hard ass or rude to them they won't want to help you out.

2) Pay them on time. As in the same day you get the invoice. I carry my checkbook with me at all times and I hand the check to the person the same day he hands me an invoice. I have even driven to meet them if that is more convenient for them.

You will gain a lot of goodwill and they will desire to work for you more because most of their other clients don't do either of those things.

Finally -- pay people what they are worth. If you end up with profitable outcome, share some of that wealth. They helped you earn it. And then you can bet that they will work harder for you going forward if they believe you will reward their hard work.

Jeff Sprunger · Answer

if you implement the cost savings idea, be sure that you approve of any materials, processes or procedures before they are bought/implemented.  meaning, if you plan to provide 50% back to the contractor when he finds a less expensive item, make sure you are satisfied with the item and its quality before agreeing to the change.  I can find a kitchen faucet for $35 bucks that looks almost as nice as the $200 Delta, but it is cheap crap!

Ritch Bonisa · Answer

This is a great discussion!  I work in project management with remote investors.  I have a pool of local general contractors.  I help investor and contractor set up construction phases, draw schedules, dates - the contract (contract is between contractor and investor - not me). I want to see an investor that is thrilled and a contractor that is fairly happy. @Doug W. I like your attitude on this and I think you are right - it's about actions and reactions.  Investor actions will cause contractor reactions, this is true both ways of course.

I think a contractor can have an influence  on a lot of things up front.  There needs to be a good plan in place from the beginning with a scope of work.  This is where the contractor can make suggestions on the possible layout of the structure and any other cost saving ideas. I think it is part of the planning process.  Develop the scope with the contractor, THEN get an estimate for that scope.

Of course we have to penalize contractors.  There are things that happen - like weather that can slow the process down at no fault of the contractor.  The problem is how do we remember these things and how we agree on them.  This is where I think documentation is key.  I think it is best to use one documentation system where both parties are documenting.  Documentation happens at least twice a week and everyone reviews it often.  Find issues as they happen and address them as they happen.

I also like the idea of bonus for quality work delivered before the completion date.  Contractually this has to be discussed and addressed AFTER terms are agreed upon.  The bonus portion then placed into the contract just before signing.  BUT I think there has to be a quality clause.  You don't want to end up being the victim of a rushed construction process.  Smart contractors will agree to completion times, but really add in some time cushion (under promise and over deliver).  A bonus / penalty model only works if time frames are realistic and firm (minus agreed upon types of unforseen events).   AND this is all in regards to GC's not subs.

@Brad Morse It sounds like you want to find a few good contractors and keep them busy and happy.  I think a lot of contractors would like to work for you.  It is a two-way relationship and I think sometimes as investors, it is easy for us to overlook that.   Awesome topic!

Brad Morse · Answer

Thanks, Eli!  Ideally, what I'd like is if he offers suggestions for savings along the way.  I'd be more than happy to give him a big chunk of the savings.  If he finishes on time and on budget, I would be thrilled...just trying to optimize how to do that.  I like the bonus idea.

Eli Molloy · Answer

I've seen this done a two ways on large infrastructure projects, penalties and bonuses. You could charge liquidated damages for costs you incur for them being over the contract time (holding costs, lost rent). The other way I have seen is to offer a bonus if they are complete by a certain date. I like this option better because it is really just a penalty but it's presented as a bonus an causes less friction if it's  not received.

I personally don't think that a contractor should have any effect on a budget during construction. If he gives you a bid, and nothing changes, that should be the price. I said "should" because I know that's not always how it works in the real world.

Brian Garrett · Answer

@Greg S. What % do you hold back until after inspection and punch list is complete?

Thomas S. · Answer

Incentives for saving money/cutting corners can have serious negative ramifications. When a contractor saves money it is usually at the owners expense in the long term....rushed, poor quality construction, low quality materials.

Draw up a contract that fits your pocket book and put in financial penalties if not completed on time. You will need to include exceptions for conditions beyond the contractors control such as weather.

Make sure you have a defined payment schedule based on work completed. Hold back the final % until after inspection and all necessary fixes are done.

How to incent a contractor

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