How do you pay your rehab contractor?

Question

I am meeting with a few contractors this week, I am trying to find one that I can trust to do complete rehab work on rental properties and flips. How do most of you work out your compensation agreement with the contractor? Do you pay them to assess the property? Do you have them quote you a flat fee for the entire project or hourly? I am leaning more towards a quote because I can budget it in my expenses better. Have you ever had a contractor quote you a price and it ended up costing more due to unforeseen circumstances? When interviewing contractors what questions do you ask them?

Thanks
Phil

Chris Winterhalter · Answer

With pesos....

Your contractor is your partner....do the due diligence up front to make sure you have selected someone competent.  Be overly CLEAR with your scope of work and contract.  List out and talk about every detail openly.  Be EXTREMELY clear in your payment schedule.  Contractors want to be respected, treated fairly, and PAID QUICKLY.  Paying a contractor quickly is one of the best ways to make them happy.  Your job is to manage expectations.  Managing expectations means understanding what the contractor is bidding.....A very clear scope of work is very essential.

Regarding contract penalties....many contractors will not sign contracts with these clauses.  My recommendation is to work with your contractor to build a schedule that works for both of you.  You can then add in the penalty several weeks after the agreed upon date.  I can tell you that if you ever impose a penalty that will be the end to your working relationship.  Change orders or unforeseen items are the standard not the exception to rehabbing.  That is why you create your own contingency budget outside of your contractors budget.

Rob K. · Answer

This is quite common. There are ALWAYS unforeseen circumstances. Rehabbing a house is like peeling an onion or undressing a fat chick. Every layer that comes off gets worse and worse.

I can't tell you how many times I've gutted a house and found electrical problems, rotted wood, code violations, plumbing problems, etc. It never goes as planned.

To answer your original question, I like to pay by the job. When suprises come up, they can be addressed. If you've dealt with the guy before, you can get a best case worst case. If it's someone new, make sure that any additional charge is agreed to before any work is done.

J Scott · Answer

Some of my thoughts on the topic:

http://www.biggerpockets.com/renewsblog/2010/04/14/6-rules-for-managing-your-contractors/

http://www.biggerpockets.com/renewsblog/2010/04/07/the-paper-trail-every-rehabber-should-follow/

http://www.biggerpockets.com/renewsblog/2010/02/17/whats-in-a-contract-contractors-rehabbing-real-estate/

http://www.biggerpockets.com/renewsblog/2010/06/09/better-faster-cheaper/

http://www.biggerpockets.com/renewsblog/2010/05/26/are-you-sure-your-independent-contractors-really-are/

Bill Gulley · Answer

Steve caught that question for me...I probably should have explained the penalty issues a little better.

An assessment for failure to complete is not always appropriate, such are generally used for larger jobs. Two considerations, cost of the job and length of time. A job that may run 50k is a significant labor cost, 5k it may be difficult to impose, since your last draw might be $1250 or less. If a job is to be completed in a week, you're not really looking at any significant delays, but 90 days or more could get into some issues.

These penalties will exclude bad weather, additional work ordered or required that are unforseen and issues beyound the scope of work or control of the contractor.

As Chris mentioned,  you need to look at your relationship as a partnership, a team approach getting the job done. Any monies withheld are not meant to slap the hand of the contractor but cover financial losses arising from one partner failing to do their part. Why would you have a partner who doesn't have any skin in the game? You simply can't take the financial responsibility for issues arising from workers that are selected by the contractor or perhaps his equipment failing. Professionals understand that they are responsible for the loss of use of a property due to negligence or failure to perform as agreed.

If a contractor tells me work will be done in a week, I'll usually allow another 20% or 3 days in this case. 90 days will get them 3 more weeks, that is plenty of time for the CG to cover an issue.

Toward the end of some jobs, when there is not much money left in a job you may find a CG who starts moving on to other jobs, they may tend to slack off, dragging their feet finishing a punch list. Always make sure the CG is owed more than the value of the work to be completed. If this happens and it's getting to the dead line, some may walk off, this is another issue, but generally with smaller CGs you don't have a history with.

I have only had this assessment a couple times. It is more of a motivational issue, there is the carrot and the stick. I have also paid bonuses, the other end of any penalty. That's only fair IMO.

Speaking of bonuses, you can really motivate a crew with very little money. Everyone likes to be told they did a great job. If I'd see a worker hussel and hard at it I'd tell them I appreciate the effort today and say "here, let me buy you're lunch" and hand them a twenty.
You have 5 guys working for a week, a hundred bucks going straight in the worker's pocket pays off. Just a little something to say thanks!

Account Closed · Answer

I've done hourly and had flat quotes.  I prefer flat rates especially when using a contractor for the first time.  I do not pay any upfront money.  Contractors get paid as they complete segments of the job based on their quote.

David Niles · Answer

Chris hits it on the head, treat them as your partner with respect and not as someone who is out to rip you off every chance they get, this will make for a better relationship and jobs go much more smoothly that way.

As far as penalty clauses, I wouldnt work with anyone threatening me right from the start, jobs have unforseen issues, nobody knows whats behind the walls or what other scab work is hiding waiting for us to find it, just the nature of the beast.  
Pay draws is the proper way to handle it so if your contractor does turn out to be bad, you cut them lose without losing all your cash.

Steve Babiak · Answer

You set a completion deadline that is not only reasonable, but agreed to by the contractor. For each day that the contractor exceeds that deadline, there is a penalty amount to be paid in the form of reduction in amount you owe to the contractor; $100 per day can be used.  Others don't use this practice at all.  But time will cost you - you will pay more in holding costs and lose rent for every day that is spent (and if not a rental, you might lose buyers due to not being ready for sale).  Figure out what it costs you per day, and use that as a minimum for the penalty amount.

Shannon X. · Answer

Bill Gulley What do you mean by penalty? could you list some examples please.

Thanks

Bill Gulley · Answer

Quarterly payments??? Every three months? That contractor will likely be out of business with collections like that....LOL

Depends on the scope of the project as to how they will be paid, some want weekly draws to pay labor, at least monthly on larger jobs. Just make sure you don't pay for more than for what was actually done, materials and labor and hold out as much as you can to be paid upon completion.

Find out what jobs they did and ask about them. Ensure they have insurance and workmen's comp is covered. If it's a bigger job ask for an itemized estimate, and have a penalty for not completing on time except for weather conditions. (you can get rained out for a week!)

Much more, but some basics.....

Philip Accardo · Answer

thanks!

How do you pay your rehab contractor?

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