Issues That Arise When Working With Contractors And Ways To Reduce Them.
One of the most important individuals on your Real Estate investing team will be your General Contractor and Sub Contractors. These businesses/ individuals will take part in the most important aspect of your investment, the rehab process. When taking on a rehab project no matter how big or small, you have to find contractors who are experienced working with investors, understand there is a schedule, have fair pricing, are efficient and do great work. As you can see this is a lot to ask out of a group of people but this is there job. Your job is to find contractors who can fit the mold and when do you find contractors who fit these characteristics be sure to take care of them as they may make or break the sale of your property. This process is very difficult and will most likely involve some form of trial and error. During this process you will come across several issues that affect your project.
Issues From Working With Contractors
Each contractor you encounter will be different. Some will have been in the industry for years and some just starting out. Some will have a large crew and others a few guys. Some will have never worked with investors and some thats all they do. This is where the trial and error process comes to life and where you will learn what works and what doesnt. Here are some common pitfalls to avoid in your first couple projects working with contractors:
The billing process: Before your contractors get on site and begin there work be sure that you have agreed upon a method of how they will bill you, what days and what method of payment. When working with sub contractors who may be taking on a small portion of the job such as refinishing hardwood floors, you will usually pay for the material up front (sometimes they will want 50% up front) and pay for the rest of the work upon completion. These contractors will be easy to handle, just make sure everything is laid out in the contract that you have them sign before work begins. The billing process that you need to have laid out and secure is when you are dealing with a general contractor who will be taking on 40-70% of the work or handling the majortity of the rehab. Here you want to have a weekly or biweekly payment plan consisting of an invoice delivered on Monday and payment to the contractor on Wednesday. What I personally like to do is have each division of work in there scope laid out on an invoice and have the contractor bill the percent complete after each week. This ensures that the contractor is billing off of the total contract and there are no mistakes along the way. Any Change Orders will be added to your original total contract and billed for same as the other line items on the invoice (percentage complete). Just make sure that you and your contractor are on the same page to make this aspect of the job run smoothly.
Scope of Work: The scope of work that is developed for the project will be the single most important document of the rehab process. Your project scope of work will give a detailed look into exactly what the rehab will entail and what contractors will be doing specific tasks. This will eliminate confusion between you (the owner) and the contractors in regards to what was agreed upon for the rehab. Make sure that you have each contractors scope of work laid out in there contract when you have them sign. Have your general contractor help you put together this scope of work so you two are on the same page with the work that will be going on. If you are looking for an example of a detailed scope of work just send me an email and I can send you an example of what it should look like.
Schedule: The schedule is also an important piece of the rehab process because your schedule will lay out the timeline when you expect certain tasks to be complete. This will give you as the owner something to hold your contractors accountable to and will also allow you to schedule your sub contractors based on the projects progression. This is another area where you should work with your general contractor to establish a schedule so your on the same page when the project should be completed and also take into consideration what order your contractor likes to complete his work. The more communication you and your general contractor have the more questions will be answered and the smoother the project will run.
Materials: The purchase and payment of materials is always a question that will come up when dealing with contractors. If this is your first rehab you may want your contractors to purchase all materials since they will have a better idea of what they need. The way I handle the purchase of materials is by figuring out what the big priced items will be on the job. For example, the countertops, cabinents, flooring, garage doors, backsplash, appliances, some exterior doors, some interior doors, light fixtures... alot of the finishes that will go into your project I will evaluate and usually work with my contractor to purchase myself. Any of the "working" material as I like to call it such as nails, screws, electrical supplies, plumbing supples etc.. I will have my contractor purchase. With these items you will usually be charged a 10% mark up, but thats the cost of doing business.
Conclucion: These are just a fews areas that you may find trouble with when you are working with contractors. If you take care of these tasks and set up certain systems to have these aspects of the job run as they should, you will be fine. Creating these systems will take time, but after you find out what works and what doesnt, who your contractors will be on a regular basis and what works best for them you should be able to reduce your risk and come up with more accurate estimates and reduce your costs.
Enjoy your New Years and Be Safe!