Do you have a contract for your contractor?
Real Estate Investor · Jersey City, NJ · Member since 2008 · 203 posts · 1 vote
Wondering is anyone uses their own contracts (as opposed to a contractors contract) when hiring work out?
If so, what type of information is in it?
Thanks,
Fred
I use several contracts/forms for all my projects:
- W9: The first time I work with any contractor, they sign a W9 form (IRS form). This ensures that I don't have to pay taxes on the money I pay them.
- Independent Contractor Agreement: This lays out the schedule, terms, insurance requirements, responsibilities, etc. Most importantly, it establishes the fact that the contractor is *NOT* an employee, hence relinquishing you of the responsibility of managing the person as an employee and paying associated taxes.
- Scope of Work: This lays out specifically what work is to be done, in as much detail as possible
- Materials List: This lists the materials that should be used for all aspects of the job, including where they should be purchased, SKU numbers, and anticipated pricing (if the prices are off, call me to figure out what to do)
- Payment Schedule: This lays out when the contractor will get paid, generally using 2-5 draws (depends on scope of project and schedule)
I use several contracts/forms for all my projects:
- W9: The first time I work with any contractor, they sign a W9 form (IRS form). This ensures that I don't have to pay taxes on the money I pay them.
- Independent Contractor Agreement: This lays out the schedule, terms, insurance requirements, responsibilities, etc. Most importantly, it establishes the fact that the contractor is *NOT* an employee, hence relinquishing you of the responsibility of managing the person as an employee and paying associated taxes.
- Scope of Work: This lays out specifically what work is to be done, in as much detail as possible
- Materials List: This lists the materials that should be used for all aspects of the job, including where they should be purchased, SKU numbers, and anticipated pricing (if the prices are off, call me to figure out what to do)
- Payment Schedule: This lays out when the contractor will get paid, generally using 2-5 draws (depends on scope of project and schedule)
If you’re in the process of overseeing your first property renovation you’re in for a real treat as you get a crash course in working with contractors. While most are professionals who are dedicated to doing the best possible job for you, there are some prima donnas out there waiting to take advantage of your naiveté. Here are some steps you can take before you hire a contractor to ensure that your first contractor experience is a positive one.
Have prospective contractors fill out an application – It may seem silly, but by having a prospective contractor take the extra step of getting an application and filling it out, you can assess how serious that contractor is in working for you. If they won’t take the time to fill out an application in order to win a bid, what makes you think they’ll take the time to follow up with more important details – like showing up at the worksite?
Get references and check them – Your contractor will probably offer to provide you with references when they bid on your rehab project. Most will have good references, but you need to know as much as possible about a contractor’s work ethic before you sign on the dotted line and commit to spending several thousand dollars on a project. When you call their references ask specific, pointed questions about the quality of their work. If they have a tendency to not show up for work, or worse – disappear in the afternoon, it can significantly impact the profitability of your project.
Get all bids in writing – I know you’d like to be able to do business with someone based on a handshake and a smile, but the reality is that memories fade and a good faith agreement can be misinterpreted by you or the contractor. A contractor is only human, and by taking the time to get all agreements in writing, you’ll have clarity in the event that a disagreement crops up later.
Work with licensed and insured contractors – Licenses and insurance are common business expenses, but too many contractors are running around without the necessary licenses and insurance. You may be provided with license numbers and promises that they have insurance, but I highly recommend that you take what you’re told with a grain of salt. As the owner of a property, you are ultimately responsible in the event that there is an accident or a fire. Make sure that their insurance information is accurate – and that their coverage is in force before letting them begin a job.
Visit one of their worksites – Wouldn’t it be nice if you could somehow magically know ahead of time what the quality of your contractor’s work will be? Fortunately, by visiting one of their worksites you can gauge the quality of their work and see how vigilant they are about keeping work areas clean. Before visiting one of their worksites, make sure you have permission to go. Find out if they’re the general contractor on the job or just a sub-contractor.
Don’t pay them until the job is done – One of the biggest perils you can face as a new real estate investor is that your contractor doesn’t cause dramatic delays by failing to show up for work when they say they will. Perhaps as problematic is the contractor that will prematurely suck the funds out of a project and then not want to complete the work. There’s really only one way to prevent this from happening. Don’t release payment until the job is done. You may be hit by pleas to release payment early, but if you do there’s a strong likelihood that your contractor won’t show up to finish your project. Imagine that your contractor has already been paid for finishing your job. Then after giving you a hard-luck story, you can’t depend upon him to return to finish your job. This could put you in the position of having to pay twice for the same job or having to postpone the process of renting the property. Obviously, you’ll need to release some money for materials or your project probably won’t get started. Just be careful that you control the purse strings carefully.
I don’t want to give you the impression that most contractors are lazy or unwilling to live up to their agreements, because that’s simply not true. The vast majority of contractors are as honest as the day is long, but by clearly defining expectations you can stop problems before they come up. By doing this, you can ensure that your interactions with your contractor is a positive one, and that you’re just as happy when you part ways as you were when he first waltzed into your life.
I use contracts, not on every job, but I should. It should include what needs to be done, when they get paid, what happens if you fire them before finishing, that they will pay taxes, get permits, not charge you for work unless agreed in writing, ect ..
Contracts are of vital importance and should never be skipped.
In some states, the property itself is financially liable and not the owner or previous owner. Case in point: (TX)Contractor/builder is hired to build a single family residence. Contractor receives the pre-determined draws and completes the work. Contractor receives final check after completion. Contractor fails to pay some of the service providers or subcontractors. Property is sold to another party. Subcontractor files a lein on property for non-payment of contractor invoice. New owner now has a lein on property and can not sell it without paying the lein off, even though the debt was not their responsibility.
Original owner/developer should have had language in the contract that states that all subcontractors invoices must be paid in full and proff of which to be presented prior to receiving payment.
This is one of MANY problems that can occur without the proper contracts and contingencies.
Contracts are extremely important when it comes to contractors. In my contracts I have the following main points:
• Scope of the work to be done
• Agreed upon price and draw schedule
• Timeline
• Clean up after yourself clause
• Not responsible for subs
• Insurance
I believe the scope of the work, price, and timeline are the most important to getting the job done. If you do not have anything in writing, it seems that a contractor will forget the first three items quickly and your will be over budget and will not be meeting your deadline. One way I make sure my deadlines get met is by applying a 10% penalty for not finishing the project on time. The contractor will have to deduct a 10% per day until the job is complete. The only time, I have not had my project completed on time is when I did not have this penalty in my contract. However, the scope of work , price, and timeline may change during a project but always have a change work order request to stay on track.
You must state to clean up after yourself because contractors seem to drop caulk, paint, and other materials all over the place. Not to mention, they will leave their cigarette butts, lunch, drinks thrown through out a house. The trick to making the accountable for their mess is to have in the clause they will not be paid until the cleanup crew if finished. If the cleanup crew has to spend extra time scrubbing the paint off the floor, you have stated in the contract that the contractor will be deducted this charge from their final payment.
To help keep from a sub contractor putting a mechanics lean on a property; you must state you are not responsible for the subs or payment to the subs. I have seen in experience a contractor run out of money and then the subs are filing mechanics lean on property. Also, you will want to state that you are not liable for anyone getting hurt at your property. However, you will have to check in your state to see what insurance is required.
Just remember no job is too small for a contract and to get the job finished timely and on budget you must have a contract.
You can state this all you want in as many contracts as you want, but the fact of the matter is, if your contractors don't have workman's comp insurance, YOU will risk having to pay.
Don't just state in the contract that you aren't responsible or that your contractors need insurance -- actually require your contractors to provide you with a copy of their workman's comp and general liability insurance. Better yet, have them have their insurance company fax it to you.
Could those of you more experienced post your contracts and other forms you used for rehabbing? I believe it would be a great help for those of us just starting to get an idea of whats out there so we have something to take to our attorneys :)
Thanks in advance!!!!
Bump
Anyone have anything to share?
Sorry, I was mesmerized by the image in your avatar. Have you spoken to someone about your fixation yet?
Just kidding.
Seems to me there was a lot of great advice here already. Now how about hiring your real estate local lawyer to come up with a contract that can help you.
FYI as a contractor myself I never do a job without a payment schedule. Usually we just break the job down into weekly payments since most folks are not qualified to understand job stages. We give our customer weekly updates and answer the phones when they call. This is usually the biggest complaint against a contractor and easy to remedy.
All the points made about insurance esp workers comp and health insurance are very meaningful as well.
A great contractor will be very interested in developing a great relationship with another business person. Go for it.
You can find great contractors via NARI or Remodelers Advantage, 2 peer groups that hold the members to very high standards.
Best
Diane Menke
I have a meeting with a lawyer later this week, I had wanted to see what others had in their contracts so that when I received whatever he draws up for me I have a baseline to compare it against. Maybe there is something he forgot or didn't know about, or maybe there is something in someone elses that I like and would want to include in mine....
Thanks for the contractor references I will definitely use that.
-Bob