6 Rules for Managing Your Contractors
In my opinion, the most difficult aspect of being a first-time house flipper is managing your contractors. Perhaps it’s because I came into this business with no construction experience, or perhaps I’m just not a terrific “people person,” but regardless, on my early flips, ensuring that my contractors performed to expectation was by-far the most frustrating part of the job.
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Luckily, since I started this business, I have built up a very reliable, and very trustworthy crew; but every once in a while, I still need to hire contractors who I've never worked with before, and therefore run the risk of having them cause difficulties on my projects. Remember, even the most experienced rehabbers with the best crews are going to need rules in place to ensure that their contractor experiences are good ones, and that a bad contractor doesn't risk an entire project.
Given that, I wanted to take a few minutes to summarize some of the methods I have put in place to ensure that I only hire and keep the best, brightest, and most motivated contractors, and to ensure that my contractors stay motivated throughout the project(s).
Here are My 6 Rules for Managing Your Contractors
1. Cover yourself with contracts and paperwork.
This is so important that I have a separate article on this topic…check it out…
2. Always check references before you hire a contractor.
Many rehabbers will ask contractors for references, but how many will actually check out those references before hiring the contractor? You don’t necessarily need to interview past clients of the contractor, but at least take a look at the work that was done. For example, if your contractor is a painter or a roofer, it should be fairly easy to obtain a list of addresses the the contractor worked on, and then just drive by the exterior of the house to see the quality of work.
Perhaps the contractor has work currently going on (if he doesn’t, why not?!?!?). Will he allow you to stop by and check out the crew, check out the progress, evaluate the safety precautions the crew is taking, etc?
Worst case, if you have any doubts, you should call previous clients of the contractor. Ask them pointed questions about how well the contractor maintained the schedule, the budget and the overall quality of the work. Lastly, ask the client if s/he would hire the contractor again…the answer to this question will tell you everything you need to know.
3. Never pay ahead of the work that’s been completed.
Many contractors will tell you that they can’t start on your project until you pay them some amount of the total cost upfront. Then, they’ll have you continually pay them throughout the project to ensure that you’ve always paid more than the work that has been completed.
This is backwards! If your contractors ever walk off the job or fail to show up for work, you’ve paid more than the work that’s been completed, and YOU LOSE MONEY. Instead, your contractors should be working ahead of your payments, not the other way around. This way, if the contractor chooses to not show up, he’s done at least some of the work for free and HE LOSES MONEY.
If the contractor insists on not taking the risk of you not paying, then offer to pay many installments. For example, in the most extreme case, you can pay the contractor at the end of every day for the work that was completed that day. This ensures that the contractor never has to worry about losing more than a day’s pay to an unscrupulous investor who doesn’t pay, and you can ensure that if the contractor ever doesn’t show up, you’re not out any money.
Certainly, there will be cases where the materials are a considerable portion of the total contractor cost (such as getting a roof replaced or sheet-rocking an entire house), in which the contractor will rightly want some payment upfront to ensure he not buying a bunch of materials he never gets paid for. In these cases, you can agree to pay for the materials upfront, but also ensure that the contractor delivers the materials to the property the same day. Again, this will protect both sides.
4. Get a schedule from your contractor before the work starts.
Whether you write the schedule or your contractor writes the schedule, it’s important to ensure that there is an agreed-upon schedule for any project, no matter how small the project might be. There are a couple reasons for this:
- It keeps the contractor accountable for getting the finished product completed by the finish date. If you have no idea what 50% looks like, how do you know if the contractor has completed 50% of the project by half-way through the schedule.
- It ensures that you don’t pay ahead of the work completed. Again, if you don’t have a schedule, how do you know if it’s time to be paying the 50% completed installment?
- It helps ensure that other contractors stay on schedule and that your project stays on schedule. If your sheetrock guy decides that next-week is better for him to finish than this week, how does that impact your overall schedule? Is this going to impact your painter, your flooring guy, your trim guy, etc? It will likely impact the entire project!
5. Make sure you visit the job site at least a couple times a day, and make sure you “drop in” by surprise.
Best case, you or someone on your management team will be at the property any time a contractor is working there. Unfortunately, this isn’t always realistic, and if you have a trusted crew that you’ve worked with in the past, this may not even be necessary. But, if you’re not going to be at the property full-time, make sure you at least check in a couple times a day — on surprise visits.
Too many investors will let their contractors know exactly when they’ll be at the property. For example, they’ll meet the cabinet guy at 9am to let him in the house, and then say, “I’ll be back at 2pm to check up and see if you need anything.” While this won’t matter with good contractors, if you have a bad one, you’ve now given him the information he needs to slack off for the next couple hours or go finish up another job down the street.
I know this sounds far-fetched, but there are LOTS of contractors who overbook their schedules, and will use any opportunity they can to make it seem like they’re in two places at once. The really bad ones will actually be making extra money by doing this, not just screwing up schedules. You want to be sure that your contractors are working when you’re not around, and that they’re working on YOUR project.
To avoid problems, don’t tell your contractors when you’ll be visiting the site, and don’t be consistent. For example, if you always stop by at lunch and after work, take a late lunch on occasion to keep your contractors on their toes. Or send a friend over to check on progress every once in a while if you can’t do it yourself.
6. At the first sign of trouble, don’t hesitate to get rid of a contractor.
While it may be a pain in the ass to have to find a replacement mid-project, it’s much worse to have to deal with a bad contractor for any amount of time.
The biggest mistake I see rehabbers make is not getting rid of bad contractors quickly enough. They will rationalize that the contractor will get better (trust me, contractors don’t change), or that the project is almost over and they’ll just not hire the contractor in the future.
In most cases, if the contractor is not getting the job done early-on in the project, things will just get worse (not better!) as the project wears on. Plus, a bad contractor will not only hurt his part of the project, but will also affect the morale of the rest of the crew, who are just trying to finish up so they can move onto the next job.
Let me leave it at this: If you have any doubts about a contractor, go find another one. There are plenty of great contractors out there, and it’s not worth your frustrations not to have them.