Business Management

Construction Management 101: The Real Estate Investor’s Guide to Overseeing Rehabs

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Have you ever exceeded budget, run behind on schedule, or disputed with your contractors while constructing or renovating your building? If so, you’re not alone…

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Construction is very difficult, but here are some of the things that you can do to manage your contractors more effectively to avoid cost overrun, project delay, and many other issues.

1. Hiring a Contractor

Referral is one of the best ways to find a reliable contractor; however, you should still do your due diligence on the contractor’s reputation and experience before hiring him.

Start by asking the contractor for a list of their recent projects. Hopefully he has completed projects like yours in terms of size and project type.

For example, you wouldn't want a TI contractor to do a ground-up construction or a small contractor to work on a multi-million dollar project.

Call owners who have used this contractor before. Hopefully you get some positive feedback. You can also get a feel of the quality of work by visiting one of their current projects.

If you're investing in a hot market, make sure that the contractor doesn't have too much work on their plate. It isn't unusual nowadays for a contractor to win too many jobs and become overwhelmed with work.

For example, unaware of how many projects a paving contractor had won, we hired them for our ground-up development. A year later, when we were starting to install the pavers, the contractor didn't have enough manpower for our job anymore.

It was a huge headache! I will explain how to resolve this issue in section four below.

Related: 7-Step Process for Finding Great Contractors for Home Renovations

2. Comparing Contractor’s Bids

When asking contractors to bid on your project, the best practice is to send them the same scope of work specifying the work and materials. This way, your bids will be apples to apples—not based on the contractors’ speculation.

For example, if you want to do engineered wood flooring with glue down application, then put that in the scope so the contractor doesn't give you a quote for floating floor or something different.

If a bid is significantly lower than the others, don’t jump the gun and hire that contractor right away. Give him a call to go over the scope. Then you don’t have to argue with them in the future over changed orders, which will cost you additional money and may even delay the schedule.

If you already went over the scope with them and everything checks out, then consider hiring the person. But make sure you set aside a contingency just in case. The reserves will come in handy if the contractor runs out of money later on to pay its suppliers or subcontractors.

Unless it’s a small scope, I recommend getting three different bids.

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3. Negotiating Costs

Negotiation is not easy, especially when the contractor is more knowledgeable than you. They are all experts of their own trades after all.

Your best bet is to ask the contractor to run you through the costs by breaking down and justifying the numbers.

Let's look at this scenario: A contractor gives you a change order for extra work that they have completed without your request.

In this case, the contractor is technically at fault for performing extra work without authorization, but you should treat the contractor fairly by negotiating for a reasonable price. The last thing you want during construction is ruining your relationship with the contractor.

To negotiate for a reasonable price, ask the contractor for the time and material (T&M) tickets, which are used to track the daily labor and material costs to complete the extra work. If there are no T&M tickets, then walk the job with the contractor to get a good understanding of the additional work. Ask him to justify the hours and cost.

Related: Flipping Houses—The Ultimate Step by Step Guide

4. Document Schedule Delays

Let’s say one of the contractors is delaying your project, now what do you do?

For example, the paving contractor I mentioned earlier didn't provide enough manpower to our project. They sent three workers to our job site when we needed at least 10. I emailed and called the contractor several times in the first week, but they showed little to no improvement.

At this point, you want to immediately put him on notice. Include these important elements when doing so:

  1. Attach your previous emails to show that this isn’t the first time you’ve requested additional manpower.
  2. Give the contractor a target date or 72 hours. If you are emailing him on a Monday, then ask him to complete a certain amount of progress that you deem satisfactory by Thursday.
  3. Attach daily progress photos that you’ve taken.

After you've put your contractor on notice, if they still don't perform by the target date, then you can now formally send them a delay notice. In the delay notice to the contractor, you can state that you'll either supplement their crew and back charge him for the cost, or you'll take away their scope completely and give it to another contractor.

As you can see, the whole process takes about a week and a half before you can start taking the scope away from the contractor. Document the contractor's progress diligently. However, don’t take away their scope too quickly, because if you end up in court for a dispute, you want to show that you've given the contractor sufficient time to perform.

I also recommend saving all the emails and photos in a folder, so they are easily accessible when you do get into a lawsuit.

5. Back Charge a Contractor

Besides schedule delays, there are couple other issues that you may want to back charge a contractor for:

  1. Contractor A damaged Contractor B's work, and you're about to ask Contractor B to fix the damage.
  2. The contractor made a mess and didn't clean up, and you're about to hire a cleanup crew.
  3. Contractor B is ready to start their scope, but Contractor A didn't finish their work properly.

For the scenarios above, you should send an email out, stating that the contractor has 24 hours to correct their work. Follow the email with a phone call. Note that 24 hours is not a lot of time to react, so give the contractor at least 48 if the work is not critical to your schedule.

Lastly, make sure to take photos for documentation purposes.

6. Contract Language

In order to take actions that I mentioned in sections four and five, you need to include in your contract language your rights as the owner to take these actions after putting the contractor on notice.

BiggerPockets has contract templates that you can use, and you can revise the language based on your needs. AIA is also a good resource for contract templates, but they do cost quite a bit.

Another important item to include in your contract is the hourly labor rate, which will come in handy when you're negotiating costs with your contractor.

Do you have additional advice for investors about dealing with contractors? 

Add it below in the comment section!

 

Jay, a civil engineering graduate from UCLA, is an active investor, developer, and writer. He is the President and Founder of Hestia Capital, which syndicates multifamily properties with value-add opportunities in Phoenix and Tucson. He is also working at CIM Group full-time as an Assistant Construction Manager/Analyst on the development team. His responsibilities include entitlements, cost management, and construction management for ground-up projects. Jay is also currently one of the leaders of a real estate investment group called the MultifamilyMasters.com, which grew to 1,000+ members within a year. Before working at CIM, Jay worked for Pankow Builders on large construction projects, such as the R3 Metropolis in DTLA and the EDITION Hotel in West Hollywood. Jay aspires to develop coliving projects in the future. When he has free time, he travels, plays basketball, snowboards, and golfs.

    Matthew Kale Rental Property Investor from Rapid City, SD
    Replied 5 months ago
    I learned all of these lessons the hard way when I did my first rehab last winter. Ended up total nightmare!
    Jay Chang Developer from Los Angeles, CA
    Replied 5 months ago
    Yes construction can be hard to manage, but if done properly, it can be a pleasant experience! Especially when it’s on-time and under budget. Feel free to reach out to me if you’ve any questions!
    Dani Sung Rental Property Investor from San Diego, CA
    Replied 5 months ago
    This is very insightful and helpful! Thank you for the information! I just encountered all of those problems in a multi family rehab I’m doing, soooo stressful. The contractor threatened to file a mechanic’s lien on the house, have you had experience with that? do they have grounds if he didn’t finish the contracted work, and I had already given him extensions? Thanks.
    Jay Chang Developer from Los Angeles, CA
    Replied 5 months ago
    Hey Dani, I am glad you found this article helpful, and sorry to hear about what you are going through. I need a bit more information on what happened. A lawsuit gets very complicated and costly, so I suggest you to avoid it at all costs. Maybe I can give you some guidance. Feel free to message me personally.