Over my years, I have seen many times when someone will hire a contractor to do a job where the final scope looks something like this:
- Exterior (repair fence, replace shutters, repair rot, landscaping): $2,400
- Interior (paint, replace windows, replace damaged doors, etc.): $4,300
- Kitchen (cabinets, appliances, countertop, flooring): $5,900
- Bathroom (toilet, shower surround, vanity, toilet paper holder, door stop, towel rod, soap holder): $5,200
- Bedrooms (build closet in left bed, flooring, etc.): $3,500
- Total Price: $22,400
And that’s about it. Forget the numbers and items on that above “scope,” as they’re just there as an example. Generally, my experience with such bids is that a lot of knick knack work will be left undone. There will generally be confusion as to what was agreed to, particularly in terms of what type of materials are to be used, the smaller items, and sometimes even the location. A friend of mine hired one contractor and told him to put the laundry hookups on the first floor, but he instead put them in the basement despite the verbal agreement. Unfortunately, it wasn’t in the scope, so there wasn’t much that could be done after the fact except argue about it.
Furthermore, costs can be hidden in those paragraphs of things they will do. If you’ll notice above, I put a lot of stuff under the “bathroom” category, but most of them were petty items (towel rod, toilet paper holder, door stop, soap holder). Unless you are putting in a diamond-encrusted toilet or a solid gold shower surround, there is no way that should cost $5,200. But it’s harder to spot these sorts of things when a contractor is quoting multiple items at a time.
This is why demanding individual line items is so important.
- It’s much easier to spot things that are overpriced. You can also bid things you are on the fence about and see whether the price makes it worth it to do or not.
- It’s easier to compare one contractor’s bid to another since you know they are bidding the same thing.
- It reduces miscommunications, and you can make sure the contractor is bidding all of the work you want done.
So how do you put together a scope of work? We’ll start with your first walk through, before you get the property under contract.
Related: How to Quickly Estimate a Rehab: 13 Items to Note on a Property’s Interior
For this, I highly recommend J. Scott’s book The Book on Estimating Rehab Costs. He lays out 25 different categories that will induce expenses. I added a few (for example, I separated basement and foundation) to make my initial estimate. The items are as follows:
- Ext. Paint
- Septic System
- Interior Paint
- Flooring (HW/Carpet)
- Flooring (Vinyl/Tile)
I put together a one-page form that allows me to quickly estimate the rehab costs. First, I note the basics about the house (i.e. the ARV, asking price, beds, baths, garage, neighborhood quality, etc.) and then put together an estimate on each of these items. Then I add in a little for extra knick knacks, a sewer line contingency (if the house is older), my estimated holding costs, and then a general project contingency (usually 20 percent). Then I add them up for my total estimate. Here is what the estimate sheet looks like:
So, for example, if all the line items added to $20,000, the final part of the scope would look like this:
- Rehab Estimate: $20,000
- Knick Knacks: $1,000
- Sewer Line Contingency: $500
- Holding Costs: $2,500
- Project Contingency (20% of rehab estimate): $4,000
- Total Rehab Estimate: $28,000
Of course, you might be better than me at estimating up front and not need to add the contingency. From experience, I’ve found that unforeseen items and things I missed usually add up to about that, so this is what works for me. You will need to customize this somewhat.
As far as how to estimate expenses, it depends on what materials you are using, what quality contractor you are using, and sometimes, where you live. I recommend analyzing the quotes you’ve gotten from contractors, asking contractors and other real estate investors in your area, and analyzing the prices of various things where you live. This is something you will definitely want to learn.
That being said, by being able to put this estimate together quickly and on one sheet, you can make your offers with confidence that you won’t rehab out all of your equity. But this alone isn’t something you can send to a contractor for a bid. For that, we need to put together a scope of work.
Scope of Work
With scopes of work, you want to catch every little item. For this reason, you really want to make sure the utilities are on. Sometimes that will require doing work up front, and it’s usually better to get that done and then do the scope of work afterwards.
Related: How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps
We have a large checklist that’s six pages long and goes through each room in the house to mark off and make notes about each item in each room. Yes, this is a tedious process, but you want to be thorough up front to avoid headaches on the back end. The front page of our scope of work template looks like this:
I’ve known people who just bring in a notepad and start making notes. But I find the checklist to be more helpful, as I’m less likely to forget anything. (On an aside, this is true for almost everything; for more, read The Checklist Manifesto: How to Get Things Right.) As you can see, on the right, there is a space for extra items that aren’t listed in the checklist. Your scope of work system doesn’t need to look like mine, but it should be very thorough and detailed. Don’t rush through this process. It takes us between 30 minutes to as much as two hours to fill one of these out depending on the size of the apartment unit or house and how much needs to be done.
We then transcribe this into a scope of work template. It would be nice to bypass this phase, and if you can write up a scope with an iPad on site, more power to you. But I type slowly on iPads, and it’s too hard to get everything in the right order, so we use a two-step process. The final product looks like this:
We separate each item out into four sections:
- Pre-Construction (This means things like fixing the electrical so the power can be turned on, which is usually done before the scope is put together.)
- Vendor Items (This includes anything we don’t have our main contractor or construction crew do. It might include things like painting, flooring, appliances, foundation repair, tree trimming, etc. If your main contractor is doing everything, this list is unnecessary.)
- Punchout (These are the last items that need to be done after the painting and flooring. It includes things like outlet covers, door stops, installing the appliances, cleaning the carpets, and general cleaning).
We use a program called Smartsheet and after the scope is done, we send it out to any contractor that is going to be bidding the project. We also create a budget up front to make sure the quotes are in line with what we are thinking. (This is also good practice when it comes to determining how much rehabs will cost.) We also demand they put the bid into that template. Early on, it may be hard to demand this of a contractor you’ve just met, but I would certainly request it. It is much easier to compare different quotes if they are on the same template. The vast majority of contractors we’ve met have had no problem with doing this.
After a project is accepted, we also ask contractors to put any add-on requests at the bottom of the page.
Regardless of whether you want to use a system like ours or one quite different for putting together scopes of work, it is very important to be thorough and consistent about it. A messy scope of work will lead to a messy project. And a messy budget will lead to a blown budget. As Abraham Lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” Do the leg work up front and the project will go smoothly more often than not.
How do you put together your scope of work?
Let me know with a comment!