School of Hard Knocks: Systems for Contractors

Roofing. What is it about roofing that attracts the most unreliable, unscrupulous, and shady guys out there. Just a small word of advice, if you find a reliable and affordable roofer HOLD ON TO THEM FOR DEAR LIFE. Scratch that if you find any contractor that is reliable and won't rip you off in any trade, hold on to them, pay them on time, treat them right, and know that you should feel thankful for finding one of the good guys. Day one I kind of just winged it with contractors, came incredibly close to being completely scammed out of a good bit of money (by my friends referenced above), and then wised up a little bit.

I wouldn’t say that I am good at finding contractors now, but I would say that I at least protect myself somewhat through my systems. I wanted to share a little bit about what I do systems wise to protect myself and see if anyone had any comments or things that they do to work with contractors. I won't take the credit for any of these. I've learned them all from those that came before me through the BP podcast, PREIA (Thanks @Josh Caldwell for organizing and always having great speakers), great seminars, other investors, and many many other sources. I've learned some of this from so many people that I don't even know where each piece came from!

 Today I’m referring to the parts that come after you’ve selected people to come quote your job. The best people to come look come from trusted recommendations of other investors in your area. When you find a good contractor ask them who they would use to work on their pluming, electrical, etc. Good contractors would only hire other good contractors most of the time (Thanks Robyn Thompson). Consider using sites like thumbtack and home advisor if you don’t have personal recommendations. A lot of those site verify their contractors and investigate claims made against them. Last but not least just look around your neighborhood. If you see the same guys working on a lot of houses in your area at least you know they show up and do the job you ask them to do! Also, ask the owners of that building if they would hire the crew again. 

System One: Pre-Contract

Always meet the contractor in person and go over this information.

• Number One: Determine if the job you are hiring someone for requires a license and then find out if the person has an active license.
• Number Two: Get references and ask for their three most recent jobs. Consider going to talk to the homeowner or business at that job site.
• Number Three: Acquire their employer tax ID and then verify that the company is legitimate.
• Number Four: Ask for verification of insurance and make sure that they have workers compensation and what not taken care of.
• Number Five: Scour the internet for reviews of the company and any evidence of scams or ripoffs in your area related to the company or the company owners.
• Number Six: When they give you their phone number and company name you should find the company office phone number and then call in to that line and ask for the person. There are people out there who will pretend to be from legitimate companies and scam you.

System Two: Contract

Your contract should be reviewed by a lawyer in your state to make sure that it is enforceable. A good start is the example from J Scott on this website. Use that as a start though and make sure that what you turn it into is reviewed. At the very least get something from a colleague that has stood up in the state. Ensure that your contact has a release of liability for the injury of anyone that will be working on the job site related to the contractor. I’m not a contract lawyer so I won’t give you too much advice on what to put in/leave out of your contracts. My information below is simply things that I like to have in writing.

• Number One: Determine the scope of the job. You need to establish exactly what the work done on the interior and exterior will be. This scope of work should be signed by the contractor and you.
• Number Two: Get pictures documenting the before of everything within scope. Include them as attachments to your scope of work.
• Number Three: Document everything that you verified during the pre-contract stage on your contract. Employer Tax ID, company information, etc.
• Number Four: Determine price schedule: I like to only pay after completion of job, but if they absolutely insist on prepayment and they seem legitimate/reliable I do the following general payment structure for a simple job.
  
  • Payment One: 30% of cost paid upfront
  • Payment Two: 20% After the completion of the first days work and delivery of materials.
  • Payment Three: 50% after completion of job and the steps in system three
  • Under no circumstances should you pay all up front or buy materials. If you purchase materials the IRS can deem you an employer. If someone gets hurt on the job the lawyer can use that information to go after you.
• For more complicated jobs my payment structure will be based on actionable steps. An example would be the basic finishing of an unfinished room.
  
  • Payment One: 20% of cost upfront
  • Payment Two: 10% after hanging of drywall on ceiling and walls
  • Payment Three: 10% after joint compound is finished and cleanup is performed.
  • Payment Four: 10% after painting is completed
  • Payment Five: 10% after trim completed and painted
  • Payment Six: 10% after flooring installed
  • Payment Seven: 10% after punch list items completed
  • Payment Eights: 20% after cleanup is completed
• Number Five: Get named as coinsured on insurance policy
• Number Six: Confirm that they will be pulling any appropriate permits and that they will be liable is correct permits are not obtained.

System Three: Completion of Job and Payment

Number One: Always Always Always do a final walk through and confirm that all work from the scope of work was completed. Take pictures and document everything.

Number Two: Generate a punch list of things that need to be redone or repaired/touched up.

Number Three: Only pay once the job is done completely to satisfaction.

So far this is as developed as my systems are. Feel free to ask questions and provide any best practices that you have. I’m still learning how to find good ones so if you have any suggestions they would be most appreciated! I'm no the most experienced guy in the world (far from it) so any advice anyone has would be more than welcome!