Saint Petersburg, FL · Member since 2015 · 4 posts · 0 votes
HI all,
This is my first post for info. So I am excited to read the great responses that I know I will be receiving. Let's get started:
My business involves buying cheaper houses that need a lot of work and rehabbing them to specific standards to create a cash flowing rental property. These are not high end, and the margins are pretty tight all the way around. I have just come across a great opportunity which will force me to ramp up significantly in all aspects of my business. Starting with buying more properties then rehabbing etc. I am excited to take this opportunity and run with it.
My problem is for me to ramp up to scale, I will definitely need a contractor who can handle the projects. My best friend is a newly licensed GC, here in Florida, and is running a successful business already. So it's not an issue of knowing someone. It's an issue of keeping his overhead costs low enough to work for both of us! He says that automatically 40% of every dollar he pays his guys goes to workman's comp. With that factored in to his bids, he puts himself out of the running. The thing is, other contractors can come in at the right prices, so why can't he? What are the other contractors doing to be able to come in at the right price? Is there a legitimate way for him to cut his costs?
I know that investors and contractors can have a great working relationship but I'm not doing one house with a 50K profit, at a time. I do more houses with a 10K profit. So rehab budget is significantly smaller per house. This is where we are having trouble trying to figure out the numbers... Anyone have any ideas?
If he's counting all labor as framing and has a bad experience rating, 40% isn't out of the question for WC rates. Bear in mind that rates vary state to state.
Most likely the other contractors you're talking to don't have insurance at all.
Your best friend could be paying too much in overhead or the other guys may have little or no overhead because they are not licensed. Had a guy once show me all this paperwork and it turns out he wasn't really licensed anyway and he was an alcoholic that didn't do any of the work he promised.
I am a licensed contractor in Michigan and even with comp ins...over head on high side is 25%....he is trying to make too much....or needs to find different guys....that amount of overhead is insane....or he figures he is a friend n can get more....he will figure out that it is better to make a lower profit per house and work with investors that will keep him busy and do 10 houses per year and make 10k per house is better long-term then making 25k on a house and not having steady work
I agree. 40% sounds ridiculous. However, I really don't think he would be BS'ing me. The 40% might actually include the other insurances and taxes. Need to clarify that for sure. However, from what I understand, workman's comp in Florida is expensive for newly licensed guys. It decreases over time with a strong safety record. When contract labor is mentioned, is that basically hiring a separate crew outside of your employees and not having them covered ?
If he's counting all labor as framing and has a bad experience rating, 40% isn't out of the question for WC rates. Bear in mind that rates vary state to state.
Most likely the other contractors you're talking to don't have insurance at all.
Wow, He is trying to take you to the cleaners I believe! Are you really friends? all joking aside, that is EXTREMELY high...I don't see how he would make much of a profit at 40% workmans comp. or have much of a business...
@Jarrid Dotterer, @Aaron McGinnis is probably close to what the real underlying issue is. There are 2 parts to work comp, the class of biz you are categorized in and your "Experience Modification Factor".
First, each state has different rates, but in general, a GC who does exterior work will be classified in the most hazardous class code, which is roofing. Roofing is typically $30 - $40 per $100 of payroll. If another contractor is just a siding contractor, that rate can be $7.50-$15.00 depending on the state.
Secondly, an Experience MOD will add a credit or debit to your rate. So if he is being penalized for bad experience with work comp losses, or is a new employer, the state can add a debit mod to his work comp rate which can be as much as 50%.
So, if your buddy has a $30 work comp rate and is being penalized 50%, that puts him at $45 per $100 for work comp. If a competing contractor has a work comp classification of $10, but has a credit mod of -25%, he is only quoting $7.50 per $100.
You buddy needs to get his work comp program under control as it sounds like he is paying higher hazard work comp rates for the type of biz he is bidding on.
I agree. 40% sounds ridiculous. However, I really don't think he would be BS'ing me. The 40% might actually include the other insurances and taxes. Need to clarify that for sure. However, from what I understand, workman's comp in Florida is expensive for newly licensed guys. It decreases over time with a strong safety record. When contract labor is mentioned, is that basically hiring a separate crew outside of your employees and not having them covered ?
It isn't ridiculous, try 100%, unbelievable? ask your insurance agent how much their contractor clients pay for roof contractors. Framing and carpentry are around the 30s as a trade, if he is having that as his primary trade, then that would easily work out at 40, you have to add employer share taxes roughly 8%. That's not even factoring out other insurances outside WC. The factor also in play is he hasn't been in business for 3 years so he doesn't have modifier/EMR factor, and he doesn't have $xx,xxx in premium for the last 3 years so he is a liability to the insurance company. On th issue of contract labor, that is still subject to WC, say I pay this guy $2000 labor only for a bathroom job, as a contractor, I still need to deduct him employee share, pay employer share taxes, and pay WC. If I decide to give him a 1099, he better be licensed, and have his WC and insurances in tact. Welcome to RE, BP and contracting world.
Work around? Yeah, declare all your workers as "officers" of your company. Highly unlikely that they will believe you, but legal. Make sure you cover the costs when they get an accident.
Likely some miscommunication here. 40% WC rates are for like roofers. I ran mostly heavy equipment operators, which are on the lower side, and they run about 10-12%. First he must have them categorized properly, as mentioned. But, the "payroll burden" will also have SS/MED of 7.65%, about 2% in unemployment taxes, etc. if he's new, his experience mod starts at 1.0, then goes up or down from there. Assuming he's not doing any roofing work, I'd guess his rate is 15-20%.
I just looked it up for FL; carpentry/framing 15.91%. carpentry/trim, interior 8.44%.
The reality is you're competing with others using unlicensed/uninsured "contractors".
Contract labor is when workers are hired as 1099 instead of W2 workers.
It is a slippery slope. If I hire subcontractors, they are true subcontractors. Some of my competition tells a worker they will pay $x/day and issue a 1099. I have heard the horror stories of the workers getting a surprise call about taxes owed. The IRS is cracking down on contract workers.
Regarding paying WC on contract workers-if I can show they carry their own WC, I do not have to pay WC on them. If I cannot provide proof of WC, my insurance company charges me.
Unfortunately there are a lot of people trying to be contractors, and for lack of better words, they are not running a business. My business is commercial and focused on hospitals, offices, and schools so I have to carry a lot of insurance and there are checks and balances to confirm my insurance.
In residential I think there are a lot of shortcuts. A typical residential customer does not really know what they are buying and that may get taken advantage of. To protect yourself as an investor, you need to get listed on your contractor's insurance. Ask for an ACORD form from your contractor before they start work. If the contractor does not know what that is, look for a different contractor.
I think you can not fix your friend's bussiness. You can not make his prices fit what you need. Perhaps what you want and the prices that will work for you are really not attainable.
See if you can get bids that work for you. If you can not do that you need to do buy different kinds of property. You can not make something work if no one is agreeing with you. Your friend can not do it at yor desired price. No one else can do it or will do it for you at your desired price,
price. There is your answer. It cannot be done. No one is willing to lose money to take your job so yo have to move elsewhere
Your buddy is probably not just referring to WC, but also his massive new truck and trailer payments, new shop and new tools. Overhead in general like you mention @Jarrid Dotterer.
In my experience, the best contractors and subs drive unassuming but functional trucks, have well-worn tools and their work speaks for themselves so they grow by word of mouth and you are lucky to get on their schedule.
The 'Big hat no cattle' knows no bounds! My boys and I have fun guessing the size of truck payments when driving around. "$880 for eighty months." Maybe we're just wierd!
Thanks for the replies. Truly valuable info provided, by most, and it's much appreciated...
I have clarified a few things and the 40% is his TOTAL overhead cost/employee. All inclusive of workman's comp and the rest of the red tape. He is being hurt by the new license, Florida has a 2 year experience factor which doesn't help at the moment. We are about 6 months from the time that should ease some costs.
SO, we are going to take a look at his rates and see if there are any ways to reclassify employees. One thought I had was to hire 1 or 2 specific crews under his company to do the work within the lower limits of insurance and outsource the more "dangerous" jobs. I.E. Roofing.
If anyone else has any suggestions, I am open to hearing them.
This is a great post and something that I think all new and experienced investors run into on a fairly frequent basis. It goes without saying that the relationship with your GC is extremely important.
The biggest issue I've seen is not just getting a GC to meet your price point, but understanding the nature of the business. Meaning, that a lot of GC's fail to understand how an investor works, the tiers of properties they are investing into, and how best to manage and find supplies to accommodate the tenuous price points needed to ensure that capital expenditures fall within a reasonable budget. The ideal solution is to work with partners who have the size and scale to help ramp into your investment model and work with you to help you grow your business, instead of only watching their bottom line.
As a lot of investors can attest to, vendor management takes on a life of its own and can end up eating away at valuable time that would have otherwise been best spent pursuing new capital and/or properties. The right partners will work to ensure that you are successful, because your success and the ultimate volume that you can bring as an investor is more important than grabbing as much gross profit from you as they can on each job. Finding discounted supply lines outside of what your GC is offereing is one way to ensure you are geting friendly price points and allows you to negotiate the labor costs separately.
Ultimately, knowing and controlling each aspect of your cap-ex, including your GC, in conjunction with a well thought out and executed investment model will ensure your success.
Step 3: Study the comps using a 1-star, 1-star minus, 1-star+, 2-star, 2-star minus, 2-star+, 3-star, 3-star minus, 3-star+, 4-star, 4-star minus, 4-star+, 5-star, 5-star minus, 5-star+
1-star = teardown, 2-star = ugly home, 3-star = livable home, 4-star= nice home 5-star=luxury home
Study the finishes in the comps in great detail and find the general trend of the comps. If all the comps are 4-star, then you want to rehab 4-star+. Always go up one plus. For example, if it were a 3-star minus, then you go up to a 3-star.
Step 4: Based on the 5-star system, figure out what construction items must be rehabbed. Measure all of those items. If gutters need to be replaced, measure the linear feet of gutters. If siding needs to be replaced, measure the square feet of siding that needs to be replaced. If cabinets need to be replaced, measure the linear feet. If you need to add vinyl flooring, measure the square feet of the flooring. There is a lot to know but do it several times and it gets easier and easier.
Step 5: You need to know how to estimate the construction yourself. First, pick up J Scott's book on estimating Rehab Costs. Personally, I don't set-up my jobs like how the books states but it's an amazing starting point. I use the 16 Construction Divisions when setting up my bids, as that is what everyone uses in the construction industry. As you estimate yourself and then get bids, you'll get to know what things cost in your local market.
Add 10% misc.
Step 6: It's irrelevant what your friend's overhead is. Create your scope of work from Steps 1 to 5 and build a detailed materials list. Build a bid form from your scope of work and material sheet. The general contractor gets 15%. Period. End of story. If you get real good at steps 1 to 6, you may find that you don't need a general contractor. Project manage yourself by using Gaant charts and critical path to schedule (refer to the construction sequencing in the book Flip). Save the 15% GC fee and get licensed yourself.
Step 7: Construction has many things to learn and you will learn over time. For example, on older homes the electrical code has changed. Now you need an outlet for every six feet or continuous wall. Estimating that without an electrician is virtually impossible regardless of if you counted all the outlets and switches in the house. Many things to learn like the difference between paint-grade MDF trim and stain grade cherry. But the thing is that you don't need to know everything. You just need to know where to get the right information.
Email me at [email protected] and I will send you a sample scope of work. When the contractors you know their job as well as they do, guess what they do? They come in on budget and on time. If I give you a detailed scope of work by the linear foot or square foot and a detailed materials list with SKU #s, guess what? You'd better have some good data to get a change order from me. If the G.C. or subs overhead is too high, guess what? That's not my problem! They bid the contract with all the details laid out and this is a legally binding contract.
@Jarrid Dotterer To be honest, your friend doesn't want to take the risk, neither will you, in one way or another, you have to deal with the costs. Shifting work to another contractor is sometimes create an issue that you will not be able to handle, just pay the fee and find the deal that works for you, do not squeeze your numbers to make the deal work. Dealing with contractors when you are starting out is as hard as finding a good deal itself. You will have to have to double your target, as 10k will easily be eaten up when surprises come up, especially if you have something that could not be seen. What your friend is trying to do with "shifting" trades for WC purposes is an illegal activity but a shady area, but nobody can really determine how and what trade they are working.
@Ryland Taniguchi Step 6: It's irrelevant what your friend's overhead is. Create your scope of work from Steps 1 to 5 and build a detailed materials list. Build a bid form from your scope of work and material sheet. The general contractor gets 15%. Period. End of story.
LOL, it's not the end, I won't do any contract if it is less than 3k, and 15% is only my supervision, there is no way that I am doing a rehab job with only 15% profit, why should I? I carry all the risk on materials, labor delays, and most especially, clients who don't pay.
@Ryland Taniguchi Step 6: It's irrelevant what your friend's overhead is. Create your scope of work from Steps 1 to 5 and build a detailed materials list. Build a bid form from your scope of work and material sheet. The general contractor gets 15%. Period. End of story.
LOL, it's not the end, I won't do any contract if it is less than 3k, and 15% is only my supervision, there is no way that I am doing a rehab job with only 15% profit, why should I? I carry all the risk on materials, labor delays, and most especially, clients who don't pay.
Are you saying that your not pricing your materials and labor delays into your construction estimates? It's exactly why I do this... To vet the contractors out that can't estimate and project their materials and labor costs accurately. Why should a flipper pay for errors in a contractor's material and labor estimates? Everyone on this forum would agree that the biggest risk for flippers is contractors who are not on time and not on budget.
Read J Scott's book on Rehab Estimating. The 15% number comes from that book.
Personally, I don't work with general contractors beause we a better job managing the project than our general contractors. I don't pay for a 15% markup for some contractor making excuses why they are late and over budget.
@Ryland Taniguchi Step 6: It's irrelevant what your friend's overhead is. Create your scope of work from Steps 1 to 5 and build a detailed materials list. Build a bid form from your scope of work and material sheet. The general contractor gets 15%. Period. End of story.
LOL, it's not the end, I won't do any contract if it is less than 3k, and 15% is only my supervision, there is no way that I am doing a rehab job with only 15% profit, why should I? I carry all the risk on materials, labor delays, and most especially, clients who don't pay.
Are you saying that your not pricing your materials and labor delays into your construction estimates? It's exactly why I do this... To vet the contractors out that can't estimate and project their materials and labor costs accurately. Why should a flipper pay for errors in a contractor's material and labor estimates? Everyone on this forum would agree that the biggest risk for flippers is contractors who are not on time and not on budget.
Read J Scott's book on Rehab Estimating. The 15% number comes from that book.
Personally, I don't work with general contractors beause we a better job managing the project than our general contractors. I don't pay for a 15% markup for some contractor making excuses why they are late and over budget.
I'm saying I won't work with only 15%. I don't make errors on my estimates on labor and material, I build enough buffer to cover the things I miss. In my 9 years in construction, I missed 2 project deadlines, out of 80 - maybe a little more, most of them have 4-6 month with 20-30 workers at a time, I say I'm pretty good at running the projects, I might not be as good as you though, hats off to you. On investors side, contractors might be the biggest risk, but on the contractors side, our biggest risk is the opinion of the owner/investor, the moment they say "can you" that's a labor delay, can you count how many "Can you"s there are in your projects? This is the reason why I don't work with investors who don't know what they want. I deal with plans -pure black and white- with specifications if necessary, either that or labor only contracts where change orders are on time & materials at 70/hr, that way I avoid the Can you's. I don't care if a client pays me 10 times to paint a wall just because they changed their mind, as it will mess up my schedule for another client. Why would you pay anything for delays and errors? You should be imposing penalties, not paying for them.