I'm curious to learn ones (contract/payment) systems/approach when it comes to hiring contractors (be it a general contractor or subs) and paying them for their services. I'm in Chicago, and there are SOO MANY "quick & cheap" contractors, that its overwhelming.
I'm looking to start out with buy and holds, but I WANT to find units that need rehabs as I want to eventually:
1. Step into Fix and Flips
2. Purchase properties that need to be rehab.
3. Create my OWN contractor staff/team.
Would love to hear some wisdom on this topic!
As far as payments are concerned, I have a pretty simple process. I never (very rarely) pay for services in advance, everything has progress payments and I see the progress BEFORE I cut a check, and the final payment is held until the job is completed to the satisfaction of the contract or by me or my project manager.
I also buy a lot of the materials so the contractors are typically labor only. Several will buy small items, submit receipts and get reimbursements. This keeps markups down to zero which helps my bottom line. Some can argue that contractors have better discounts and that may be true in some cases, but after they mark it up, bye bye to that discount. Establishing relationships with material providers is essential and establishing credit with them also can improve your bottom line. If you can get credit at lower interest rates than borrowing from hard or private money, you are ahead.
Couldn't agree with @Will Barnard more! When dealing with contractors, any kind of contractor, in any industry, you need to tie your payments to milestones. You're SOW (Statement of Work) should clearly define what is to be delivered, who is responsible for what, what is in scope vs. out of scope, and the schedule for execution/delivery. It should then breakdown specific milestones, success/completion criteria for each, target dates for each and the payment to be made upon successful completion of each milestone.
I personally would not allow my interim milestones and their associated payments to equal more than 70 - 75% of the total project cost. That ensures a significant amount is tied to project completion. I would also ensure the SOW clearly specifies the terms of any penalties tied to late delivery and what the final acceptance, sign-off & payment criteria is. i.e. All final city/county/whatever inspections & certificate of occupancy (if applicable), final walk thru & successful completion of my punch list, receipt of release from the contractor and indemnification against any sub-contractors, etc.
I'm new to REI, but I've been in project/program management for the better part of the last 25 years. If you're employing contractors &/or vendors, a solid vendor management plan will make your life and theirs a lot easier. Reputable contractors will appreciate the fact that everything is spelled out in writing. Those who object to this level of rigor are probably not the people I want to deal with.
I use general contractors for my flips and always have a significant holdback. In the past couple years I've also instituted a "mini-holdback" of $500 for 30 days after the punchlist is deemed complete and the main holdback is paid. That way there's some incentive for the contractor to come back if we find some issue that was overlooked when putting the punchlist together.
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