Why are contractors part of the problem not solution?
Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes
I read too often contractors are more of the problem rather solution to investment strategies. What if you could find a local contractor service that manged contractors based on customer satisfaction ratings you provided as reviews (kinda like Angies but exclusive to contractors), a service that required all contractors to be performance bonded and insured so that you are guaranteed good service and quality workmanship or you money back. What would that be worth to you?
Disclaimer: There would be stipulations on the insurance claims such that false accusations could not be made, of course
There should be some sort of BP award given to anyone that has endured this thread. =D
My issue isn't with whether it's needed or can be successful -- I think that's certainly possible. My issue is that it seems Terry believes that because he is a successful GC, he has the core competencies to launch a service business that would require skills that are 99% not related to his GC skills.
It's no different than a someone who has cooking skills opens a restaurant -- just because you can cook doesn't mean you can run a restaurant. About 50% of all restaurants close within 3 years -- not because the food isn't good (though in many cases that's probably part of it), but more because running a restaurant is not typically a core competency of a chef.
I'm not saying that Terry doesn't have the skills...he absolutely might. I'm just wondering if he thinks it would be easy just because he has great construction skills. I don't believe that will be the case.
Several good points made, I tend to agree with J on this.
Our approach is to establish a long term relationship with our sub contractors (captive subs) that we used on all our jobs. We are
aware of their talents and they are aware they are going to be paid on time. We have a sub-contractor agreement that covers the scope of responsibility of both parties, we provide a description of the work involved and they agree to the terms and conditions.
The relationship once established is repeated on all future jobs.
If we require a speciality sub-contractor we seek them through
recommendations of our subs. Good subs like to work with others
who enjoy the same reputation. Our rates are below what they receive in the "Consumer Market", but we are also restricted by how much we can charge the consumer for our end product by the "Appraiser" and the marketplace.
Opps, I was getting a strange error so I double posted.
So in the title of the thread I tried to convey from my reading out here and blogs that contractors are part of the problem not solution. The same exist in my market place; we launched a business because my son worked for a company like ours as a top salesman prior that had a lot of unhappy customers. When he left his old employer, he took his big clients with that are much happier now. We focused on customer satisfaction and quality, have high ratings with them that continue. In other words, we successfully solved a problem resulting from bad contractors short coming’s, identifying a market niche and capitalized on it.
What we have learned from a select few pro's above that have long term relationships with contractors is there is no market there for me, I am fully aware of that and why I don't target REI's. However, I have a few of them here that want my services I am looking at if the job is big enough, but my big bread and butter is with companies that manage a much higher volume/profits, and I only deal with one person.
My thought is to take our success mentioned in the first paragraph, again targeting and capitalizing on the majority of bad contractors my areas has to offer and there are plenty of, or that are far too expensive. It would be business as usually but in a retail space right next to a box company as Karen stated (I actually got the idea from you after reading your blog on locating a med center next to a hospital). I would be the licensed GC paper contractor and handle my customers every need. I could have options, where I mix in what UBUILDIT does and guide customers to building their dream home cutting some of my cost by customer DIY-GC, and/or mix in what Renovation Realty does renovate, sell, profit, as an entirely new composite business model to boot. This may be a reason to get a RE broker's license involved, sort of like some REI's have on their team.
I would build this 4-plex the way BP taught me to with enough margins that my space is paid for so I would not pass on overhead in my bids and loose work. As far as sales goes, we have a top notch team to thank for our success to date, not an issue; it is part of normal day to day operations now.
When you walk into the big box companies you see their products not their advertisements as well as I would display them, I would NOT have their products in inventory. My retail contractor’s outlet would market their products to be purchased right across the street; I may even be able to joint venture with big box, or profit share. Since I would be increasing both (big box, suppliers, my) volume of sales, to offset at a fraction of my cost, in building more sales for them, in other words they would see a profit in several ways. I would now produce a bigger customer base from my office space and I’d continue to buy materials at big box but at a higher volume, not be in a conflict of interest with them. I will however target their everyday customer since I will be at their entrance and exit in customer’s direct line of sight. People on the way in stop in and I can handle it all, or again they can handle some, or we can renovate/sell, etc……or on the way out after they purchase materials and decide they rather pay me and relax over the weekend.
People around here are afraid of Craig’s list, and we are the big boxes number on contractor at this location. They come to us when they have a supplier that needs more sales. There is no competition to us here. We would be taking some of their contractor referral business, but returning material sales volume, that’s just competition and business, and if I can offer a better contractor labor service so be it.
Yes, we found a successful niche we will continue to expand of course, but I’m exploring others in an effort to reach out to other markets and the general public DYI, in volume where I can make lower margins work. Don’t get too wrapped up into the rating’s that is just an online marketing tool I have yet to figure out.
No obviously I don’t have all the details worked out lol, I just thought of all this yesterday when I went to big box company to get a water facet and after just read Karen’s blog. ? and seen land for sale a commercial 1.9 acre for around $300K listed.
Like a GC normally do I put a profit on top of materials and labor for finding and managing the jobs my subs perform. I answered the rest above, or tried :)
I won’t market to old REIs as described above. I’d buy the performance bond based on customer requirements per job and pass the cost to them, unless I placed myself out of the markets bid, or eat the cost in my profits to make my customers happy. The rating system I believe would help offset the customer need, or over time. The marketing at this location next to the big box will work on its own; I would need less sales team out in the field finding/selling jobs dropping my commissions cost.
Well if nothing else no harm in dreaming or having a vision. Some that have done so and were told it never work are successful. :)
Again sorry about the confusing I am not the best writer/speller I admit, it is difficult to communicate sometimes in writing.
Thanks Ben. Check out Renovation Realty out of Sand Diego, CA and UBUILDIT here, and I am sure there are others that retail these services at office locations all around the USA and have been in business for years. I went and looked at some roofing competition in existing retail space too, that are right by major highways with big bulletin signs. None of them were there in the middle of the day, and there were no customers in their lots. I peeked in the windows and all they have inside is a desk or two, an office. They pass that overhead onto their customers and I always under bid them since I have a home office right now. I figure if I can use some of the tools I learned here on BP, I won’t have the overhead and the property may even cash flow too if I am lucky! Cash from RE and from more construction business sounds good! I won’t lock the other three spaces into suppliers; they can be fast food for all I care.
So I have the plat drawings and will look at the utilities define my cost to connect. I will look at the easements to determine the max square feet of my building for starters. Then I will take that over to my rendering and estimating software and model up the basic building estimate. Nice thing about commercial is it can be simpler than SFH just needing metal flat roof joist/studs, etc. and that is what I will be shooting for, simplicity. We don't have fancy expensive property here like Cali/etc..That will determine my max offer on the land. I take that into a business plan.
I’ve never done the RE part before so any other advice on how to approach this would be appreciated. Once I have that I will start looking for hard money lenders or partners. I see there are some new blogs/podcast on that I need to look at. Perhaps I need to pre-sell these so I have the $.5 mil or so I am thinking I may need vs. taking the chance or renting them. If I have any takers, I’ll ask them to issue a construction loan cash outlay requiring material cost for their space up front, the full payment to pay my subs and myself when complete, like normal. I really don’t want the risk of partnering with anyone.
Hey Terry,
I was unable to get back to the thread i started about retail vs invester pricing, so I'lll offer my thoughts here.
I completely get what youre saying here. Im a professional remodeler and know all the trades and do high end work. I dont market and I dont bid. My work is in demand so I offer my price and do the job. The only incentive I would have for working exclusively for investors would be if I controlled the jobs and got a peice of the action. It never made sense to me why A good contractor should discount their work untill J Scott explained what his contractors receive from him. In his markets and at the level his investments fit into that market, there is considerable competition for the available work. For these contractors to have steady work that pays without all the headaches, REIs are a great customer to service.
The key is in finding those who havent yet built a name and rep for themselves, while they do have enough of the right stuff(dependable, honest, good work ethic, acceptable workmanship, etc) to be an asset to an investor.
I have had thoughts like yours for many years. I would not do an Angies list type thing for the reasons already given. I would do more of a central booking type agency. You find the good ones and train up some good ones on both the work AND business side and you are the referer for your contractor list. When investors or homeowners in your market need a plumber, roofer, tile setter,etc you become the go to guy. You then have the option to bid a rehab yourself or send out contractors to do it and you get referral fee. As you grow your website hosts the contractor pages and you gather the feedback from the customers to build their rep while controlling the content. They pay for the service or you get it in the referral fee.
Many options on how this would run. But it would be local. It could be duplicated and even franchised, but you would be building a solid local service desireable to both contractors of this type and to investors who cant afford to risk their spread on hacks.
I have other ideas targeted more toward investors only, but thats in my pocket till several of the rehabbers here get my phone call! ;c)
Here's the thread Randy was referring to:
J Scott Randy F.
Randy, good to read someone is on the same page as me, thanks for coming back. What you described is what I have been trying to describe in part. It helps to write out a brainstorm, we just have different ways of writing and reading.
I think where we differ is market and location. I live in a location were wind and storm consistently feeds good contractors if you meet the requirements. The profits are very high, over double what the REIs can offer. Winter is our worse quarter, glad it is over, spring is a cash flow cow since that is when this area has constant storm damage year after year. I can't imagine how say roofing, siding, and guttering contracts do up in your cold neck of the woods, but I can tell you it is a shark feeding frenzy here, even bad contractors can make some bank roll better than what REI have to offer. Here, that leaves the bad or expensive contractors to the general public and REI's.
I think the success of my new business idea will be very dependent on local contractor’s market. That is evident by the two types of similar business I have used as an example, that are successful working out of a retail store fronts. Renovation Reality out of San Diego, although I could be wrong would never fair well here because contractors are focused on storm damage, they would struggle finding good reliable ones. UBULDIT, would not do well in San Diego simply because that area does not have the open land to help customers build their dream home. I can perhaps see a composite of these services working at both locations, with an in house GC-subs, Realtor, and good sales team.
I'm heading to my first REI Association meeting today to see how they fair in my local market. I think we have to remember what one REI like J.Scott can offer may be entirely different than another REI. I'm not looking to work for one REI, I'm looking to build this into an enterprise servicing all kinds of needs by targeting a need for good low cost contractors, cornering my local market, capitalizing on it.
As far as a central agency for rating contractors here in this small town there is none. We belong to our local builders association but so does all our competition. I could create one like Angie did but why reinvent the wheel and compete with her and local BBB, and I have no desire to not make money as she is. I will use her, BBB, internet, and all the rating systems I can to promote my business.
:)
I went to my first local REI meeting today, lots of new members. We all introduced ourselves, one lady before me was a company that does back ground checks on contractor's, she said if you need a contractor she has them, most are in the median price range. Then the Association leader said "we all know how difficult it is to find good reliable contractors". That's when I knew I was in the right place.
I introduced my company, saying we under bid because we have low overhead, etc…. I handed out about 15 cards by the time I left most were gone.
Learned a lot about tenant evictions wow what a hassle, makes me want to stay in the contractor business, building, flipping.
It's easy to find good reliable contractors...
I'm pretty sure what he means is, "we all know how difficult it is to find good, reliable AND INEXPENSIVE contractors..."
You know what they say:
Better, Faster, Cheaper -- Pick Two!
I like it. I must be behind on the RE jargon and will guarantee all three are satisfied :)
This one guy was grabbing cards out of my hand as I was intro my company, lol!
I asked the law office doing the presentation about commercial evictions, they said they are much longer than the two weeks it takes residentals. With that said I think I am going to try and flip the other three spaces I build in my plan. I'm going to ask the land owner if I can put a sign on the property to pre-sell them so I can raise the $ to do the deal. Probably less than $175K ea which is still half what you Cali's and AtlantaYIKES pay for just land lol! :)
Tell you what I was one of the brightest in the room with all the right questions thanks to BP :)
Speaking of ole sayings, how bout this one...
"Pigs get fat, hogs get slaughtered"
If the numbers work and youre looking at a decent ROI, whats wrong with "Better, Faster"? Many a homeowner or investor shooting for "Cheaper" has gotten themselves "slaughtered"!
"Pigs get fat, hogs get slaughtered"
If the numbers work and youre looking at a decent ROI, whats wrong with "Better, Faster"? Many a homeowner or investor shooting for "Cheaper" has gotten themselves "slaughtered"!
Lol. Well here is my new saying,
“The hogs may get slaughter but the BP boar will prevail” Here is why….
Based on my competition assessment I have concluded that overhead is causing some to be too expensive. Their retail office space is not being utilized to increase sales, perhaps just to look good vs. home based for which I think there is no ROI. If a customer can get it cheaper, better, faster they will. Some have no presence at them, but their company signs are working facing highways at a large price vs. bulletin boards. Some use it for industrial storage, another high price to pay for just storage.
If you are GC, “Construction Company” etc., paying high prices for retail office space that is not at least paying for itself, you have to pay that somehow you’re customers, not only in rent but loss bids since you’re home based competition that does pay for itself that does the same work as fast as good out bids you. Many of us use the same subs so better and faster are somewhat fixed, it boils down to overhead cost and a good marketing plan to beat out the competition, to not bid yourself out of the market.
As with agents, appraisers, etc., contractors are focused on what they know best, their business not REI. I'll assume here, most have not taken the time, and it does a lot of time away from growing your business to learn unorthodox ways of acquiring property. Most I will venture to say do not have the skill set or vision to see how the right REI/marketing strategy can not only provide cash flow, as many REI's have proven, but grow a business.
So I regress, just because you are paying a high price for contractors DOES NOT mean they are “better, faster” ;)
Better, faster, cheapest I have figured out. What I don't is how to grow and remain cheapest. We shall see :)
There are three things wrong with it:
1. In my experience, if an investor is paying anything near retail prices (i.e., what a homeowner would pay), there isn't going to be a decent ROI. That's because, while real estate markets are often inefficient, they're not THAT inefficient.
2. Even if there are massive inefficiencies in the market, those inefficiencies will tend to erode quickly (why do you think investors in places like Atlanta and Phoenix can't get inventory these days???).
3. "Better, Faster" will often help investor fetch a higher offer price, but the appraisal system is rigged against "Better, Faster." Basically, while "Better, Faster" will get higher offers from buyers, in many cases those offers will get squashed when the appraisal comes in, and the investor will wish he had spent less money on the rehab.
I would never give up "Better." I would never give up "Cheaper." And while I hate to give up "Faster," I've learned enough in this business to know that that's often the trade-off.
This is why, when the margins aren't large on a rehab, I'll use one or two quality carpenters, a small sheetrock team, a small painting team, etc, who can get the job done just as high quality as a big team with a GC, but at a much lower cost...and a few extra days...
Randy/Terry - Do you pay retail prices for your labor? If so, what are your typical prices for your various contractors?
"This is why, when the margins aren't large on a rehab, I'll use one or two quality carpenters, a small sheetrock team, a small painting team, etc, who can get the job done just as high quality as a big team with a GC, but at a much lower cost...and a few extra days...
Randy/Terry - Do you pay retail prices for your labor? If so, what are your typical prices for your various contractors?"
----------------------------------------
We pay wholesale labor prices to our subs, we keep some busy, others not so much, we get better prices on the ones we keep busy.
J. Scott, this is not directed at you since I know you know this.
It is a risky and costly business being a licensed GC, Construction Co, that manages subs, more so in high volumes. We are an LLC for one and for a good reason, as most of our competitors. We carry over $2mill in insurance and bonds. We belong to several associations with annual dues, we have a reputation to protect, and we spend a lot of time making sure our customers are happy, we are on the phone and internet all day (my job), we are on the job sites delivering materials and managing subs, and it goes on and on. Yes, if you have these things and skills, and time, in place you can DYI-GC, but be prepared to take on the risk unless you know the business.
The other thing some of competition does that may be deceiving and costly is take on direct employees. You may see in their ads “We have no subs”. They pay the price in ½ FICA taxes, and benefits (some).pay less perhaps, and may pass that cost difference overhead onto customers vs. letting the subs pay their own self-employment taxes, insurance, etc…..Big corporations fight the same battle whether to hire subs or direct employees. The subs if they do not perform can be fired easily in a day. In my experience subs are more driven for that reason, directs there are state laws, unions, unemployment tax too. Other thing you have to be aware of if you decide to manage your own subs, is there are state and federal laws that define if they are an employee or sub based on how you manage them. We have all the proper contracts in place with ours so there is no question they are not employees, and it is very clear we don’t not “control” them as defined by law. If you fail to handle this properly and the IRS or states dept of labor finds out, you could be responsible for back FICA taxes, fines, and penalties.
Back to the retail store, I can see placing some REI and wholesale guru's in it for yet another service reinventing the way the general public buys and sells homes to compete directly with RE agencies. If you could show a person how to buy with equity, or hand them a deal, I would think that would be more attractive than conventional acquisitions at 100% ARV/LTV most people buy. This would not work in areas where the market is inefficient.
Also, another way to make money on commercial land is to put a digital bulletin board on it.
Couple of quotes of the big dogs about us website here fit the discussion……hmmmm!
If your sole selection criterion is to find the cheapest bid possible, we may not be the right company for you. Because even though we often deliver projects at less cost than other builders, our emphasis is always on giving you the highest quality no matter what your budget.
The construction business is a small world. When a job's done poorly, when corners are cut and the work is shabby, word gets around. But when the work's done right - on-budget and on-time - people notice that, too. We take pride in the fact that 80% of our business is repeat or referral. They know what they're in for when they hire us: Quality. Honest. Integrity.
3. "Better, Faster" will often help investor fetch a higher offer price, but the appraisal system is rigged against "Better, Faster." Basically, while "Better, Faster" will get higher offers from buyers, in many cases those offers will get squashed when the appraisal comes in, and the investor will wish he had spent less money on the rehab.
From a sound investing standpoint, "Better, Faster" doesnt mean putting more into a property than a property itself and the comps dictate, or than what the buyers in the market want. The appraisal factor doesnt apply as it would have been considered and taken into account. When I look at "Better" in reference to the thread topic, I'm talking about paying the price for a better contractor... Not to play roulette with the ARV, but to attain the highest standard of quality within budget and by managing risk upfront rather than damage control thru the process.
In my experience, the cheaper the labor, the more costly the mistakes. It is one thing if an investor without extensive experience himself has a GC or project manager who does. And its hard to argue with success, J Scott! I appears that you have found a great balance thru good management and cheap labor. I believe this is the exception rather than the rule. Why? Because Ive been in the business for over thirty years and I know that In the long term there is no combination which includes "Cheaper" that can be sustained. for a miriad of reasons, "Cheaper" will require the headache of the revolving door... finding and keeping good help.
Even if you give your guys stability, regular work, and better money than they were making, eventually they will flake out on you. Thats an entire subject of its own... The mentality of tradesmen. Ill just say that when I consider these issues here, Im thinking about the average investor and the newbies looking for guidance and for them, my best advice is to evaluate a rehab based on paying well established contractors what they charge to remain well established contractors. For every sub used who either doesnt have the experience or the business acumen to be a part of the foundation of the given markets trades pool, you increase your risk. IMO, an investor either looks to hit a home run on every investment and is willing to accept greater risk to do so, or he is willing to accept lower margins with lower risk and steady returns over the long haul.
That said, balance IS at the heart of success in most things. Paying top dollar for all your trades or hiring the cheapest labor you can find are the extremes, which leads me to...
What many dont understand is that "Better" and "Faster" can coexis. But seldom do they come in the same package for "Cheaper". If you look at "Better" simply in terms of quality, while one contractor may have the capacity to produce high quality craftsmanship at lower rates, but requiring a great deal of time, there are experienced high end contractors who can produce high quality much faster, but at a greater cost. If your holding costs are high, which would you choose? If the high end contractor is "Better" by virtue of the fact that he delivers high quality "Faster", allows you to plan for most of the unseen problems that could present, AND can effectively manage the job to meet both budget and schedule, could he not also end up being "Cheaper" in the long run?
This makes a lot of sense. For a less experienced investor however, not so much. He must rely upon professionals in the early stages to ensure that he doesnt walk into things like foundation issue, code problems, etc. that will blow "Cheaper" out of the water.
Once they know what they are looking at and what to look for and can anticipate the types of problems inherent in their market, yes... A project manager and hungry subs can getter done. Of course, Im not saying anything you dont already know!
I pay the going rates for the type of labor I want or need. For me, it has nothing to do with retail/wholesale/investor rates. It has to do with what they are worth.
It isnt about me. Its about them. Whether an individual or a crew, they are worth what they deliver. No less, no more. Unlike the OP, I couldnt care less about production contractors who chase insurance work. I have no interest in the work, profits that for the most part are unrelated to performance/quality, or in the money motivated mentality in that sector. I'm a perfectionist, an idealist, and a big picture guy. My interest is in what I personally create and leave behind. And, I try to live by the Golden Rule. I expect to be paid what Im worth, therefore I pay people what they are worth. I understand that if for whatever reason I choose to pay less, I will get less.
I dont believe there are any right or wrong, black and white answers. The remodeling/renovation/restoration business is one of the grayest, most complicated businesses in existence. No two people measure things like quality and worth the same. No two contractors work at the same task at the same speed. And with as many variables as there are, no two people will have the same definition of what "Better" means to them. More often than not, its the intangible that makes the difference... Things like work ethic, honesty, trustworthiness, modesty & humility, and being able to play well with others, none of which there is a standard rate for! Its seems you have to be a freaking psychologist to even hire a laborer these days, let alone a GC.
I think you missed my point (most likely because I did a poor job of making it :)...
If I have a project that I purchase at $50K (because I can't buy it any lower), know will appraise for $100K (I can't get it to appraise higher), and my fixed costs are $10K (no way to reduce those), that leaves $40K for rehab costs and profit.
Every dollar that I pay towards rehab is a dollar I lose in profit. If I spend $40K in rehab, I make no profit. If I spend $20K in rehab, I make a $20K profit. If I want to be successful in this business, I can't spend $40K on rehab, even if that's the "going rate" for the renovations I want to do.
Instead, I need to get the job done for about $20K to make my desired profit. To do that, I need to get labor at less than the going rate (assuming the going rate would be $40K in this example). That's how I make (more) money in this business.
You're probably thinking, "You just need to find deals with more meat on the bone, J Scott!"
I try. And sometimes I do. But, if I turn down the type of deal above because I plan to pay retail for labor, I'm turning down potential profit (and I'm turning down most of my deals!). No reason to do that when I have the ability to get labor for less than retail...
What makes you think my contractors aren't as reliable as the "retail" contractors? Many of them ARE "retail" contractors when they're not working for me. Many of them charge 20%, 30% or 50% or more to the bulk of their customers than they charge to me because of all the reasons I gave in the other thread (the one about why contractors would want to work with investors).
So, in many cases, you and I are using the same exact contractors (figuratively speaking).
In other cases, yes, I have contractors who are more flaky, require more management, generate more risk and may not be around as long. That's the overhead I pay for more profit -- and I pay it in the form of a full-time project manager who can babysit contractors, fire them when necessary and keep the pipeline of new contractors full.
I think every investor should be doing this to some degree. Of course, if an investor has a full time job or for some reason can't manage his subs as necessary, then I agree he should be bringing in a full-price GC to do the work and make sure it gets done right. But, those investors are going to make a lot less money and probably find many fewer reasonable deals.
So, we certainly agree in principle...
Its seems you have to be a freaking psychologist to even hire a laborer these days, let alone a GC.
We're definitely in agreement there, Randy!!! :)
Randy,
Where I differ is in the overhead variables in contractor pricing that DO NOT necessarily mean lack of experience, slow, poor quality. I think that is where you are wrong, I do respect years in a business, but unless you have that many years in every city in the world it does not make your experience more valuable, it is just localized and can be skewed from the masses.
As stated some overhead variables are,
1. Employee vs. sub
2. Cost of retail office space
3. Advertising
4. Litigation (some subs may be in)
5. Education and experience
6. Volume of work
Again, these are cost that can be passed onto the customer that have nothing to do with a company’s ability to perform on time and schedule or cheaper.
My day job I am an Aerospace Engineer with 30 years. I've worked in most major cities you REI in, never Alaska thank you, ;) I do hear what you are saying Randy since as a consultant-contractor that has seen A LOT of BIG corporate business, I am high priced because I know my trade very well. I'm usually the first to get let go when the budget crunches since I am expensive. Just happen so I am working on my company and REI. But, I don't see this as Rocket Science and as "complicated" as you. I realize the people we manage are not professional, rather blue collar workers that can make it more complicated than needs be, but the principles are the same at a smaller scale. I am fortunate to have seen the big dogs play, another reason why I know how to provide that level of service to my customers at lower cost. Dealing directly with the shop, mechanics, contractors is not new to me, I am a licensed FAA mechanic as well. My son is also an Entrepreneur degree with a lot of talent, some experience that out sells ones with more experience, so I don't underestimate the kids with less experience I have learned a lot from. This all plays a factor into faster, better, cheaper. I also consult a lot of companies that are stuck in old manufacturing and design practices that run their companies into the ground. You can bet the same thing exist in the contracting world from people that do not know how to manage, just simple principles, that created this thread. Yes the risk are high to the REI that is not in the field daily, not only the things Randy and I pointed out but in estimating jobs.
“Unlike the OP, I couldn’t care less about production contractors who chase insurance work. I have no interest in the work, profits that for the most part are unrelated to performance/quality, or in the money motivated mentality in that sector.”
Fist off our sales team chases the jobs, our PMs manage them in the field. It is obvious you have no idea what this work entails or have experience with it. If we did not perform quality work fast at low cost our mega client(S)/ customers would never hire us back, there are too many others knocking at their door. We will obtain more work from these clients based on past performance and a good reputation as we have already have proven.
A recap on the risk (some of which can be very costly) to an REI hiring and managing subs to save up front cost, new or seasoned. This is USA.
1. If you don't pay the price from profits to have an LLC and proper "Commercial" General Liability and Workers Comp insurance you run the risk of personal injury and workers comp and other law suits. I have talked to both attorneys' here, it happens often.
2. If you don’t not have the experience and/or software to estimate jobs you run the risk of under estimating jobs.
3. If you do not understand labor laws and IRS code you run the risk of back taxes, fines, and penalties.
4. If you do not understand building code and keep up on them, you run the risk of making costly mistakes. We attend a builder’s local code meeting every month for this purpose, time you don’t have to account/pay for by hiring a GC. If you can't pull permits you need to pay a licensed contractor.
5. If you do not have experience managing materials and labor, job sites, etc., you can make costly mistakes.
There is more trust me.
I no longer have any idea what we're discussing... :)
Lol, thats why you need to hire a GC. My last post was more directed at running a construction co not REI which are two totally different things, and the risk to the REI for not hiring one. If you followed along you may have picked up some insider tips on what to look for when selecting a GC and/or determining if it is worth the risk in trying to be one.
You're probably thinking, "You just need to find deals with more meat on the bone, J Scott!"
I try. And sometimes I do. But, if I turn down the type of deal above because I plan to pay retail for labor, I'm turning down potential profit (and I'm turning down most of my deals!). No reason to do that when I have the ability to get labor for less than retail...
Hey! I dont throw back skinny salmon. Theyre still tasty... Just takes more of them to fill the freezer! I get it!! :c)
I cant help it. I just have a problem with the word "retail" with regard to labor rates. Its really just semantics and perspective. And my only motivation in engaging on the subject is to gain a better understanding of your perspective as a successful investor dealing with contractors. One of the things that makes me good at what I do is being an effective problem solver. And I get WAY frustrated when I dont have clarity on a subject I should be an expert on!
My intent was not to dispute what your contactors are or arent. The incentives you
listed for contractors to work within your budget are legitimate. My question is... Is it reasonable to assume that the system you have put in place is easily duplicatable by the average investor starting out? I know that there are contractors out there that are reliable, do decent work, and are hungry enough to take on work for less than "retail". I also know that for every one of those, there are thirty who will take the work for yhe same money but who are far from reliable and wouldnt know quality if it bit them in the butt!
There are trade-offs in life. My concern is for the newbie risking his hard earned, and limited resources by going into deals counting on cut-rate labor, without a clear understanding of the associated risks. And in any type of investing, risk management is key.
I have as good a handle on the mentality of tradesmen as one could have, and I know that I only know when I know!! Ya know? If I dont have the ability to identify whether a contractor is worth using before Ive used him... Repeatedly... How can I expect anyone else can. Theres a great deal of luck involved. It takes years in a market to hire with confidence. Knowing all I know of the Milwaukee market, im surprised and impressed you seem to have put together a team so successfully. Not sure Id want to play poker with you!!
In other cases, yes, I have contractors who are more flaky, require more management, generate more risk and may not be around as long. That's the overhead I pay for more profit -- and I pay it in the form of a full-time project manager who can babysit contractors, fire them when necessary and keep the pipeline of new contractors full.
I think every investor should be doing this to some degree. Of course, if an investor has a full time job or for some reason can't manage his subs as necessary, then I agree he should be bringing in a full-price GC to do the work and make sure it gets done right. But, those investors are going to make a lot less money and probably find many fewer reasonable deals.
Exactly! Inexperienced fishermen should not take an ultralight rod to a King Salmon Derby!!