Do you incentivize GCs? If so, how?

26 Replies

I know flippers sometimes write penalty phrases into contracts ("must complete by XXX or pay $/week/month"). Do you ever pay your GCs extra when they get it done on time or early? Or, are they being paid to do that already? Have you every paid a GC an incentive for a house selling at a certain price point?

I've never entertained the idea of incentive's for GCs... I can certainly think of GCs being interested in some contractual or non-contractual incentive to pay for some portion of it in cash. 

Will be interested to hear others input on this, great question!

I have offered them on projects. I calculate them based on my "hold cost" which is built into my spreadsheet. If that house is costing me interest, taxes, utilities, HOA, etc then incentives could potentially save money. Also, a few hundred bucks a week is usually small compared to the grand scheme, but can be huge for those guys.

 I also do my payment "schedule" not based time, but based on completion benchmarks. ex: Here is 'week one' work. When you get it completed I will pay you $XX

@Kathryn Stevens As a licensed contractor I am not looking for bonuses to get done faster . And am not looking for anything more than the contract price . As far as penalties for taking more time , The contract I would have you sign doesnt have anything close to that in it . It does state  any delays due to things beyond the contractors control will add time and possibly extra charges to the final price .

@Jeremy VanDelinder  The couple hundred bucks may be nice to throw at some lower level subcontractors , but as a professional you would have to move the decimal point to the right to get my attention

Cost plus or T&M too much work (adminstrative burden) .... Save that stuff for something that can't be well defined.

Fixed price works better IF you come up with a fair/attractive price point. This shifts the urgency to the contractor to get done as quickly as possible to maximize profit. 

Some people feel ripped off when a contractor gets job done ahead of schedule like they were over charged for labor.. but that's a foolish way to look at it. You paid (a agreed price) for the job, why wouldn't you want it done as fast as possible? There's no incentive for it to be done slower and even less incentive for the contractor.

@Kathryn Stevens  I dont know what you consider "large cost " But I only do bid prices .   Cost plus 20% sounds great on paper , But what you and the contractor consider costs can be a problem . 

Second as a contractor  I have found lower cost subs equals lower quality , or uninsured , etc. 

Let me describe some of my costs on a job that you never see but I would bill you for plus 20% .  Office time pricing and ordering materials , time spent obtaining and paying for permits , time spent scheduling subs , time spent consulting with the customer , time spent running for small materials . Time spent checking the job . Anything I spend time on relating to your job would be billable  plus 20% .

As far as a contractor requesting a bonus , I dont , I give you a price , and a time frame , I make sure I will make what I want on the front end , I dont beg on the back end .  Now if you are so happy with me and cant hold yourself back and want to throw $100 bills in my direction , I bend over to pick up pennies , I would do similar with Ben franklins .

But I wouldnt ask for a  "Bonus "

@Kathryn Stevens Initially I did neither - and quickly learned my lesson! Now, we write up simple contracts that have several milestone payments (most GC's ask for only 2 or 3 but we push for 4 or 5) as well as a early completion bonus and daily penalty if the completion date is not met. Here is a break down of all three:

First disbursement is for demo so it's relatively small given it's mainly for labor. All other disbursements are project based (i.e. painting, kitchen remodel, bathroom remodels, etc). Final disbursement is withheld until everything is completed to satisfaction.

Early completion bonus is arbitrary. We ask the contractor how long it will take them to finish the job. We then give them an additional 14 calendar days. If they complete the job 14 calendar days before the date they gave us (28 total calendar days from contracted completion date) we will kick in a $1k to $3k bonus depending on size of job. 

Since all of our properties are buy and hold rentals, we take the fair market rent lost as well as the estimated cost of utilities for the month and break it into a daily penalty fee. For us, it's typically in the $45 to $60 range. This is withheld from the final payment. 

Hope this helps!

EDIT: Our GC's likely do not operate at the professional level of Matthew Paul (above). We've had issues with our GC being late as well as performing poor quality of work on our initial deals. Reigning him in with a contract that we both agree on has been the best thing for us.

You can always change order additional labor to get the job done faster in a fixed price vs doing a bonus. More or less accomplishs the same thing just different view of the task...

Also using Larry's method extremely effective/efficient for new contractors. Both sides need to build trust. You need to know the contractor can do what they say when they say and the contractor needs to know you will pay when the bill comes due. 

Plus it allows you clean break points if things don't work out.... But equally important it leaves money on the table to the contractor has reason to continue to show up...

Communication and building relationships with your GC is key. You need to have an understanding and agreement of everything both parties are bringing to the table. I highly recommend getting that done in the form of a subcontract agreement - short form or master depending on the dollar value of the contract.

You need to incorporate a schedule of values breaking down the contract sum into tasks, and with an accurate cost assigned to each task. In my experience, bad GC's typically front-load the SOV with all of their profit. By accurately and fairly breaking down the contract sum into corresponding values, the GC will be incentivized to push production on each task, trying to achieve the percentage of completion milestone when payment is due, typically at 25% increments. This has been known to cause disagreement on projects because it can be viewed as subjective - what the GC may think is 50% complete, you may think otherwise, hence why I mention communication and building relationships is key. 

It is imperative that you maintain control of your own project costs and hold the majority of the leverage, which is why I would suggest holding back 5-10% retention on each milestone payment until project completion. By withholding retention you are incentivizing the GC to complete the project whilst you earn interest on that cash in the process.

You'll also need to include a project milestone schedule detailing when each task is expected to be complete. There are plenty of online tools available to help you develop a plan which gives you the ability to track progress. And I would advise incorporating a liquidated damages clause which sits alongside this progress schedule. These LD's need to be based on a reasonable forecast of damages for not delivering on time, and they need to be justifiable. I've seen LD's run from $100 per day to $1,000,000 per week. LD's are a robust method to protect the owner from the GC's failure to complete the contract work within the number of calendar days both parties agreed to. 

@Kathryn Stevens I appreciate the offer , but I am in Maryland , and I get to pick and choose the work I want at the prices I want to charge .   Taxes here suck and I wont get into gun laws , but the rest is great 

I never tip my gc's or workers for completed projects unless i feel they have gone above and beyond. At that point I usually buy them tools they needed to complete the job or something trade related. 

Above & Beyond= completed early, under budget, solved some major problems for cheap or in general showed up on time and had a good attitude

@Kathryn Stevens Dealing with contractors of any kind in Austin is a nightmare right now. My investments are out of state but I like in Lakeway. I've been needing a deck replacement, and nothing fancy, of my 8ft x 24ft deck with wooden rails. Materials alone including stain are less than $1k yet the lowest bid I received was $7,200 and the highest has been $13,500. The demand for all trades in the area is so high that these contractors can practically extort clients. 

@Account Closed So true. I bet your deck replacement is a 2-3 day job, right?

Investing in Austin is a buy, hold and pray for appreciation play. No cash flow. No wonder you are investing out of state. It's hard to believe the real estate prices continue to go up and up. At some point, there has to be a correction, though none of the typical indicators (i.e. population growth, job growth) are pointing that way currently.

@Matthew Paul "Now if you are so happy with me and cant hold yourself back and want to throw $100 bills in my direction , I bend over to pick up pennies , I would do similar with Ben franklins ." I actually laughed out loud at this; one of my favorite quotes on BP to date. 

Overall a very good conversation, with valid points on both sides. Incentive based contracts are probably best determined on a case-by-case basis. I personally think putting incentives into contracts could head down a slippery slope in the long run. As Matthew said, he prices his jobs based on what he will need to complete them fully, and to his standard of quality. When you start including incentives, I fear some lesser GC's would use this as an opportunity to gain a little more cash and your finished product would suffer as a result. Faster doesn't always mean better. 

A while back I read The Empowered Manager and it goes into depth on incentive based performance. There is a very fine line between successful incentive programs and disastrous programs, with the majority being the latter. One of the things that most people don't realize is that rewards systems are very similar to punitive systems (further explained in this Harvard Business Review Article). Either way, you are attempting to motivate workers based on behavioral manipulation, which will never drive you to receive the results you desire. 

I think to achieve the best results when working with a contractor would be to establish a THOROUGH scope of work, concrete timeline and contract value. Pay them for their hard work and keep working together. If you feel they did exemplary work and want to give them a bonus then do so, but as Matthew said it isn't required.

Also - Another key point Matthew brought up: understand the contractor only owes you what was agreed upon in the contract, they are not obligated to do anything above that. If there are changes to the timeline or project by owner direction or unforeseen existing conditions, the contractor deserves the cost and time associated with those. This is a difficult thing for most investors to understand, but why should a contractor be on the hook for changes and delays outside of his control? 

For example: If the contractor puts cabinets in, in the finish selected by the owner/investor and then the investor turns around after seeing the final product and says the finish isn't what they want now, well tough luck buddy, you chose it, you approved it, you own it. It isn't the contractor's responsibility to then replace them at their cost because you now changed your mind. Now if the shoe was on the other foot and the contractor provided the cabinets in the wrong finish or installed them poorly, then yes they should replace them at their cost. 

I feel a lot of issues in the overall process come from poor communication and unsaid or unrealistic expectations. Communicate, work together, and manage expectations: we all want to and easily can be successful in the end.  

Counterpoint to the scope of work...

It should be clear and measurable, but don't get into the weeds on details about how to do the job. If you cross into telling the contractor HOW to do something vs what to do... You will get change ordered to death if your instructions fail or you forgot something...

Originally posted by @Kathryn Stevens :

I know flippers sometimes write penalty phrases into contracts ("must complete by XXX or pay $/week/month"). Do you ever pay your GCs extra when they get it done on time or early? Or, are they being paid to do that already? Have you every paid a GC an incentive for a house selling at a certain price point?

 I represent both owners and GCs in TX; I often only see penalty clauses as opposed to incentive clauses. Occasionally we'll see incentive clauses in cost-plus build contracts, but that's rare.

@James Miller Thank you for your response. I agree with your approach and have selected a project manager in lieu of a GC for this project. By eliminating the cost-plus expense, I can better control expenses and keep our interests aligned.

@Kyle Jiron You raise many valid points especially about creating a thorough scope of work, concrete timeline and contract value. On one project, I had a GC balk at a very detailed, 8-page SOW for a very large project and told me he was "overwhelmed" by its appearance and the 5-page independent contractor contract that accompanied it. He was used to a 1 1/2 page contract that covered "everything" (but really didn't). I decided not to work with that GC since he couldn't read through the entire document. I want to work with partners who understand the value of a contract projects everyone involved and serves as the safety net when our memories fail us.

@Kathryn Stevens You definitely made a good decision. I think it's very easy to find yourself in a poor position (on either side, as a GC or investor) when contracts aren't clear. Everyone wants to be successful, so we just need to work together to make that happen.