Real Estate "HACK" Of the Week - August 22 - How to Deal With Contractors & Avoid Costly Delays

34 Replies

I was inspired by @Brandon Turner  's landlord's "hack" list. SO I've decided that every week, I will share my real estate "hack" with BP Nation. Here's my first real estate "hack" of the week:

Issue with Some Contractors (not all of them, but some of them): DELAYS in finishing their work on time

My "Hack": I ask them what their deadline is for a particular job and I add 1 week to their deadline. Then I tell them that I will penalize them $100/day per every day they are late on their deadline (+ 1 week padding). I put this penalty clause in my contract with all my contractors. If they finish their job ahead of schedule, I give them $100/day BONUS.

The result of this "Hack": all of my rehab jobs are finished ON TIME. The only time I have delays are during "Acts of God" situations. 

What about you rehabbers out there? How do you avoid delays in your rehab projects?

That is exactly what municipalities do to roadwork contractors, only on a much larger scale. 

This probably weeds out the contractors that aren't reliable before they even start the job. 

Great idea! 

Originally posted by @Joe Demonte:

That is exactly what municipalities do to roadwork contractors, only on a much larger scale. 

This probably weeds out the contractors that aren't reliable before they even start the job. 

Great idea! 

 A much larger scale, but it is effective to motivate them to get it done either on time or early. There was an IBM project several years back where the late penalty was $100,000/day.

Originally posted by @Joe Demonte:

That is exactly what municipalities do to roadwork contractors, only on a much larger scale. 

This probably weeds out the contractors that aren't reliable before they even start the job. 

Great idea! 

 Yes - exactly. When I started doing this, "fly-by-night" contractors are discouraged to even bid and I only get the contractors who are professional and diligent with their work.

Originally posted by @Nathaniel Berry:
Originally posted by @Joe Demonte:

That is exactly what municipalities do to roadwork contractors, only on a much larger scale. 

This probably weeds out the contractors that aren't reliable before they even start the job. 

Great idea! 

 A much larger scale, but it is effective to motivate them to get it done either on time or early. There was an IBM project several years back where the late penalty was $100,000/day.

 Wow - $100K/day!

@J Scott, other than the above, do you have other "hacks" to avoid costly delays in rehab projects? 

"If they finish their job ahead of schedule, I give them $100/day BONUS."

@Wendell De Guzman , do you find that the guys try to cut corners in order to finish early?  Sometimes it is obvious if workers cut corners, but often they do so in ways that you don't find out until an inspection for closing.  I sure would hate to pay extra to finish early, if this was the case.

.... I'm all about penalizing them if they are late.

901‑545‑9092

I recently had 1000 sq ft of laminate flooring installed.  The contractor I accepted the bid from said his install crews had 3 people on them and they could complete the job in 1 day, but to give him 2 just in case.  I stopped by after the first day, and only about 100 sq ft was down.  I didn't think much about it as I thought they would finish the second day.  I stopped by at the end of day 2, and there is only about a total of 200 sq ft down.  

I called and left a message for the contractor that evening.  The next day I stopped by in the middle of the day to see what the install crew was doing.  There was only one worker there.  When I told him that contractor X had said there would be 3 people there working on it, he didn't know what I was talking about or who contractor X was.  To cause me further concern, he said it was taking him so long because he had never installed laminate before.

To make a long story short, my original contractor subbed it out to another installer, who then subbed it out to another installer.  Unfortunately It got nasty between me and the original contractor, an the project ended up taking a week and a half.

Now I stipulate that anyone I company I contract with has to actually perform the work and can not sub it out.

Good to see someone exercises advice I have given here on BP. I have posted several times about this very thing and it is highly effective. Of course my per day penalties are higher due to the higher holding costs.

For those of you wondering how to calculate the penalty/bonus, simply add up every single holding cost you have (taxes,insurance, interest, utilities,lawn maintenance, payroll, pool care, HOA fees, etc etc). Get that monthly number and divide by 30. Then I usually tack on a bit more as I really want to incentivize them to complete the task on time. I estimate my opportunity loss to be very high so if they finish early and I have to pay more than my actual holding costs,mi still feel I am ahead as I have more opportunities out there in excess of said bonus.

Medium be logoWill Barnard, Barnard Enterprises, Inc. | http://www.barnardenterprises.com | Podcast Guest on Show #130

Originally posted by @Wendell De Guzman:

I was inspired by @Brandon Turner  's landlord's "hack" list. SO I've decided that every week, I will share my real estate "hack" with BP Nation. Here's my first real estate "hack" of the week:

Issue with Some Contractors (not all of them, but some of them): DELAYS in finishing their work on time

My "Hack": I ask them what their deadline is for a particular job and I add 1 week to their deadline. Then I tell them that I will penalize them $100/day per every day they are late on their deadline (+ 1 week padding). I put this penalty clause in my contract with all my contractors. If they finish their job ahead of schedule, I give them $100/day BONUS.

The result of this "Hack": all of my rehab jobs are finished ON TIME. The only time I have delays are during "Acts of God" situations. 

What about you rehabbers out there? How do you avoid delays in your rehab projects?

This is a very good idea. I have a friend who does this and he says it definitely helps speed up his jobs. At one time, he was considering (I don't know if he did it) a small bonus if they finished it a week or two early.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Originally posted by @Julia Blythe:

"If they finish their job ahead of schedule, I give them $100/day BONUS."

@Wendell De Guzman, do you find that the guys try to cut corners in order to finish early?  Sometimes it is obvious if workers cut corners, but often they do so in ways that you don't find out until an inspection for closing.  I sure would hate to pay extra to finish early, if this was the case.

.... I'm all about penalizing them if they are late.

 Julia,

I also have a 10% retainage that I release only upon satisfactory walk-through at closing...so I protect myself from contractors who cut corners.

Originally posted by @Tyler Clark:

Now I stipulate that anyone I company I contract with has to actually perform the work and can not sub it out.

 Be careful.  If the IRS were to look at that clause in a contract, they may determine that this "contractor" is actually an employee -- one of the key tenets of independent contractor relationships is the freedom to delegate and sub out work.  

Originally posted by @Wendell De Guzman:

@J Scott, other than the above, do you have other "hacks" to avoid costly delays in rehab projects? 

Here's a suggestion when you have a contractor who isn't getting the job done in a timely manner...I use a recent example with a plumber I was using...

Plumber wasn't getting stuff done very quickly.  I wasn't ready to fire him (he wasn't that bad), but I also wasn't willing to wait much longer.  I have a penalty in the contract for not finishing by the deadline, but it got a little muddied because the project slipped earlier and knocked him behind schedule.

Anyway, I said to the plumber, "Hey John, do you have any plumbers you can recommend?"

He looked at me and laughed a bit.

I said, "I'm serious.  I have two projects coming up, and need some guys to cover them."

He said, "Why wouldn't you give me the job?"

I said, "This job that you're working on right now is the highest priority, and I'm not pulling you off this one until it's done...but I want to get started on the other ones ASAP."

As you can expect, the job he wasn't finishing suddenly became his #1 priority.

And btw, if you don't plan to use the contractors again, this works even if you don't have any other jobs (you can just lie about them)...

This is a really great suggestion and correlates with a situation I am currently dealing with. I will be using this in my future projects. Thanks for sharing!!

Originally posted by @J Scott:
Originally posted by @Tyler Clark:

Now I stipulate that anyone I company I contract with has to actually perform the work and can not sub it out.

 Be careful.  If the IRS were to look at that clause in a contract, they may determine that this "contractor" is actually an employee -- one of the key tenets of independent contractor relationships is the freedom to delegate and sub out work.  

 J, thats not entirely true. You are hiring a contractor for their work, not someone else's.  I don't see it as an issue unless this person is doing full time work for only you.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

Originally posted by @Steven Hamilton II:
Originally posted by @J Scott:
Originally posted by @Tyler Clark:

Now I stipulate that anyone I company I contract with has to actually perform the work and can not sub it out.

 Be careful.  If the IRS were to look at that clause in a contract, they may determine that this "contractor" is actually an employee -- one of the key tenets of independent contractor relationships is the freedom to delegate and sub out work.  

 J, thats not entirely true. You are hiring a contractor for their work, not someone else's.  I don't see it as an issue unless this person is doing full time work for only you.

 I was just basing that off the criteria that the IRS uses to make a determination between contractor and employee.  One of the sets of criteria is the "behavior control" that the hiring party has over the hired party.  One of the example questions that the IRS lists under behavioral control is, "What work must be performed by a specific individual?"

Of course, that's one in a long list of determining criteria, and like you said, unless the person is working full-time for one employer, it's probably not an issue.

The contractors that make the real money all use subs , most general contractors only have a few punch out guys the rest are all subcontractors .  The only way to get a job done in a timely manner and with decent quality is for the contractor to use  subs who are pros in their field.  

As far as the 100 dollar a day penalty , the contractors I know , first would chuckle at that , second would never agree to it . There are too many variables in remodeling , inspections , ordering materials , unexpected problems , changes  etc.  But then the contractors I am friends with are high end , word of mouth , and you generally wait 6 to 10 months to get on their list . 

We do 99% of our own work, but my old boss used something like this .... "Contractor will be directly responsible for the quality of workmanship of any workers or subcontractors he hires. Contractor will be responsible for the timely, professional performance of all tasks, in accordance with legal requirements. This is to include any building permits or licensing requirements. Contractor will provide proof of liability insurance and workman's comp insurance prior to beginning work. No payments will be made until insurance, licensing and permit requirements are documented." He also used a penalty/bonus based on holding costs as suggested by @Will Barnard

Originally posted by @Wendell De Guzman :
Originally posted by @Julia Blythe:

"If they finish their job ahead of schedule, I give them $100/day BONUS."

@Wendell De Guzman, do you find that the guys try to cut corners in order to finish early?  Sometimes it is obvious if workers cut corners, but often they do so in ways that you don't find out until an inspection for closing.  I sure would hate to pay extra to finish early, if this was the case.

.... I'm all about penalizing them if they are late.

 Julia,

I also have a 10% retainage that I release only upon satisfactory walk-through at closing...so I protect myself from contractors who cut corners.

We go one step beyond that. We treat it like a building inspector does. We list critical mileposts that will trigger inspections and also draws. Obviously small jobs do not require such inspections, and not all jobs will.

Originally posted by @Will Barnard:

Good to see someone exercises advice I have given here on BP. I have posted several times about this very thing and it is highly effective. Of course my per day penalties are higher due to the higher holding costs.

For those of you wondering how to calculate the penalty/bonus, simply add up every single holding cost you have (taxes,insurance, interest, utilities,lawn maintenance, payroll, pool care, HOA fees, etc etc). Get that monthly number and divide by 30. Then I usually tack on a bit more as I really want to incentivize them to complete the task on time. I estimate my opportunity loss to be very high so if they finish early and I have to pay more than my actual holding costs,mi still feel I am ahead as I have more opportunities out there in excess of said bonus.

 Awesome way to calculate the daily late penalty. Thanks Will.

Originally posted by @Tyler Clark:

I recently had 1000 sq ft of laminate flooring installed.  The contractor I accepted the bid from said his install crews had 3 people on them and they could complete the job in 1 day, but to give him 2 just in case.  I stopped by after the first day, and only about 100 sq ft was down.  I didn't think much about it as I thought they would finish the second day.  I stopped by at the end of day 2, and there is only about a total of 200 sq ft down.  

I called and left a message for the contractor that evening.  The next day I stopped by in the middle of the day to see what the install crew was doing.  There was only one worker there.  When I told him that contractor X had said there would be 3 people there working on it, he didn't know what I was talking about or who contractor X was.  To cause me further concern, he said it was taking him so long because he had never installed laminate before.

To make a long story short, my original contractor subbed it out to another installer, who then subbed it out to another installer.  Unfortunately It got nasty between me and the original contractor, an the project ended up taking a week and a half.

Now I stipulate that anyone I company I contract with has to actually perform the work and can not sub it out.

 Thanks for sharing your experience. It makes sense. You have to be in control. So your contractor subbing it to another...who in turn will sub it also...means you'll lose control.

Originally posted by @J Scott:
Originally posted by @Wendell De Guzman:

@J Scott, other than the above, do you have other "hacks" to avoid costly delays in rehab projects? 

Here's a suggestion when you have a contractor who isn't getting the job done in a timely manner...I use a recent example with a plumber I was using...

Plumber wasn't getting stuff done very quickly.  I wasn't ready to fire him (he wasn't that bad), but I also wasn't willing to wait much longer.  I have a penalty in the contract for not finishing by the deadline, but it got a little muddied because the project slipped earlier and knocked him behind schedule.

Anyway, I said to the plumber, "Hey John, do you have any plumbers you can recommend?"

He looked at me and laughed a bit.

I said, "I'm serious.  I have two projects coming up, and need some guys to cover them."

He said, "Why wouldn't you give me the job?"

I said, "This job that you're working on right now is the highest priority, and I'm not pulling you off this one until it's done...but I want to get started on the other ones ASAP."

As you can expect, the job he wasn't finishing suddenly became his #1 priority.

And btw, if you don't plan to use the contractors again, this works even if you don't have any other jobs (you can just lie about them)...

 As always JScott - awesome suggestion. I will use this "hack". You are not lying though....you will always have another job or rehab project :-)

Originally posted by @Nicole Keller:

This is a really great suggestion and correlates with a situation I am currently dealing with. I will be using this in my future projects. Thanks for sharing!!

 You're very welcome! Let BP Nation knows how using this "hack" works for you.

I wish I could vote for @J Scott 's post about the employee vs contractor issue 10 times over! Now, I just typed a detailed response about several issues I've had, including a recent state audit, accidentally hit some combo of keys on my laptop and erased the whole darn thing! AAARRRGGGHHH!!! I've got to run, but basically wanted to add that besides the IRS, you have to worry about your state's rules as well! Here in WI, they have 9 rules, a contractor must meet 6 of the 9, or else you better get out that checkbook and make it payable to "State of WI"!!! 

As a former accountant, I can tell you that the IRS started cracking down HARD on that issue over 20 years ago and they (plus each state) LOVE to find fields of biz that are ripe for he picking and whack them hard, over and over and the flipping/rehabbing, etc field is apparently one of the hot ones now! For the last maybe 10 years, they've been going hard after tipped servers, bartenders, etc because they found them to be cheating big time on reporting tips and now they see with the "flipping boom" that MANY operators are playing fast and loose with things. Problem is that even those of us who play by the rules (I pay ONLY by check, send out 1099's at year end, etc) and know the rules of employee vs contractor can easily get caught up and can get whacked hard with fines, interest, etc. 

Anyone not totally familiar on this darn well better read up on it now, as one of the "rules" both here in WI and for the IRS is that you aren't supposed to be able to set contractors hours and that's a slippery slope to me!

http://www.irs.gov/pub/irs-regs/subcontractorsfaq&...

Look at this straight from the IRS

Originally posted by @Matthew Paul:

As far as the 100 dollar a day penalty , the contractors I know , first would chuckle at that , second would never agree to it . There are too many variables in remodeling , inspections , ordering materials , unexpected problems , changes  etc.  But then the contractors I am friends with are high end , word of mouth , and you generally wait 6 to 10 months to get on their list . 

 The way I see it...whoever writes the check writes the rules. When I am rehabbing houses, the contractors I work with has to follow MY rules. If they don't like the $100/day penalty if they're late, then I don't work with them.