Flipping and Giving Contractor a Percentage of Profit?

7 Replies

Has anyone hired a contractor for flip and as part of the pay give them a percentage of the profit. This would incentive timeliness and good work. Thoughts?

Just make sure they have a realistic expectation of what they will be making. Plus if things go south and you can't sell for as much as you intended, then you may be over promising your contractors a bigger paycheck which could burn that bridge. There are also some contractors who don't always have the best business sense, they may not see the importance of getting the work done as quickly as you do. Also, what happens if they bail on you halfway through the project? Will they still expect to get paid in full when the project is complete. It's certainly not a bad idea, but I personally probably wouldn't do it.

Colin Smith, Real Estate Agent in CO (#ER.100052152)
719-232-6709

They would still get paid a base amount, but less than what they would normally would have received. Contractually, they would have to complete the project to be eligible for profits.

Yes, lots of people do it.  But, that doesn't make it a good idea.

First, it sends the message that you don't expect timeliness and good work...so you're willing to pay extra for it.  This is the wrong message to send to your workers.  Instead, you should be sending the message that you always expect timeliness and good work.

If you'd like to pay a bonus for beating deadlines, coming in under budget and/or exceptional quality, go for it.  But, I don't think a profit split is the way to go in any case, for several reasons:

1.  I assume you don't want to give them the ability to audit you to verify your profit numbers?  If you contractually agree to paying a part of the profit, they might expect this.

2.  What happens if there is a disagreement over the timeliness or quality of work?  Do you want to go to court to fight over whether they get the percentage of profits?

3.  Once you go this route, there's no going back. 

I like to give my contractors bonuses when I do better than expected (or when they do better than expected).  But, I like this to be at my discretion, not in the contract.

@JScott good suggestions. Thank you.

I assume that @Account Closed  What if I wanted my general contractor to be more of a project manager instead of my contractor when he works for me.  I can't afford to have a full time project manager.  He would still hire all the subs etc but he would be working "for" us mutually as opposed to for himself.  Not sure that I didn't just ask the same question in a different way but basically I would like to hire a GC as a part time project manger.

Originally posted by @Chris C. :

@J Scott What if I wanted my general contractor to be more of a project manager instead of my contractor when he works for me.  I can't afford to have a full time project manager.  He would still hire all the subs etc but he would be working "for" us mutually as opposed to for himself.  Not sure that I didn't just ask the same question in a different way but basically I would like to hire a GC as a part time project manger.

Keep in mind that he'll likely be classified as an employee based on IRS definitions, which means you'll potentially also be on the hook for employment taxes, workers comp, etc.  If you go that route, I see nothing wrong with the compensation package being a combination of salary and profit split, but I would try to ensure that the total compensation is in the same range as if you were just paying a salary (in other words, don't do full salary PLUS profit split).

@David Kroh

That's your future competition.

I wouldn't.