Structure of General Contractor (GC) Incentives
I was wondering if anyone has come up with a successful agreement that aligns the interests of the owner and general contractor. I was looking to "partner" with a GC to work on some rehab deals. I want to set-up a structure so that I can align my interests with the GC. If I pay x% of a rehab budget then they are incentivized to spend more on a project not less. I am looking for this to be a long-term arrangement over multiple properties with the same person, so I want the agreement to be "fair" and rewarding to the GC.
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I have an ongoing relationship with my GC, but each property is a separate agreement, because each property is different. The general understanding is a cost-plus, and then cash incentives based upon completion time frames and meeting budgets. My GC also has a very good eye for design and trends so I feel he adds value here as well. I usually have a good feel before I get any quotes from him on what I think the time frame and budget should be.
On average, he gets paid cost + 7.5% as a base price. Then I usually have a 2-4 week window of completion dates, with different bonus structures (always cash, not profit). I pay him the base price plus half of the bonus, when the house is ready to sale (sign in the yard/listed). The other half of the bonus is paid at closing, to insure punch items from inspection are taken care of, etc.
Lastly, I also get competitive bids at random times, just to make sure all pricing stays in line. On average, I do this on every third house. It all depends on how closely you want to manage the process.