How to “Nail” The Basics of Contracting
My buddy gave an extremely thorough presentation to our real estate club back in February, when he reviewed his past two LA renovation projects. Figured the Bigger Pockets community could benefit from some of his key takeaways...I encourage any and all feedback!
- Craig (aka CDP) has managed renos and the contract process for both himself AND others
- His smart approach = limiting downside and learning from the past
- CDP writes down all mistakes to learn from for next time
GENERAL CONTRACTOR BIDDING PROCESS
- Get multiple bids & compare, and ask for line-by-line proposals
- Can have two out of three, but not all → (1) Quality (2) Speed (3) Low Cost
- Incent project completion via an end balloon payment (typically in 10% range)
- Don’t do cost-plus, instead provide max price for material/parts…keeps costs down
- GC should get multiple bids for all sub-vendor work, ensuring optimal pricing
- Ensure GC keeps good records for future audits
- Hire structural engineer for changes to things like load-bearing walls, etc
- GCs mostly require their standard template. CDP inserted his own clauses for additional protections
- Be super specific — ambiguity is dangerous
- Define process for change orders upfront
- CDP used GC’s for primary build, but not for projects like the garage, tile, painting…can save money here, but your call as homeowner / investor. Both pros and cons
- Have punctuated check-ins to prevent expensive reversals of major work (closed walls, etc)
- Some incorporate 12–13 check points for renos (dry wall, plumbing, inspection, etc)
- Include others on team as needed like architect, structural engineer, designer = creates system of checks & balances
- GCs may oppose very specific timelines since much uncertainty with availability of sub-vendors
- Manage timeline of how long different team members stay on, e.g. architect may only stay on through primary build
- If GC is already working nearby on another property, reno can move faster by limiting GC travel time from other jobs, etc
- Contractors not always great project mgrs — CDP reviewed manpower & timeline plan with GC, and gave input that took multiple wks off project timeline
- Be particularly present around property for finishings, and KNOW your preferences (outlet placement, etc)
- A good GC is very adept at managing inspections — knows what inspector is looking for, avoids common pitfalls
- Know your “snowball” problems (e.g. one bad decision upfront impacts MUCH future work)
- For foundation, can have slab vs stilts / raised — slab tougher for work like plumbing since limited access
- What permits / processes can you look up and manage in advance / get started early on?
- Be wary of non-conforming units in a purchase — might be illegal to have tenants staying there AND you have to pay them to leave…a ridic double whammy
- CDP didn’t use GC for garage, was able to save margin there
- Buy own toilets, usually have crazy markup
- Received credit for trees interfering with sewer line during inspection, but didn’t use in closing negotiation, although totally could have
Sounds like still in the early stages of PM and half legal work. For one, you can't hire someone to paint anything unless they are licensed with a C33 (painting specialty contractor for CA), bonded, and insured, plus have client/inveestor named as additional insured, very basic stuff, without these 3, the contract and liability will not be bounded together. For the credit of the whole process, it might hit 30% correct, the rest have their own pitfalls but i believe it is too broad to be of real benefit, if this is a sales pitch to hire the firm or an education guru, then i'd move on. There is no real meat here, to further strengthen this post, it needs real samples and a step by step process. One other point is some cities take home owner permits very seriously, you will need to live at your residence 1 year after the reno, else you're guilty of perjury/fraud. Why not let your friend post all documents including sample contract here so everyone can benefit. The contractors that will end up doing this job is either one that has a lot of buffer in them to cover and adhere to the contract or someone who works for himself plus one other.
Originally posted by @Christopher Erwin :
- Be super specific — ambiguity is dangerous
You can say that again
Are you using a guaranteed maximum price contract? If so, do you have an performance clause built into the contract to reward early completion? My understanding is yes based on the 10% balloon bullet item mentioned. Do you split cost underruns with the contractor to encourage contractors to keep price low?
Haven't heard of that 10% balloon item, first time I encountered that, I could understand 10% retention. Not sure why a contractor would split cost. I'd never do.