How to pay your contractors so everyone wins
So the big question for a lot of newer investors and some experienced investors is how to make sure you keep a good contractor as well as your investment and personal interests safe? Well, there are a few different ways to do this, with each way being a better fit depending on multiple variables such as risk tolerance, available time to run a project, the interest in running the project, and emotional grit. You have to ask yourself exactly how you envision your real estate investing to go; do you want to be apart of every little detail or would you prefer to take updates and write checks and enjoy your life with family and friends or doing the hobbies you love to do?
So the first question is, how do you make sure your contractor doesn't run off with your money? Well first off do not hire the cheapest contractor out there, they are cheap for a reason. You can start by asking them a serious of questions to vet them, see my other blog post https://www.biggerpockets.com/blogs/9607/71901-things-to-ask-your-general-contractor?created=1
The next serious is taking the time to prep for your project rather you are using individual subcontractors or using a general contractor. A detailed scope of work is needed no matter what, this ensures you get what you want to be done at a fair price. We have run into multiple investors who are just not prepared for their project and do not have a scope of work. This scope of work should act as your contract for your contractors to hold them accountable to their bid so there are no questions on what was or wasn't said during the walkthrough.
After that, I recommend hiring a contractor that has their own contracts for you to sign. If they do not have any then they are not that serious about their business and this is a huge red flag for me personally. If they do have their contracts in order then you know they mean business and care about their work and reputation.
I suggest either writing up a schedule to have your contractors follow or ask your general contractor for a schedule. This allows you to set up a weekly payment plan and ensure you contractors can eat and you can sleep easy knowing the work was done and there is not a bunch of your money in someone else's bank account that might not show up next week.
Now for materials, I recommend having your contractor buy them or put together a list of materials they need for the upcoming week. I suggest they do it so you get materials that they like to work with, every contractor has a preference of brand. In order to prevent you contractor from having to front your project cost, we like to use phone orders or we put the list together the week prior to tell you exactly what we plan to buy so you can deposit just that amount. This again allows you to maintain control and have transparency with where your money is going.
To wrap everything up I will give an example of what Gear'd Development does.
1. walk through with client and review of the scope of work. We do not go out to bids without a scope of work emailed to us. This prevents us from working with fly by the night clients as well as wasting our time and preventing any miss communication.
2. Review the architectural drawings if the project needs them.
3. We transfer the client's scope of work onto our own template, this serves as the contract for the project. It includes the work to be done by us and the subcontractors such as HVAC, the price, and basic weekly schedule.
4. Our master contract and the project contract are signed with a start date in place and payment schedule.
5. A small deposit is collected to secure the client on our schedule. This is to ensure our schedule stays full and the client does not disappear come start time for the project.
6. We do weekly payments for labor. We invoice Friday evening for the work that was completed. The payment must be in our account Wednesday at the latest or work will be stopped and you will be taken off the schedule. This ensures we are not put into financial dismay because the investor was not truly ready to invest or we are not fronting the costs for your projects. That would be like working as an accountant and waiting for the client to get their return months later in order to be paid, it just is not fair to the professional.
7. Materials are done via phone order after we pick them out at HD for the week Monday morning or we put together a materials list and bill you
8. Every Monday you will get an update on your project with photos and what was done and what the plan is this upcoming week.
Now again how each contractor and investor handles payment is up to her or him, but this is what I personally do and how we at Gear'd Development handle our projects. This is a middle of the road solution. What do you do with your contractor? How do you pay them? What documents do you two sign?