Ask me anything about...Construction.

113 Replies

Hi Meryl - I am responsible for building out our development pro forma for new projects. Budgeting and reconciling from acquisition through design, planning and permitting to servicing, hard construction and obtaining occupancy permit. Right now we have been basing all our costing for servicing and hard construction on a blend of sqf costs from previous projects AND quotes from 2-3 sub trades to compare... however, sometimes our builds are unique (ie. 3 storey apartment building with 12 units and exterior walkway/stairway) 

Any recommendations on how to refine our preliminary budgeting other than running around between sub trades for quotes? 

Originally posted by @April Pangilinan :

@Meryl McElwain Hello! What is the best way to negotiate a contract to a contractor once they put in a bid for their estimate When is the best time to collect insurance and licenses? Is it better to provide them with a scope of work or allow them to draft on themselves:? Also, do you usually cover materials costs or is it better for the owner allow them to buy materials through a pro account at Home Depot.

Ive done it both ways where the contractor would provide their own scope of work or i would provide them with a scope of work during walk through for an initial bid. Seemed to work better when I drafted it myself.

Some contractors show a per hour for labor and some do not. Is it common to negotiate labor hours to lower cost?

Sorry so many questions, just trying to see it from the other side

The best way to negotiate is by telling them what your budget is up front.  This is only going to work if you know what it costs ahead of time but I'll get to how the average person can do this. A GC has an overall budget.  Each trade gets a line item. When I talk to subs I give them the plans (if it's a job where you need plans), a very detailed scope of work that I wrote, and my budget number.  I say this is what I have on the line for plumbers, if you can do it for this let me know. If you're talking to a GC the same language applies.  Go through the scope of work and say to them this is what I can afford. No more.  If you can do it for that please let me know.

This method has always taken a ton of the stress out of it for me. I've used this method for years. My main motivation for using this method came from how I choose to conduct myself in business.  Driving sub prices down because I can is something I just won't do because the tone it sets with the subs I'm about to rely on to get a job done is not one I want to set.  Some people live for the deal.  They want to know they got a good price out of someone. That they won. They got the other guy to give up something.  I don't.  I want to know that I paid a fair price, that the sub doesn't feel screwed or insulted by me right out of the gate. That they are being compensated fairly. That matters to me both on  a human/business level and on a very practical and logistics level.  Lots of guys disagree with me on this, their response is-they won't do the work unless there's money in it so don't worry about whether the sub is making money. Let me tell you how untrue that is.  I've had plenty of guys I didn't know agree to do work at a price that I thought was low.  This was a long time ago and I would never trust a low number now but it's how I learned.  They'll agree to do work for a much lower price than is reasonable and you know what happens?  It's garbage work.  Because they will find a way to make it cheaper but it will be at your expense.  Not theirs. Most of the time guys who agree to underpaid work are struggling financially and robbing Peter to pay Paul.  They just need cash to get through the next hurdle.  Once they get enough out of you and a better paying job comes along they're out.  So now you're 6k deep into a 12k plumbing job that really should have cost 16k but you thought you were getting a good deal with that low bid.  Joe the Plumber is gone and you are interviewing Bob to clean up Joe's work.  You know what Bob is going to charge you? 12K Because he will tell you everything Joe did wrong.  Everything he is going to have to fix. And then you end up paying 18K for a job that should have cost 16K. Sometimes Bob is telling the truth about Joe's work.  Sometimes it's BS. But most of the time they just don't want to continue a job someone did half *** and then get blamed for the portion of it they didn't even do.  A good example of this would be painters.  I once did a house with literal miles of trim in it.  Baseboard, chair rail, crown, panel boxes, coffer ceilings. We built the interior doors ourselves from scratch. To say that the nail holes were overwhelming would be an understatement. There were thousands of nail holes.  The painters told me it would take them a solid week just to prep the surfaces. In this instance were talking about adding 6500 dollars on for a group of guys to puddy and caulk nail holes.  I was like I'm not paying that I'll do it myself.  You know what happened? I spent 10 days doing what three guys could have done in 5 and they charged me anyway because they went back and reprepped everything I did.  Because they wont take responsibility for a final finish without having complete control.  That is so common.  I don't even bother trying to save time or money by prepping work for trades with my own guys anymore.  Let them do the whole job.

As for materials, it depends.  Most subs can get their supplies much cheaper than you can.  The drywall sub is buying sheets of drywall from a supply house for a lot cheaper then you can get it at home depot. The electricians are buying wire and switches for cheaper than you can get it at home depot.  It is to your disadvantage to try and control costs by buying specialized materials that you know nothing about that they buy every day. At the risk of a huge list here are the general rules:

1. Concrete guys buy all their own materials

2. Framers do not buy lumber, tyvek or tape. They generally provide nails but a lot don't. If you're buying the nails, buy the brand they tell you to. They know.

3. Siding guys get a better deal on siding than you.  Roofers get a better deal on roofing than you do.

4. Masons will buy all their own material except for the actual brick generally.  If you have a building with 40,000 brick going up you're going to be paying for that up front.

4. Windows and Lumber you can buy. Menards is the absolute cheapest for lumber and windows but it's not high quality stuff. It's mid market.

5. Plumbers buy all their own rough materials.  They'd prefer it if you bought the trim.  They don't want to deal with helping you pick faucets.

6. HVAC all the material comes from the sub

7. Electricians-All the rough material comes from them, trim you buy.

8. Hardwood and tile guys.  You buy the trim material. Hardwood guys usually bring their own glue, paper and nails, tape.  You're going to buy the wood. Sometimes they will if it's real hardwood not prefinished. Red Oak is pretty common at supply houses and easy for them to pick up. Tile guys will usually buy the mortar you're buying the tile.

As for per hour labor this is my warning: I do everything by the job unless it simply can't be estimated like that because you don't know what goes into it. Reno's can be like that. Sometimes there is no plan. You're just opening up walls and deciding as you go. Those are beasts of projects and they can be out of this world expensive. If you are not 100% sure exactly how much time something is going to take don't agree to an hourly labor rate. It will never end in your favor. On a side note-new construction is a walk in the park compared to renovations. I built 21 houses ground up before I was 30 and then decided I can do this addition/renovation easy. I almost had a stroke trying to attach a 3 story 16 ft addition and blend the two structures together. That little reno took more time then building 5 houses at one time did. Renovations are not easy. I shudder at the memory.

So to bring it back around to how the heck do you tell a contractor what your budget is when you don't know what it should cost?  Pick 3 contractors and have them estimate it.  Average those estimates and shave 10% off of it and then go to a 4th contractor and say this is my budget.  Toss the outliers.  If you get 3 bids- 16k 18k and 25K. Toss the 25K, go with 17K and pull off 10%. No we're at 15,300. I guarantee you'll get a contractor to do it at 15,300 which is 700 lower than your lowest bid and you didn't have to stomp on anyone to get it. Could you have gotten is for 12k? Maybe. But you also might end up with Joe.

My final thought this is: There will be a lot of people out there that say but I have a contract! Joe agreed to do it at 12K! I have a contract! Threaten to sue him! Make him hold up to his end of the bargain. If you subscribe to that line of thought you will never survive in this line of business. While you're hacking with Joe and threatening to sue him you're interest payments are rolling in, your schedule is off, now you're delayed and you're wasting time. You have to keep it moving, always. If a sub is shaky you do everything you can to keep them there. I'm the type of person that will offer to pay Joe more to stay because it saves me time. In this business time is money. You want them to finish. You do not want them to walk off. If that means you offer more money you offer more money. Do what you have to do to get them to finish the job and don't ever hire a sub like that again. This piece of advice is only applicable on small jobs where you will drown in time delays and worlds of hurt. A mid size project say over a million, Joe is instantly replaced with a more reputable sub and no one blinks an eye.

I feel like I've written a book here but I hope this help all of you.

 

Originally posted by @Dylan Earl :

Hi Meryl - I am responsible for building out our development pro forma for new projects. Budgeting and reconciling from acquisition through design, planning and permitting to servicing, hard construction and obtaining occupancy permit. Right now we have been basing all our costing for servicing and hard construction on a blend of sqf costs from previous projects AND quotes from 2-3 sub trades to compare... however, sometimes our builds are unique (ie. 3 storey apartment building with 12 units and exterior walkway/stairway) 

Any recommendations on how to refine our preliminary budgeting other than running around between sub trades for quotes? 

I would just ignore the unique factors unless you need to be to on the dollar at this phase.  If this is just a prelim to see if you're in the green and get the return you need to you're already doing decent due diligence.  An exterior staircase you haven't done before on 1 apartment building isn't going to be the thing that makes or breaks the overall budget. A 3 story concrete stair on 12 apartment buildings is worth diving into. But if you need to know for sure then unfortunately I don't think there is a shortcut on this one.

 

Originally posted by @Chase Kimbrell :

@Meryl McElwain

Man, have I been needing this thread. I’m basically rehabbing my first property, and while most of my questions are answered at the moment, I know I’ll need to ask some questions soon. Thanks for helping us.

Anytime!

 

Originally posted by @Justin Miles :

So that is the problem no schooling that would qualify and all the experience has been off the books. It is actually for my father he wants to get his residential contractors license to run the subs for our flip projects.

I have not forgotten about this. I called the Georgia board because the whole thing they have going on strikes me as a racket. The cost of the books is prohibitive. The net worth requirements are prohibitive. It feels like they've tried to monetize it, but excessively so. I'm going to see what the exact details of it are. When I find out what you can do I'll post back here.

Originally posted by @Tom Harkins :

@Meryl McElwain

When in the process, and how do you go about, checking a contractor's license and insurance?

 When you're signing a contract. Ask about it verbally pre contract. When you sign an agreement ask for a copy of the applicable license and the accord.  Get the accord from the insurance company yourself. If you take it from them make sure to call and verify it's authenticity.

Hello BP,

I am new to real estate investing and my biggest concerns are contracts! I'm a ways off from actually doing a flip just trying to get as much education as possible. I was about to pay a "guru" $50k until I found this site. Thanks guys for saving my savings! What contracts would I need for a contractor on a residential home?

@Meryl McElwain Thank you for starting this thread and sharing your knowledge with the BP community. 

I also live in the chicagoland area like yourself. I currently live in Linconlwood just outside of the City of Chicago. I live in a 2,100 square foot brick ranch that was built in the 1950s. I am considering adding a second level or addition at the rear of my home. What would you recommend doing as a first step in the process ? 

My neighborhood has had several newer home built in the past few years.
I have noticed a few "new" built homes in my area that have left the foundation and/or a small section of existing old exterior bricks. What is the purpose of that ?

Originally posted by @Meryl McElwain :
Originally posted by @Justin Miles:

So that is the problem no schooling that would qualify and all the experience has been off the books. It is actually for my father he wants to get his residential contractors license to run the subs for our flip projects

 I have not forgotten about this.  I called the Georgia board because the whole thing they have going on strikes me as a racket.  The cost of the books is prohibitive.  The net worth requirements are prohibitive.  It feels like they've tried to monetize it, but excessively so.  I'm going to see what the exact details of it are.  When I find out what you can do I'll post back here.

wow thanks for going above and beyond on this!!

 

@Meryl McElwain

Could also hire a large loss claims adjuster.

Through him or her a couple hundred bucks,

They can write a scope very quickly. That would give you a decent ball park.

Originally posted by @Glidden Rivera :

@Meryl McElwain

Could also hire a large loss claims adjuster.

Through him or her a couple hundred bucks,

They can write a scope very quickly. That would give you a decent ball park.

That's actually a really good idea. 

 

Originally posted by @Tom Harkins :

@Meryl McElwain

When in the process, and how do you go about, checking a contractor's license and insurance?

So insurance is something near and dear to my heart. One of the things that bothers me the most in this world is when good people who try to do the responsible thing have their entire world rocked because while they thought they had the appropriate insurance coverage and they dont.

Before I go down the rabbit hole with insurance. If I ask you what kind of insurance a contractor needs- do you know?

 

@Meryl McElwain

What is the typical cost per square foot for constructing apartments?

What is average per rental unit cost for site preparation, not counting road and parking construction

What is average cost per square foot for road and parking lot construction

What is average cost of permits and other government fees for building apartment complex.

What cap rate is reasonable to expect for new apartment construction.

@Meryl McElwain

I’m looking into turning a 16,000 sq foot school building into apartments. I’m not sure yet how many the local zoning board would let me do...

I've done smaller SFH or duplexes, but nothing on a later scale.

What should I anticipate as an extra construction cost for doing this type of project that wouldn't appear in a SFH or small multi?

I would be keeping foundation, exterior walls, and roof at a minimum.

@Meryl McElwain

We have a rental property (our first one) we have been living overseas and just returned. Just trying to decide if we should keep this or sell it based on what problems I’m finding. It’s one half of a duplex- we don’t own the other half- yet! We already put a new roof on and new HVac, so we have a lot already sunken into this place. It’s an excellent location near a university campus.

However, I’m noticing a lot of erosion (it’s built on a little hillside)... I have tried to fix this with little success. There are several cracks, and the doors to each master bedroom don.’t fit correctly to the frames. Seems like the floors upstairs are not level. Concrete along the perimeter of the house is cracking. Are those signs of something worse happening in the foundation?

If I keep it, also wondering: it’s a “Tudor style” with wooden slats making a pattern, but the siding is made of another material that is starting to deteriorate right where the wooden slats are located. Just wondering- If we keep it- should we just replace this whole type of siding to something that is more durable?

It will be completely paid off in four years.

Thanks for any advice you can give!