How to manage your General Contractor?

Question

Hello,

I am doing a BRRRR on a property, I wanted to know how to handle paying your contractor. I am thinking about paying them 25% of the budget at a time. Just to be safe, this will be my first BRRRR so i want to make sure i am not giving all 100% at once and they come back saying we need more money or worse they dont complete the job.

Do you sign a contract with the contractor on completing the work properly and in a timely manner which we agreed upon?

Bruce Woodruff · Answer

I would recommend a 'pay as you go' approach. Very little upfront, and then just keep pace with completed work and no more. It shouldn't be necessary to pay more in advance with a competently run construction company.

Of course if there are large expenditures, like $20,000 worth of doors and windows, than the GC will want you to at least cover the cost of the materials, that's only fair.

Splitting the job into sections, like 25% at a time, and paying those up front can get you into trouble, why is that even necessary? Just keep your payments pretty even with the work that has been completed (and inspected if that is appropriate).

Jonathan Klemm · Answer

Amazing question @Vishal Amin!  And not an easy one to answer.

I'd suggest you pay based on work completed and installed...don't pay for any stored material or anything like that.

Many many many contractors will charge up front costs and that's because they don't have a solid cash-flowing business.  Often times you can't get away from this in the small residential market, but if at all possible you should.

Our business is here in Chicago and it takes years to build a solid team of subcontractors to work with.

There is zero doubt you better sign a contract and make sure you get lien waivers from any one who worked on the project.   The waivers ensure no subs can put it lien on your property and ess up the title.

Zachary Hryczyk · Answer

In Oregon anything over 2k if we dont do a detailed contract and a few other forms including, notice of right to lien, information notice to owner, notice of procedure, they will fine us 5k each form and possible suspension of license. They have CCB agents that grid out areas and search for infractions. Pretty crazy lol. I only did new construction so the contracts were big and detailed and alot of the  time involved construction loans so progress payments were very important. Ive seen alot of homeowners, contractors and investors get takin for alot of money over the years from lack of detailed contracts and proper paperwork to file liens. Typically GCs pay for materials because they get huge discounts . Suppliers alot of time tell homeowners they getting discounts but thats not the case. Im glad youve built a good relationship with your contractor! Ive heard its very hard to find the good ones that are not booked out over a year.

Chris Seveney · Answer

1. First you will want to have a detailed scope of work written up to make sure both parties understand who is doing what. For example are you buying appliances or is the contractor, and he just install? What type of sink are yuo installing, undercounter vs. drop in? What type of flooring goes in the bathroom? All of these have costs related to them, so you need to understand every little detail.

2. Put this in writing and in a contract form. Then have the contractor provide pricing based on phase of  work. That way you know how much to pay each phase. Note they will front-end load it (meaning bill for more things upfront or say they cost more), so negotiating that comes iwth experience.

3. Get a schedule and do not wait till they are 3 weeks behind to say something, on a weekly basis review it.

Those are some of the basics.

Alecia Loveless · Answer

@Zachary Hryczyk I have a totally different relationship with my contractor that won’t satisfy anyone here. He does work all over my portfolio and is currently working on 2 apartment renovations at different locations and a small side project at my house. I pay for the materials and generally pay him a set amount each month or more if he asks for it.

He will begin working on a new building that is a partnership between me and someone else in a couple weeks and will be billing that separately than my usual agreement. He has already given a bid on that project and we will pay for those supplies separately as well.

I also generally pay his subcontractors separately after their work is completed and my contractor has approved their bills. If they are doing major work that requires lots of supplies sometimes I buy those. For instance we are buying 14 propane heaters that cost about $22,000. I will buy those and we will store them so they are ready when the gas lines are run.

Eliott Elias · Answer

Have a contract written up by a real estate attorney. Pay your contractor in draws according to milestones. You and the contractor should sit down together and discuss all those milestones.

Vishal Amin · Answer

The 15% down is a good idea. I will definitely work up an agreement to protect myself. Thank you Zachary.

Zachary Hryczyk · Answer

Hi Vishal

I am a retired GC and the way i did it was 15% down on total contract and draws/progress payments as work is completed. Use a owner/contractor aggrement or contract to protect yourself. 🙂