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It doesn't matter whether you are a new investor or a savvy veteran; one of the biggest challenges of real estate investing can be managing contractors. Since repairs and renovations are an inevitable part of actively investing in real estate, it's important to know how to best manage contractors to ensure your projects are completed on time and on budget.
Below are six tips for managing general contractors or independent contractors to help you reduce your risk and improve project performance.
1. Hire the right contractor for the job
Knowing who to hire for a renovation or property repair is one of the biggest hurdles to effectively managing contractors. Make sure you are hiring the right contractor or company for the job. You can hire:
- A general contractor who acts as a project manager and oversees the entire project, hiring subcontractors out for jobs as needed.
- Independent contractors, like an electrician, plumber, roofer, or licensed contractor, and you'll manage each subcontractor yourself.
- A handyman.
General contractors are the most expensive option, as they oversee the entire project for you and add their cost for project management into the cost for their subcontractors' work. Hiring and managing subcontractors yourself is more cost effective, but also a lot more work for you. Whichever route you take, the general contractor or subcontractors should be licensed and insured and should be able to provide this information to you upon request.
A handyman is by far the cheapest option, but they are not typically licensed and can only complete certain tasks or repairs on the property. If you need a door put in, drywall repaired, flooring installed, or other basic to semi-complex home repairs done, chances are a handyman could take care of these items for you. Knowing who to hire can save you a lot of money in the long run.
2. Get multiple bids
While it's not required, it's helpful for you to know the cost for repairs or renovations and how much work is involved in completing the job. This helps you avoid paying too much for a project or overpaying for materials or labor.
Getting multiple bids can also be helpful to gauge prices for the project or repair. When I have a renovation or repair, I get a minimum of three quotes before choosing a company. I base my final decision not just on cost but also on who the company is, their experience, and their reputation.
3. Vet the company well
Finding a good contractor can be difficult. Most reliable contractors that produce quality work at a reasonable price are booked with jobs several months out. Asking for referrals is a great starting point, but you may have to extend your search beyond your own referral network and look at real estate investment associations (REIAs) or trade associations or do online research.
Searching for contractors who work primarily with homeowners typically means you'll pay more because most contractors charge homeowners retail rates. If possible, find a contractor who works with investors and real estate professionals. Their prices are often more reasonable because they are focused on continued, repeat business and will charge slightly less for this reason. Once you've identified a company or contractor you are interested in working with, do your due diligence. They should not only have experience in that field but also have the proper licenses to do the work.
Due diligence can include reviewing their website, speaking with past clients about their experiences with the company, and looking at the Better Business Bureau (BBB) for reviews or complaints. Additionally, look in public records in your county or surrounding counties for liens, judgments, or lawsuits against the company. A quality contractor should be able to provide you with testimonials as well as pictures or examples of past work.
4. Have a solid written contract
While I believe choosing the right contractor is the easiest way to avoid complications or headaches when managing contractors, having a well-written contract is a close second. If you hire someone, whether they are an independent contractor, subcontractor, handyman, or general contractor, put the project in writing with a concise, clear, and thorough contract.
Contracts should include, but are not limited to:
- Project location/address, start date, and end date.
- Parties involved with business addresses.
- Scope of work that includes a comprehensive list of all work to be completed. Be detailed, including the tile color, sink fixture, paint color, etc., you want. Don't leave things open for interpretation.
- Who is expected to provide tools and materials? In most cases, that's the subcontractor. If you hire an independent contractor, include specific clauses that note they are a 1099 contractor and not an employee of your company.
- Penalties for extending beyond the contract timeline. This can be a daily or weekly percentage or a flat-rate fee.
- Insurance and license requirements -- releasing you from any liability from an injury on the job.
- Payment terms, including how much the entire job is and when and how payments will be released. Some contractors require half of the money down, then the remaining half upon completion of the project. However, the more you put down, the less likely the contractor will be to finish the work quickly. I like to put 33% down, paying 33% once half the work has been done and the remaining balance upon completion.
Don't forget to collect a W-9 from the contractor before the work begins and you pay them any money. This will save you a lot of stress from having to track them down come tax time.
5. Monitor their progress frequently
Regularly check on the property to ensure the project and work are going as planned. I like to do both scheduled and random drop-ins, which lets the contractor know I'm watching and can stop by at any time.
If the project is out of town, or too far away for you to monitor regularly, consider hiring a project manager. Some jobs will require a lot of oversight and project management, especially if you choose to hire and manage your own subcontractors. I recently renovated a property and was working with seven different subcontractors at one time. Ensuring each person is doing their contracted work, getting paid, and completing the job on time can be a lot of work.
It may be a good idea to hire a separate project manager to handle the project oversight for you if any of the following situations apply:
- You are short on time.
- You have a lot of projects going on at once.
- You have a project out of town.
- You simply aren't a great project manager.
6. Consider using contract management software
Contract management software can help you monitor and track each individual contractor and is great for investors who have multiple projects going at one time or have assistants who help monitor projects for them.
The software allows you or the contractor to register their business, and they can submit important items like a Form W-9 before signing the contract or receiving payments. The software will set reminders for when payments are due and when appointments, check-ins, or follow-ups are needed. It also allows the contractor to track expenses and material costs and to update you on the progress of the project by adding pictures and time-tracking directly to the software.
You can make payments directly to the contractor upon receipt of certain items. This reduces the risk of the contractor not completing the job or work as promised. There are several options for contract management software that vary in price and features:
Because of the cost, contract management software is typically best for larger investment businesses that have multiple properties and contractors to manage at a given time or for general contractors who have multiple subcontractors they manage on a regular basis.
Best practices for managing contractors
We've all heard contractor horror stories, and while following these six tips doesn't entirely eliminate the risk involved, it does reduce it. Doing the work upfront to find the right company and contractor will greatly reduce your contractor headaches, but make sure to follow up, get the terms in writing, and manage the project efficiently.
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