Finding, Hiring, and Managing Contractors
There's no doubt about it, contractors play a large role in real estate. Whether you're rehabbing an existing property, addressing a large repair, or developing from the ground up, you'll need a contractor to perform the work. Hiring, interacting with, and managing a contractor can be a daunting task for many property owners, but it doesn't have to be that way. In this article, we'll discuss best practices that we've learned through experience for finding, hiring, and managing a contractor.
Prior to Finding a Contractor
Before you find a contractor for your project, you need to determine your desired scope/design, schedule, and budget. Additionally, especially when remodeling occupied buildings, you'll want to think about phasing requirements and coordination needs to keep your business operational. Think about how you plan to incentivize the contractor to meet your needs, and how you plan to penalize them if they don't. And lastly, for very large projects, determine whether you want to bring on a construction management firm to oversee the contractor on your behalf.
The Hiring Process
Now that you're ready to start your search, there are many ways to go about this process. For smaller projects, the most common methods for finding a qualified contractor would be word of mouth and internet searches. Utilize different search engines like Google Maps or Yelp to find the highest rated contractors in your area and give them a call. Ask the contractor to provide a line item quote, and request that they separate labor from materials (not all will do this, but it's worth asking). It's always a good practice to get a price from at least 3 contractors to determine who provides the best overall value. Double check that the contractor has a valid, current license with the governing agencies.
Larger projects, on the other hand, typically require a much different approach. Most commonly, you would open the opportunity to any qualified firm or a hand-selected group and ask for bids to be submitted by a specific date and time. As time goes on, you could choose to work only with your trusted go-to firm of choice. You can bring them on early in the process and utilize their expertise for design improvements, or you can bring them on just before you're ready to break down. We would suggest bringing the contractor in as early as possible and paying them an hourly fee for design input and value engineering. This relatively small fee will save you thousands when it comes time to build the project.
Executing an Agreement
Now that you've found your contractor and have agreed on a price, it's time to execute an agreement. Typically the terms of this agreement will be given to the contractor prior to bidding on the project, to ensure they have accounted for the contract duration, insurance requirements, etc. in their pricing. You'll want to clarify the following in your agreement:
Project. Define the project itself, where it's located, roughly what the work consists of, the contractual parties involved, any applicable drawings and specifications, and that the intent of the contract is for the contractor to safely and efficiently provide labor, equipment, and materials for construction of a complete, high quality, finished product.
Price. Establish the agreed upon contract price and itemize it per the quote provided by the contractor. If the contractor only provided a lump sum bid, be sure to incorporate a schedule of values into the pay structure.
Contract Duration. Specify the number of calendar days allowed for the project to be complete. Be clear about the definition of "complete" (typically final acceptance by owner) and what the penalty is (damages) for not meeting this date. Specify what constitutes additional contract days (weather, acts of God, etc.). Make sure you include the legal phrase "Time is of the essence." Consider providing an incentive to the contractor for being done ahead of this duration.
Contract Changes. Clearly define the change order process, and what the allowable markups are for labor, equipment, 3rd party, overhead, and profit. Also define the process for handling disputes between the parties about changes. Make it clear that the owner has the absolute right to change or stop work as they see fit, and that the contractor will be compensated fairly for such changes.
Insurance. Clearly define minimum insurance requirements required.
Bonds. Specify whether the contractor shall carry payment and performance bonds for the work.
Payment. Describe how progress payments shall be made, whether any down payment will be made up front, whether retention will be held (we'd recommend it), how the final payment will be processed, and make it clear you have the right to withhold payment for various reasons of nonperformance. Also make it clear that the contractor shall immediately pay all suppliers and subcontractors for work completed after receiving your payment.
Permits and Inspections. Clarify whose responsibility it will be to pay for, obtain, coordinate inspections for, and close out permits. If there will be a designated third-party inspector be sure to include that in this section. Include a phrase saying that work can be rejected at the inspector's or owner's discretion for not meeting or exceeding the requirements of the contract documents.
Protection. Clearly state that the contractor is ultimately responsible for the work (including materials) and shall take whatever means necessary to protect it.
Legal. Define the legal structure between the parties involved, limitations to liability, confidentiality, etc.
Warranty. Specify the warranty duration, requirements, and process for a warranty claim.
Managing During Construction
Now is the phase you've been eagerly awaiting: seeing your project come to life. Throughout construction, you'll want to ensure that you, your representative, and/or your inspector are constantly involved and overseeing the work. Have weekly (at a minimum) meetings with your contractor (and CM if applicable) to discuss progress, any issues now or foreseeable in the future, and other pressing items. If the project is going well, be sure to relay your appreciation to the contractor and his workforce. However, if things are going south, address them right away and discuss openly to find a solution.
Successful Project Closeout
Towards the end of the project, you'll want to start generating a preliminary punch list of items you deem incomplete. Share these concerns with your contractor as early as possible so that they can be addressed in advance. Once all contract work is complete, issue a final punch list that must be complete before you accept the project and issue final payment. Be sure the project is clean and presentable before issuing final payment.
Maintaining a Relationship
Now that the project is complete, if you were satisfied with the contractor, you'll want to maintain a good relationship with them for future projects. If you're in real estate, chances are you'll need them again. Celebrate your achievement together, and maintain contact from time to time if there is a large gap between projects.
Hopefully you've found the time in this article helpful so that next time it comes to dealing with a contractor, you'll be able to enjoy the transformation of your property rather than dread it. As always, please feel free to reach out with any comments or concerns.