The real deal on hiring contractors
We have been renovating properties for close to 15 years. We have used the same contractors for several projects, we have had to let some go, some moved away, some did crappy work, so we did not rehire.
We have hired people for small, medium and large jobs. I wanted to write about hiring contractors with a bit of a twist. The theory I have read about hiring contractors does not line up with the reality. Most of the articles I have read, also do not explain the size of the contract. I have also noticed most articles do not talk about timeline, or availability of contractors willing and able to do the job.
I want to let all the property managers, builders, land lords, developers, investors and flippers know that if you can not seem to get the theory you have read to match up to your reality, you are not alone.
Here is the advice that is usually written (or some version similar to the following):
Part 1 – Always make sure to hire a contractor with reliable references. Confirm that it was done well, on time and on budget.
Part 2 – Get three detailed quotes. Compare based on time, materials and price.
Part 3 – Make sure you get a performance guarantee in writing, make sure the contractor has proper insurance and pays into workers compensation.
Part 4 – Do not pay for work in advance, unless it is a large project. Even on a large project do not pay more than one third of the project in advance.
Part 5 – Make sure to have a penalty discount in place for delays or incomplete work.
I know many of you are likely thinking, that all sounds reasonable. You may have even read similar advice. I would have to agree, that it is great advice, but it lacks context. In the property management, flipping, land lording, development, business projects come in all shapes, sizes and costs. You may have a contractor involved in something as small as replacing a light fixture to building an apartment building. The budget for a renovation could rage from under one hundred dollars to hundreds of thousands of dollars.
Well, here it is; the real deal:
Part 1: References – yes, word of mouth is usually the best way. I agree, you absolutely should use someone that comes recommended by someone who has used them. One of the best sources is a local real estate group. I have met some fantastic contractors in the local real estate group I attend. Talk to people who have used them, however, here is the deal. Make sure they do the type of work you are looking to get done. If they specialize and exclusively build million dollar homes, you would likely not hire them to renovate a kitchen on basic bungalow. I would be reluctant to hire a contractor without a recommendation from someone you know. If you are new to an area and are dealing with a realtor, home inspector, etc.., they should have a name of at least one good contractor. It is also a good idea to Google the contractors name and check the better business bureau. The other thing to remember is that good contractors are usually busy, so the more notice you can provide of your up coming project the better. When you are talking to references keep an open mind around questions related to budget. A lot of times it is the client that adds to the projects budget and timeline.
Part 2: Get three detailed quotes – This might be a challenge. There are a few variables involved in this process. If you expect to Google three local contractors, call them up, and they are going to run over and do a detailed quote, I think you will be disappointed. That is why part one is so important. If you are a real estate investor you need to use some estimating tricks to have an idea about how much renovations cost. For example you can estimate labour based on the cost of an item. For example: A bathtub my cost $300, and rule of thumb labor estimate would be $300, so the project would cost approximately $600. The other factor will be the size of the project. If you are trying to get one door, a kitchen counter top and a few other minor repairs done, I would not beat yourself up, if you cannot find three contractors to come give you an estimate. If you are planning a major renovation you may need some time and patience to find three contractors to give you proper estimates. It sounds like it would be easy to do, but is a major challenge for most the people I work with. What I would recommend is forming a relationship with a great general contractor. That way you will have someone willing to work with you on small and large projects. I would also form a separate relationship with a painter, electrician, plumber and handyman, so that you will have a person on your team to handle any size project, or maintenance issue. The bottom line is that if you are finding it had or impossible to get three written quotes from contractors, that is more the norm. The second part about materials is going to be up to you. If you want to invest in real estate you need to educate yourself on what materials cost. All materials can vary in cost. An obvious one would be a granite counter top compared to laminate, however, in some cases some cheaper materials can take just as much or more labour to install. An example might be ceramic tile versus a laminate floor that may take just as much time for an experienced tile installer. You do not have to know the exact cost to do projects, however, as an expert you will be required to do some research and learn from experience. That way if a contractor quotes you $2000 to install a basic steel door, you will know that either some major work needs to be done around the door frame, or you are being over charged. The same can be said if someone quotes you $200 to install a steel door (door included) that either they are dealing with stolen building supplies, or they are going to ask for the money up front, and you will never see them again.
Part3: Make sure you get a performance guarantee in writing, make sure the contractor has proper insurance and pays into workers compensation – Workers compensation and liability insurance are important for your contractors to have. It is a good idea to make sure they have proper insurance, including errors and omissions, general liability and workers compensation. Especially if they are hiring sub-contractors to help. A performance guarantee would usually only apply if the project is large (maybe 100K plus). In most cases projects of any size will come with a written estimate and a discussed timeline. I do find that sometimes contracts get delayed for various reasons, it could be a material delay, a sub-contractor, a major surprise, which often happen when you are working on old buildings or a number of other reasons. It is important to realize that if you are going to be in the real estate investment business, surprizes happen. The best contractor in the world cannot predict surprises, such as asbestos, knob and tube electrical hidden in the wall or in one project we were doing our electrician discovered zero insulation in a couple of walls. When we bought the house we did a few test holes and found insulation, so we were surprised. You could also get a permit delay from the city. It is important to be reasonable with the contractor you hire. If you blame them and refuse to pay any extra for a surprise problem, you will likely start a dispute, which will cost you time and money. I will also admit that we have hired the odd contractor to do a small project like one door or some miscellaneous repairs and have not checked for insurance. We just paid cash, I do not recommend this especially for jobs over $2500, but it is petty common in our business.
Part 4: Do not pay for work in advance, unless it is a large project- The subject of payment needs context. If you are hiring a handyman or small contractor to do a small job like relace one door or lay down a couple floors, they may want you to pay for the supplies up front. That can be ok. I would be reluctant to pay for any of the labour up front, but be prepared to pay immediately when the job is done. Especially if you are going to hire them again. If you are doing a larger project with a larger company, they will likely not ask you for much money up front. I even had one contractor tell me to make sure I never hire a flat broke contractor. A larger company will usually ask for installments, especially if they are providing sub-contractor labour and materials. I would never pay in full until the contract is complete. You need to have some leverage. If you are dealing with a reputable contractor, they will not ask for a final payment until the job is done and you are happy.
Part 5 : Make sure to have a penalty discount in place for delays or incomplete work – This is advice that I often hear, but I am not sure who follows it. The most predictable thing about construction and renovations is that it is unpredictable. We have renovated several old buildings over the years and performed lots of various maintenance projects on old buildings. I have to tell you surprises happen. If you are doing a new build of an apartment building and the project is several hundred thousand or millions of dollars, then I would put some rewards or penalties in place. The final payment will not be required until the job is done, so that should be incentive to have the job completed. I think for the average project if you started talking about a penalty based on performance you may scare several contractors away.
In summary, in my opinion it is important to build a relationship with a contractor that will treat you well, charge you a fair price and be there for you when you need them. They also should have an understanding of what your project goal is. You need a contractor that understands time is money. They need to understand the importance of timelines, and the kind of work you expect.
As the client, you need to realize that all customers are different, your standards may be different from every other client they worked with. In my opinion many disputes could be avoided or resolved with better communication between the client and contractor. I hope I have been able to add some perspective to common contractor hiring advice.
Michael P Currie