If the first rule of success in flipping is to run your numbers accurately, the second — a close second — is to manage the job properly. And this is where a lot of rehabbers encounter challenges, as they coordinate with contractors and work to stay on schedule and within budget.
Ideally, you’ll find a contractor you trust and can work with repeatedly, one who becomes a member of your team and a valuable resource. They’ve got the technical know-how and are the experts you’ll rely on to do the work right as well as help you to analyze potential purchases. So it’s imperative that you do the work necessary to find and keep excellent ones.
It’s also imperative that you know when to dismiss a poor or mediocre contractor. In fact, that’s the first tip for managing contractors: there’s no effective way to manage a bad one.
A bad contractor will not respond to deadlines, incentives, threats, or begging. Their work will not improve. They will probably cut corners and attempt to skip permits. And they will make your rehab project a massive headache.
Before we move on to tips for managing contractors, here are some red flags to identify and hopefully avoid the bad ones:
- They don’t want to sign an independent contractor agreement.
- They resist getting specific with milestones and deadlines.
- They resist giving you referrals or allowing you to visit a current work site.
- They may hedge on pricing and estimates. While it’s true that every project’s cost will “depend,” a good contractor won’t hesitate to provide an estimate and include variables.
- They do provide an estimate, but it’s far lower than others. Beware an estimate that seems too good to be true, and/or one that lacks detail.
Now that we’ve covered the worst-case scenarios, let’s move on to the standard rehab experience and tips for managing contractors.
Draft a detailed Scope of Work
Before any work is done, make sure you’ve taken the time to walk through the job site and outline every aspect of the rehab you and your contractor can think of. This benefits both of you: you’ll have a paper trail that outlines your expectations, and your contractor will have clear guidelines.
A Scope of Work (SOW), sometimes referred to as a Statement of Work, is a document that essentially brings the invoice to life. While an invoice provides the bottom-line figure and overall description of the job, the Scope of Work provides a schedule and a roadmap and covers milestones and payments in detail.
For example, the SOW might include the deposit and then a “Phase 1” that describes the work to be completed prior to the next payment. Then a Phase 2, etc., until final payment, typically paid once all permits are in place and any needed inspections are successfully finished.
The SOW can be as simple as a page or as detailed as you prefer. Either way, its purpose is the same: to be specific about the schedule and the budget.
An effective method is to divide the tasks by category: plumbing, electrical, sheetrock, and so on. This makes the most sense because the plumber will likely do work in multiple rooms — same with the electrician, the sheetrocker, the painter, etc.
Again, be as specific as possible. Don’t just write that the electrician will update light fixtures and outlets; specify that they will install two ceiling fans (and in which rooms), add four new outlets in the basement, upgrade two bathroom outlets to GFCI, and replace the entry light.
This kind of specificity helps minimize miscommunication and again, benefits both of you. You’ll have a record of exactly what work you expect, and the contractor will know exactly what they’re being paid for. Thus, if you change your mind and want six ceiling fans installed, you and the contractor can make changes to the budget accordingly.
Never Get Ahead with the Payments
Make sure your contractor is paid fairly and has what they need to do the job, but also be careful not to get too far ahead in payments. In other words, continually offer incentives for the contractor to finish the work.
It’s standard practice to put down a deposit and to pay for enough materials to get started but beware of putting down too much money. Contractors are (in)famous for taking on multiple jobs at once, and if the contractor has a fat payment from you, they might feel as though they can take their time. Or they’ll try to squeeze in another project while they’re sitting on yours.
Set up your SOW so that the contractor has their expenses covered for the work that’s currently being done — meaning, they can buy materials and pay subcontractors — and then receives more when that phase is completed.
You want to provide carrots to keep the work moving and also protect yourself against the worst-case scenario: a contractor who stops showing up. If that happens, you’ll undoubtedly lose some money. But do you at least have some work done as well as funds remaining in your budget to continue with someone new?
A good contractor will have no problem with this kind of incentivized approach, while a shady one will view it as threatening. You need to be fair to the contractor and take their needs and concerns into consideration, to be sure, but beware the contractor who puts up too much of a fight over this arrangement.
Specify, Specify, Specify
This point can’t be over-emphasized: be as detailed and specific as possible, to the point that it’s nearly painful. You’ll save yourself countless troubles.
Don’t just agree to have someone paint the interior. Specify which rooms, how many coats, what finish of paint, and what kind of prep work will be done.
Count how many outlet covers need to be replaced and what color they are, how many mini blinds hung and where, and exactly where the molding is being installed and whether it needs quarter round.
As you build experience, you’ll quickly learn where the common communication pitfalls occur. A contractor will tell you they didn’t know you wanted them to do “x,” when you thought it was included. And your next SOW will be even better.
Consider Carrots AND Sticks
Your SOW outlines milestones and payments and hopefully keeps the contractor motivated to finish the work and get the next check. But what happens if they slow down, fail to show up for a week, or otherwise miss a deadline?
This is where a penalty may come in handy. Some rehabbers include penalties in their contracts that assign a fee for late work. Often, this comes in the form of a charge (or deduction) for every day past deadline. After all, the rehabber has holding costs that add up by the day.
This is tricky territory. A contractor will give you all kinds of reasons the job couldn’t be finished on time, and you need to be educated enough to distinguish a legitimate reason from a fabricated one.
Legit: Unforeseen problems after tearing down a wall and discovering issues that needed to be repaired before continuing. Or a blizzard that kept everyone off the job site for a few days. An illness that is verified.
Not-so-legit: Subcontractors who failed to show up (the general contractor should figure out how to get the work done regardless). Paint that took too long to dry. Poor coordination among contractors (again, the general contractor should have a handle on this). Or a contractor who’s simply inaccurate with time estimates.
Any successful fix and flip project involves a hefty dose of due diligence and research plus an ability to oversee dozens of details and work with groups of people. Your attention to detail and your skill with people will get put to the test when working with contractors, but this doesn’t have to be a negative — when you find good ones, your profit will increase and you’ll have a lot more fun along the way.