Monday, June 16, 2014

How to Handle Contractors - Get the Job Done On Budget and On Time

If you're involved in real estate investments, then unless you're involved in notes, or wholesaling, then you're likely going to run into repairs, renovations, demolitions, new construction, additions, etc. at one time or another.

This post is intended for professionals in the industry who do not normally get involved with day to day project related work.  This is not intended for project managers or general contractors (GC) as they already use these tips as common practice.  

For owners, it's good to understand some of what your GC or project manager does to ensure that the jobs are done on time and within budget.  If you're using a GC, then it's a good idea to use these tips in your contract with them.  Never forget that the more time a job takes, the more money it will cost you if you are using financing or not.  Even if you use all cash, your cash is being tied up and not earning anything for you while it's used in a particular project. In other words, for you cash buyers, the situation is exactly the same for late jobs.  Lateness from your contractor = you losing money as a result of the lateness.  These tips will help you avoid delays by empowering your contractor to get the job done quickly and efficiently.
The whole point of hiring a contractor is to ensure the job is done on time and on budget.  The primary objective of a contractor and that of the owner are not entirely aligned.  The contractor wants to do the job at as high a price he can get competitively.  Once they have the job, they are interested in getting change orders that will put more money to their bottom line and to get the job done with the least amount of work time spent.  The Owner however is interested in getting the job done at the lowest price while getting the job done professionally in the least amount of time.

Sometimes changes or extra work cannot be avoided, but it's important to ensure that the job is bid exactly as you want it BEFORE you sign the contract so there are no misunderstandings.  This requires thorough planning from your Project Manager or GC.  Make sure that every detail is captured in your bid on what you want your contractor to do.  If you leave anything out, he is not obliged to do it.  Typically commercial scopes are very detailed and leave little or even no room for interpretation, while on the residential side many problems appear because the details are not captured fully, or issues arise that were not anticipated.  These considerations add cost and add extra time to the jobs.  Let's discuss now how to form a good contract to help avoid the delays and higher costs associated with job delays:

1) As I've mentioned, ensure everything you want the contractor to do is captured in the bid.  This must include everything down to the fine details and thorough broom swept clean-up and disposal of all construction waste at job end.

2) Ensure that you ask the contractor for the longest time he will require to do the job.  He should give you a specific date.  Write that into the contract and then place a penalty clause for every day that he doesn't meet timing.  This is usually written as a penalty price per day that is deducted from any amount owing to the contractor.  This is motivation for him to finish on time.  He can't complain about this because he's the one who gave you the date.  Penalty clauses must reasonably cover your delay costs and not be excessive in relation to the job.  Calculate them and put them in the contract.  Always remember to ask the contractor for the longest time they will need to complete the job before presenting the penalty clause if this is the first time you've used the contractor.  If you've used them before, they will already know you will be using the penalty clause.

Now, please do note that if there is work that needs to be completed in front of contractor 2, for example, you have to ensure that that contractor 1 has completed what he had to do before contractor 2 starts their job.  You can't reasonably enforce a penalty onto contractor 2 if contractor 1 didn't finish his job on time that needed to be done before contractor 2 started.

For Example:

Rough framing is late and not inspected by the city, so your electrical contractor cannot start until the rough framing inspection is approved.  Your electrical contractor in this case is not responsible for framing / inspection lateness.  This is all a matter of being reasonable.

By imposing penalties onto the contractor in this manner, it's efficient and they really can't complain because it's their date and you are of course being fair.  Just remember to ask them something along the lines of...., "from the start of your portion of the job, what is the maximum time you will need?"  Once they give you the time / date, that's what you write in the contract.

3) Ensure your team member has daily direct contact with the contractor.  Either be on site every day as the Owner or ensure you have an employee to represent your objectives on site.  This is ideal, and is best, but realizing that sometimes this can't happen, it's important you get an update every day for work in progress from the contractor(s).  Ensure someone is on site to review the work done every day if possible and NEVER at the same time.  Your team member should mix up the time they come to the job site so that the contractor knows they can be surprised at any moment.  Don't have your project manager or GC wait several days before inspecting the work that's being done.  This allows the contractors to ease up and perhaps leave your job site to go to another job since the, "squeeky wheel gets the grease".

4) Ensure each scope is fully completed and signed off by your rep / team member or you before full payment for that scope is paid.

5) If you have a contractor that does not finish the job by the time they agreed to and they do not come back to finish within a reasonable period of time (this time frame should be in the contract explicitly, by the way), you will have the unfortunate situation of having to bring in another contractor to finish.  They will likely charge you more than you expect at this point because they are coming in to finish someone else's work.  If you've handled the finances well to this point by using progress payments per the contract, you should be able to complete the job reasonably close to budget, even though it's late as a result of the previous contractor's work.

This is by no means an exhaustive list, but it does give several practical pointers to make sure your jobs are completed on time and within budget.

Until next time....