let’s talk : Getting Started with a CONTRACTOR
UPDATE : we hired a contractor this week for Project Philadelphia! Let’s jump right in and talk about all all that went into it.
So, as we do, let’s talk Real Estate, let’s talk Getting Started with a Contractor…
HOW DID YOU FIND CONTRACTORS?
We looked at A BUNCH of different resources. We used referrals and websites like thumbtack.com, google.com (obviously), biggerpockets.com, homeadvisor.com, yelp.com, and even Instagram!
HOW DID YOU CONTACT THE CONTRACTORS?
After a bit of due diligence, we reached out to the contractors we thought would best fit our specific project, gave them a rundown of the work to be done, and if they were interested, scheduled a walkthrough.
HOW MANY WALKTHROUGHS DID WE DO?
Ultimately, we did 6 formal walkthroughs – most of which were on the same day which was great!
POST WALKTHROUGHS – WHAT HAPPENED?
After we did each walkthrough we requested a bid for the project. I had put together an initial scope of work (SOW) and asked the contractors to fill them out based on material and labor cost. I also asked them to add/delete whatever they thought was necessary. It was helpful to see what different contractors thought needed to be done. On top of the scope of work, we spoke with the various crews about their personal draw schedules and deposit requirements to ensure it was something we would also feel comfortable with.
HOW DID YOU ULTIMATELY CHOOSE WHICH CONTRACTOR YOU WANTED TO WORK WITH?
A TON of factors went into our decision; the total bid amount (no, we did not go with the “cheapest” option), references, timeliness in response, past experience, and honestly, organization was a huge factor for me.
SO YOU DECIDE WHO YOU WANT TO WORK WITH – WHAT IS NEXT?
Once we had an idea of who we thought we might work best with for this specific project, we reached out and confirmed all the details so that we could get a contract drafted. By the way, for this specific project, WE drafted the contract on our end.
WHAT GOES INTO A CONSTRUCTION CONTRACT?
Over this past week, I have learned there are a few key things to look out for and understand;
DETAILS OF THE PROJECT : The more details the better. This is important in helping to mitigate risk for both parties along the way.
TOTAL COST : The TOTAL project cost, down to the permit, material and labor cost.
PROJECT SCHEDULE : Start and end date, and how to update these in the event there are any externally caused delays to the project (i.e. fire, emergency, etc.).
DRAW SCHEDULE : The draw schedule will determine when and how much you pay your contractor – make sure this is outlined explicitly and in as much detail as possible.
PAYMENT METHOD : For us, since we are living out of state from where we are working, it made more sense to do wire transfers. NOTE that there is typically, but not always, a fee for each wire transfer.
ROLES & RESPONSIBILITIES : Although it may seem obvious as to what role each party will play here, I just wanted to make sure everything was outlined explicitly so that all parties were on the same page.
DRAWINGS : We submitted initial plans for the team to use (we drew these up using excel and PPT), however we are working with an architect to finalize these blueprints in order to be able to submit them to the city.We found the architect we are working with on Fiverr.com – will let you know how this turns out!
MATERIAL LIST : Once you and the contractor have determined a budget, you can begin to pick out materials and lay them out so that everyone is on the same page design-wise. The contractor has given us a budget to use as a guideline as we look for materials.
INCLUSIONS / EXCLUSIONS : In our case, certain items were included / excluded in the total price. For this project, I knew I wanted to use an outside source for big items like stoves, refrigerators, washer/dryer, etc. So, this was not included in our total price. While these specific appliances were not included in the total bid, the cost to install them is.
PROTOCOL FOR HANDLING DISAGREEMENTS : In the event there is a dispute of some sort, we elected that we would go the litigation route (vs mediation or arbitration). We also made sure to outline who would be responsible for attorney fees.
LIEN RELEASE : First of all, what is this? A lien gives the lien holder (the contractor) an assurance that they will get paid by giving them a claim against the property as security. If the contractor has performed the work outlined in the contract and is not paid, he can place a lien on the property and cloud the title. A lien release is to be submitted by the contractor to the owner every time a payment is made essentially “releasing” any potential lien for each specific payment amount. So for example, let’s say the total project cost is $150,000 and you, as the owner, make your first payment for $25,000. Once the payment has gone through, the contractor will submit a lien release for $25,000, and now the total lien they could ever place on the property is $125,000 in the event the work is done and you never paid them again. This is a very simplistic example and you should absolutely consult your individual state laws.
PROCEDURE FOR MAKING CHANGES TO THE CONTRACT : We all know that life happens, and things may or may not pop up as the construction progresses. Because of this, we have outlined proper protocol for making changes to the contract so that neither party wastes their time, money, or materials.
AN “ESCAPE” CLAUSE : An escape clause is a formal procedure to get out of the project in the event something happens and neither party would like to work with each other any more. Our contract requires a formal letter, with 7 days notice to either party, and has payment procedures in place depending on who owes who money here.
HOW LONG DID THIS WHOLE PROCESS TAKE?
From the moment we first reached out to contractors, to signing a contract, it took us about 10 days.
WHAT IS NEXT?
Well demo and cleanout started two days ago! Right now, we are finalizing the drawings with the architect, and picking out the materials for the project.
Any advice as we continue on with this project?! What else do YOU typically include in your construction contracts?!
Feel free to comment on the blog post HERE and let us know what YOU think!
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MYSELF, MY ATTORNEY & OTHER RE INVESTORS! – this week’s post is based on my personal experience and findings, as well as through networking with other RE investors