How do investors ensure that they don’t get ripped off during a construction project?
Here are 5 Vital Rules for Working with Contractors
Rule 1: Never give a contractor more money than the work that was completed.
When we are working with a new contractor, we require the contractor put a week of work in before a draw. We have been burned so many times by contractors that we don’t want to take the risks any more. They say they are going to do the work and then disappear. Most recently another investor I know was ripped off by a contractor for five figures. The contractor bid his jobs and cut rates and took the deposit money and split them. We’ve had that happen in the past, and we don’t give deposits until after the relationship has been established.
Rule 2: Never make the final payment to a contractor until the job is completely done.
All too often contractors will disappear after getting that final check, even if they still have work to do. For some strange reason I haven’t figured out yet, the last 10% takes 25% of the time. I don’t know why we don’t just rename it “the last 25%.”
Rule 3: Understand your contractor’s cash position.
If they can’t make it through the week and pay their guys with cash on hand, any delay on the project could threaten whether or not they can complete the project. We’ve seen it too many times that everything is fine up until something goes wrong and the contractor doesn’t get his draw. His workers stop showing up because they haven’t gotten paid, and the project comes to a standstill unless you carry his payroll.
Rule 4: Control all materials.
The contractor provides us three separate lists of materials. We will do three deliveries during a project: rough, between rough and finish, and finish materials. These three orders will cover 85% of all the materials they will need. We do this for two reasons. One, it controls costs. We have preferred vendors that we get preferred pricing from. Second, after auditing projects, we have found that contractors seem to overbuy a lot of materials when they are in charge of materials. For some reason, those materials never make it to the next job site.
Rule 5: Don’t give new jobs to contractors who can’t even complete one project on time.
All too often, we have contractors who see the amount of work we have and they want consistent work. They continue to push and say they need/want more work. If they are two weeks behind on one project, that delay will multiply by the amount of projects they have going. And eventually they will have a cash crunch and all of your projects will stop. It is easier to find one contractor to pick up the pieces of one project than to pick up the pieces of multiple ones.
