How to pick a contractor in three steps
As real estate developers, there is a hurdle in our industry that is head and shoulders above the rest when it comes to number of developers it affects and how badly it can affect you. If you haven’t guessed it by now, the number one problem for real estate developers are CONTRACTORS. If you ask any of them, they will tell you the same answer. As my dad used to say, “Give 3 masons the job, and hope that 1 shows up on Monday.”
Having a good general contractor and/or good subcontractors on your job site can make or break your rehab project and its profitability. Ask me how I know. We’ve had our share of contractors that we’ve come across, spoken with, gotten bids from, and hired to now be able to distinguish the good, the bad, and the ugly. As you follow along, I will discuss some of our experiences, and the system we’ve created (and are constantly improving) to source, interview, and hire contractors for our projects.
Hiring a contractor starts with where to find them. If you ask yourself where your best sourcing of anything comes from, whether that be a doctor, dentist, gym, new restaurant in town, or contractor, your best source will be from your network. Everyone you know knows a contractor or knows someone else who does. Your trusted neighbor Bob, knows Mike the painter, who does a lot of work for John the general contractor. You get the point. People who you trust are typically going to work with and associate with people they trust. Also when you call on Mike the painter or John the general contractor, it’s going to be a much warmer call and easier to break the ice than calling on ABC Construction Company when you Google searched general contractors in your area. Don’t get me wrong, you can definitely find contracting leads by cold calling on names and numbers you find on Google, Thumbtack, or passing by their van but referrals will always be the strongest.
Now that you have sourced contractor leads, you van start the interview process. We like to start with a “get to know you” phone interview. Use this as an opportunity to learn more about their experience and how their business operates; so that you can determine whether they fit into your business system or not.
Some specific questions to ask are...
Have you ever worked with investors?
Are you licensed and insured?
Would you be willing to sign our contract if we decide to work together?
Do you have 3-5 referrals that I could call, preferably from other investors?
These are solid questions for you to gauge their answers and their reactions to your questions. If they don’t seem like a good fit for you or something is a little off, you want to disqualify them as quickly as possible to not waste any more of your time. If they pass this test, then BOOM, congratulations they made it two step 3!
Step 3 - The second interview
The second interview is more of the “sit down and grab coffee type.” We like to take the interview slow and cautious before we bring general contractors to any job site. There are 3 main points I like to review during this meeting.
First is their company financials. We minimize our down payment to help purchase materials at the start of the project, after that, work is paid when it is complete. We have a policy that labor is never paid in advance. We expect our contractors to be able to float some costs throughout the project to keep it going at a quick pace without asking for advances on other line items. We recently had a contractor hired on a job and after realizing there seemed to be a lack of labor working when I stopped by, I realized there was a lack of cash on his end to keep the project moving. He was asking to pull money from the roof and siding line items to help get other parts of the project started. And this was after we had paid him $20,000 at the very start of the job specifically for things like that. When we realized that cash was an issue, we quickly made a change and got a general contractor on the job that could handle the cash flow.
Second is our budgets and timelines. It is also important to grasp whether you are confident trusting this general contractor with your budgets and timelines. If your budgets and timelines are not realistic for them, it is better to disqualify them as early as possible.
Third is showing them our budget breakdown spreadsheets and explaining how our draw system works. This is exactly what it sounds like. We show them how we set up our payment and line item system to ensure they understand it and that they will be able to abide by it during a project. Being clear about your processes and expectations upfront will help you avoid a cash flow issue with a contractor down the road or worse. If you have to change in the middle of the job, it is likely that it was cost you time and money.
If they pass both of these screenings, they are good enough to bring out to a rehab and bid a job.. At this point you should know each other pretty well and this encounter can be more casual. We would go through the scope of work with them and talk about the budget to see if it is attainable for both parties. You should already have a relatively accurate scope of what you want done to the property and how much you think it should cost. This is the final step to determining if this contractor fits your business. If they are the right guy (or gal) for you, and your scope and estimates are fairly educated and accurate, the right contractor will be able to come close to your budget and price.
If at the end of the day you like the contractor and they understand your system, you may have a winner. It is important your systems and budget align. Now this will be difficult to get right on your first try but finding good contractors is worth the time and effort.