Mastering Contractor Management: A Real Estate Investor's Guide
Thursday, February 29, 2024
Mastering Contractor Management: A Real Estate Investor's Guide
Transforming contractor relationships for project success.
Managing contractors is not like what you’ve been told.
All the information that I have found out there is better suited for higher-end renovations, new building, or commercial work. These might as well be totally different industries, but they are unfortunately often bundled together as “construction.”
There was a time where I would walk into my office every day and joke, “I hope we don’t have another ‘10K Day!’”
I was hoping that the bad news I’d inevitably get (like I do every day) would cost me less than $10,000. I thought that this was just the price you pay to be in business. But after my bank accounts got into the red zone, I knew that I had to make a change.
So I did two things.
First, I created a system for managing contractors with rules and checkpoints that I would make sure that I never strayed from. I would work every day to hold contractors and myself accountable to this system.
Second, I became MEAN. Nobody was going to give me a “10K Day” again.
I grabbed my proverbial hammer and headed out to job sites to bust heads with my newly developed system. This worked like a charm. I had everybody right where I wanted them.
However, there was one big problem.
One half of my day would be spent on job sites making sure my scope of work was carried out, and the other half would be spent recruiting new contractors, because my new attitude wasn’t helping me make any friends.
You see, the guys who choose to be contractors on rehabs are a different type, and managing them requires a different set of skills. In fact, most of them would rather be doing the other types of construction, so you have to walk the line between being gentle and having a heavy hand - that was the piece I was missing. I needed to adjust my attitude, get my priorities right, and zoom out to see the bigger picture.
The key to managing subcontractors (and GCs) is prioritizing relationship capital, not micromanaging.
Micromanaging destroys relationship capital. Setting clear expectations builds it. You need a management system that gives both parties clarity on who’s responsible for what. This provides everyone the space necessary to do the work and helps build trust, which helps build great working relationships.
Over time, this more hands-off approach will require way less of your bandwidth when managing projects.
For the sake of this example, we will assume that you have already recruited the right contractor and are working on getting them to bid a job or group of jobs for you.
It would also be helpful for you to have an understanding of our basic system. We break things down into renovation projects, phases of work on the project, and then jobs, which are the individual items of work on the project, like paint or drywall. You can hire a contractor for a single job or a group of jobs, which we call a “sub chunk.” Check out "How to Systematically Manage Your Renovations" for full details.
So here are the steps:
Step #1: Make a Smart Scope of Work
- Clarify your own expectations for the project. Making a good scope of work is on you, not the contractor. It’s your project, therefore, It’s your responsibility to communicate your vision.
- Give your contractor a SMART scope of work. This type of scope prioritizes wants over needs. Put simply, a “want” is something you’d do in your personal house, and a “need” is something that increases your profit.
- Make a list of all jobs on the project. Remember, these are the individual items of work on the project, like framing or flooring. These are the items you’re hiring the contractor to do.
- Make detailed notes on what actually needs to be done to complete the job. This information helps you set expectations. The more detailed you are, the higher level of accountability you have with your contractors. Do not assume that they know how you want something done. Give them the information.
- Double check your work. This may sound obvious, but it’s not. The extra time you spend planning will go a long way once the project starts.
- Determine what your budget is. Do a gut check here. What’s your ACTUAL budget for the project? You need to have this in mind before meeting with contractors, not because you’re going to share this number with them, but so you can frame your sales pitch around it.
Step #2: Meet the Contractor at the Job Site
Once your smart scope is ready, it’s time to meet a contractor on site.
There are a few things to note before we get started:
- Do not move to this step until you own the property or there is a strong possibility of you closing the deal. Remember, our priority here is building relationship capital. If you meet a contractor at a job site, ask him to put together a bid, and then bail because you don’t end up owning the property, you’ve basically shattered any chance you had of building a relationship with him.
- If you’re going to require any specific licenses, insurance, or permits, make sure this contractor is capable of getting them before you meet with him. If he can’t deliver on this, don’t waste time (yours or his) meeting him.
- Although this goes against popular opinion, I believe very strongly that you should not have multiple contractors bidding on a project at the same time. Not only does it conflict with our goal of building relationship capital, but it wastes others’ time. At the end of the day, you’re only going with one contractor. If you’re not happy with the first bid you receive, deny the bid, thank the contractor for his time, and then get another bid from a separate contractor. Giving this courtesy to contractors does mean it may take longer to find one you like. Make sure you have enough lead time to do this. Otherwise, be prepared to accept the first bid you receive.
Now - let's get back to it.
- Keep the goal of building relationship capital in mind. Start building it. Be humble. You’re not special to him. You’re one of many customers. Sell him your project. You’re great to work with and you make things easy for him, and best of all, you pay quickly.
- Hand him your printed out smart scope while clearly casting your vision for the project. This is one way you make things easy for him. As you talk with him, listen to his feedback. Often, contractors will notice things you missed, like potential obstacles to your vision, that you’ll need to consider in order to redirect. They may even have better ideas to help you achieve your vision. Listen and learn from them.
- Make adjustments as you go along. You have a printed scope with you, use it. Even better, take a video with your contractor as you walk through the property. Narrate everything you see and discuss during the walkthrough. Make sure you both agree on what you’ve been discussing.
- Let him know your next steps after the meeting. You’ll update the scope of work based on the video you just took, and you’ll send over both the video and updated scope of work for him to bid on. The point you’re trying to make is this: you want to set expectations and start the project aligned with each other. The video and updated scope of work is a tool for both of you to rely on rather than your memory, which will ultimately fail you during the project itself.
- Talk briefly about who is paying for what. I advise having contractors include material in their bid, especially as you’re building your relationship. Do not agree to pay in advance for material. Instead, set up an account at the Pro Desk at Home Depot or Lowe’s, and allow contractors to purchase material there on your account. This is a win-win. They don’t have to worry about covering material upfront, and you get an extra layer of protection on material purchases.
- Do not discuss price or your budget. This meeting is not the time or place to do this. It’s completely unnecessary for building relationship capital. Let your contractor give you a bid based on what you discussed, and then do your part to deny or approve it.
Step #3: Deny or Approve the Bid
You’ve gotten back a bid that’s too high. How do you deny it while preserving relationship capital?
- Be nice about it. Begin with the expectation that you’ve miscommunicated your vision for the project. Ask your contractor what he understands your vision to be, and see if you can clarify things for him.
- Reduce the scope of work for that specific contractor. Sometimes, a contractor can get great prices on one set of jobs and not so great prices on others. Let him do the jobs where the price makes sense, and let others do the rest of the jobs. This also allows you to get to know how he works without giving him an entire project.
- Sometimes, it’s just not going to work on a certain project. Let him know, and make sure he knows you’ll get with him on the next project, and make sure you mean it.
- Start again with the next contractor on your depth chart.
Sometimes, you may get a bid that’s too low. Don’t get excited just yet. If it seems too good to be true, it usually is. A low bid usually means your contractor understands the job differently than you do. Double check that before you approve a bid that’s too low.
Now, let’s cover how to approve a bid that’s just right.
- Get it in writing. Make sure you get the price and his version of the scope of work in writing. Some contractors will send this to you via email or a formal PDF bid, but most in the rehab game will text. It’s all the same when it’s written down.
- Provide checkpoints and pay schedules. When you approve a bid, you’re agreeing to pay the contractor for his work. Rarely will you find a contractor who is willing to complete every item on a multi-job scope of work before being paid. Make sure that you’ve communicated the checkpoints at which you are willing to pay. This means being clear on what jobs should be completed and what that looks like beforehand.
- Although we’ve been discussing the importance of relationship capital, never forget that money is the power. Do not pay ahead of any of your pre-established checkpoints. If you want to break your original checkpoints into smaller chunks, go for it. But never pay without a checkpoint being passed.
- Get copies of your required licenses, insurance, and/or permits. Make these documents checkpoints if needed. Don’t let yourself get too far into the project without having these in hand. The more time passes, the harder it is to get this stuff.
Step #4: Practice Accountability
Once the project begins, things get a little easier. You let your contractor work while you continue with other business. Eventually, he will reach one of your checkpoints. It’s time to practice accountability.
- Confirm your expectations for the checkpoint have been met. Is the job complete to your satisfaction? Does it match what was on the agreed-upon scope of work? Remember, you can consult your video and written scope of work if necessary.
- Pay FAST. If everything looks good, pay them right away. Seriously. This will go a long way towards building relationship capital. If you know they are getting close to hitting a checkpoint, set up a time to look over things in person or video, if necessary. If a checkpoint, and therefore payment, is contingent on approval by a third party, like a city inspector, make sure your contractor knows this. City inspectors in particular like to take their time, and you want to be upfront about that.
- Review change orders closely. Make sure any price increases are limited to the specific jobs that have changed in scope. It’s rare that the entire scope of the job changes once you get started. And if something feels off, get a second opinion from one of the contractors on your depth chart. You don’t need to feel rushed into confirming a change order.
- If you fall into the contractor’s black hole, get out ASAP. Make it clear to your contractor that a time expectation, typically to the next checkpoint, has been set, and then hold them to it. Clearly outline the repercussions of missing the new expectation. Fire him if necessary.
- Do not hold back. If you’ve set expectations appropriately and throughout the project, you have license to hold your ground. Now, there’s no need to get nasty. I simply mean that you are not to budge on the expectations you’ve set. It sucks to not pay someone, but if he’s not doing what he agreed to do, it’s not your fault. You’ve done your part.
Some Tips
- I don’t believe in bonuses. You’ll hear it suggested that you should give your contractors bonuses if they complete a job on time, and especially if they finish early. For me, the “bonus” is having another project lined up for them and paying quickly when they reach a checkpoint. The more jobs you can give them, especially back to back, the more likely they are to stick around. Make sure your contractors know you have more projects coming up and then actually get one lined up and waiting for them.
- Check on their work without checking on their work. In between checkpoints, walk through the job site to “answer a customer question” or “look at something for another job,” but use this as an opportunity to get eyes on how things are going. You don’t want to be surprised when they ask for a check.
- Micromanaging might get you the answer you want, but likely not the results you want. If you continually press on contractors, they are going to tell you what you want to hear just to get your off their backs. Remember, we want to build relationship capital, not destroy it.
- Don’t double dip. As much as you can, avoid having multiple contractors working on the job at the same time. There will always be someone else to blame when things go wrong.
- Keep the job site clean. A cluttered job site is not only unprofessional, but it decreases efficiency on the ground. Make a clean job site an established expectation for everyone working on the project. The more trash is left out, the more inclined everyone will be to continue leaving it out.
Conclusion
I’ve said it before, and I’ll say it again. Rehab contractors are a different breed, and managing them requires a good balance between being gentle and having a heavy hand. This is why prioritizing relationship capital is key.
Use what you’ve learned here to build a checklist (or download this one) and use it to set clear expectations, hold accountability, and pay quickly.
When you focus on these things, you build better relationships with your contractors, which ultimately means you will spend less time project managing and more time focusing on your All Weather approach. This will allow you to free up even more bandwidth for growing your real estate empire or spending time with your family. Or my favorite - BOTH!
Good luck out there investors.
Hi, I'm Ross Paller
CEO Of Larossa
After flipping over 300 houses, holding a portfolio of 150 properties, and creating a successful construction company for over a decade, I felt compelled to pay it forward by sharing the wealth of knowledge and experience I’ve accumulated on my journey.
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