HOW AND WHAT TO NEGOTIATE WITH YOUR CONTRACTORS AND SUBCONTRACTORS​

Co-authors: Alpesh Parmar and Adam Jason

Negotiating is probably one of the most important skills in any business, especially in real estate.  Never is negotiating more important than when you are dealing with contractors for your real estate projects.  The rehab costs for your next real estate investment, and your ability to control them, are going to make or break the financial soundness of that investment. The good news is, you can avoid this by carefully planning your project and negotiating with your contractor.

In this article, we want to cover two topics.  First, we want to discuss how to negotiate with contractors with a few simple tips.  There are books upon books on effective negotiation tactics. We provide a few recommendations at the end of this article you may enjoy.  We want to summarize a few highlights so that this article can be an easy reference tool for you.  Second, we want to talk about what you should be negotiating with your contractors.  Many contractors, unfortunately, intentionally or unintentionally, are not formal, attention-to-detail type folks.  This means that you as an investor have to be proactive and plan for problem situations.  We will discuss in this article the problems you should be anticipating. We even will include some contract language you can use in the next construction contract you sign so that these common problems and how they will be handled if they arise are beyond clear for both you and your contractor.

The “How” to Negotiate with Contractors

Effective Negotiation Tips

If you want to know some ways to reduce construction costs without compromising the quality, consider these negotiation tips:

Rely on the Knowledge You Have Built

We know as investors that the greatest investment that we can make is in ourselves.  When considering contractors and your next project, now is the time to turn to that knowledge that you have built.  It is easy to feel overwhelmed because the contractor is the “professional”, but take everything you hear from contractors with a grain of salt and make sure to compare it against your knowledge bank.  Does what you are hearing sync with what you have found in your prior rehabs? All those books you´ve read, podcasts you have listened to, what was it for if you are simply going to take the word of the contractors you speak with?  Have confidence in yourself and enter negotiations from a position of knowledge.

Shop and Get Estimates from a Couple of Contractors

The truth has a way of coming out. If you hire the first contractor you come across without asking for estimates from more than one contractor, it’ll be hard to know if you got a good deal on your project. Not having other bids puts you in a position of weakness. Having these bids in hand will give you leverage with the contractor you ultimately would like to work with.  “Did you see that X contractor said they could install a new bath for $8,000 when you said you could not do it for less than $10,000”? “Well, contractor X said that they could do this work in a week but seems here that you need two?” Knowing the market will strengthen your position. Therefore, it’s important to get bids/estimates from at least three different contractors until you really become experienced with respect to costs for particular scopes of work so that you’ll have comparison options. Just make sure to provide as many details as possible and carefully read each estimate so that you can get a better comparison. Once you have the bids/estimates, compare each item and category, along with their prices. Double-check and make sure they didn’t leave anything out.  

Give Specific Details of the Project

When you meet with a contractor, all project details and expectations should be clearly defined beforehand. It’ll be better if you specify details from general to specific items. If you don’t do that, there may be possibilities that the bids will be different from one another or that you will agree to a scope of work that does not actually include all work to be done. As a result, it may cause you bigger expenses down the road even though the initial estimate looked appealing. This is also important to avoid confusion and misunderstandings with the contractor.

You also want to make sure that your contractors understand your goals.  If you are flipping a house, the work that needs to be done to get top resale value could be wildly different from the amount of rehab that you need to do for your next rental or BRRRR.  This will impact the scope of work and likely the materials to be used, which could change the bids dramatically.  Make sure you are comparing apples to apples and that your bids are connected to your objectives for the property.

Perform Background Check

It is also a good idea to check the contractor’s credentials and experiences before hiring one. If possible, you can also check previous client feedback. In this way, you can get an idea of how they work, and how they provide results. Not all contractors are created equal.  We recommend hiring someone with a history of quality work and on-time delivery versus potentially cheaper options that stand to jeopardize the process. 

Push Them on Price

Even after finding the contractor that you like, make sure you are getting the best deal with them you can. We hope that you go into your projects knowing what your rehab budget should be to make it a successful investment for you.  Stay committed to your numbers and use them as a basis for negotiation.  Simple statements/questions such as “I really need to get it to X price to make this project work for me” could expose some areas for cost-savings. “How am I supposed to pay that price when my budget is X and the market rate for this process is Y?” could further push the numbers in your favor.  Make sure you are leaving yourself a buffer from your overall rehab budget for additional changes that may surface during the rehab process.

Be Respectful and Professional

We assume that as an investor you are in this for the long-term.  Much of the process steps that we went through above can be avoided in the future if you find an honest contractor who delivers work in accordance with the schedules you agree to.  But you also have to be a person they want to work with.  Pay on time and honor your commitments to your contractors.  Treating people right is the way to go, obviously, but avoiding all the steps we described above is also going to be crucial to saving time, money and peace of mind on your next project.  Much of that responsibility falls on you as the investor.  

The “What” to Negotiate with Contractors

We now want to dive into the “what” you should be negotiating with your contractors.  Everyone who hires a contractor of course thinks of two things – price and timeline.  But what about all the other details that need to be decided on in advance to make your projects a success? 

As mentioned above, you must be clear about what you want to happen from the very beginning of the relationship. This is equivalent to setting expectations for the contractor/subcontractor, which needs to be done in writing.  We will take you through certain things you should negotiate with them and also how to be concrete in the contracts you sign with them to make sure the arrangement is unambiguous.   

Getting comparable bids in a format you request (Scope of Work)

This is the most important item you need to explain to the contractor. As much as possible, be specific when discussing the scope of work that needs to be done. Things like the design, materials to be used, duration of the project, and modifications of the project all need to be there.  Come from the position that someone who you did not speak to, whether it be the staff of the contractor or a subcontractor, will be performing much of the work and they need to know what you expect without actually communicating with you. This is a common issue with the contractor and subcontractor. Most of the time, the subcontractor receives only partial pieces of the project information since the contractor is the primary person in-charge of the project. The primary plans and specifications of the project often stay with the contractor only. When plans change and the subcontractor wasn’t informed, mistakes may occur.  Deal with this in writing by requiring a precise scope of work that everyone involved has access to.

Sample contract language to include in your next contract:

“DESCRIPTION OF SERVICES.  CONTRACTOR will provide to CUSTOMER the work described on Exhibit A hereto (the “Scope of Work”) with respect to the property, which shall provide a detailed description of work to be done before commencement of construction.”  Grab a sample scope of work for your contractors and subcontractors to complete here

Timeline of payments

Never pay a contractor 100% of the costs upfront.  There is no science here, but our advice is that you spread payments through the course of the project.  We like to provide an upfront payment for the cost of materials and then staged payments throughout construction, always with a lump sum payment upon inspection and completion to keep contractors motivated throughout the process.  For simple rehabs, 2-3 payment intervals should be sufficient.  For lengthy rehabs, a more staged payment schedule may be more appropriate. Payments here will be connected to expected materials to be purchased and work to be done, but always maintaining that final lump payment.  Also, make sure that your contract permits the form of payment most convenient for you.  Some contractors may not like to take credit cards, but shouldn’t you get the points and flexibility with financing the project in the manner that best suits you?

Sample contract language to include in your next contract for a minimal rehab:

“PAYMENT. CUSTOMER agrees to pay CONTRACTOR the total sum as follows:

Event: Start of work Payment Amount: $[       ]   amount equal to 50% of total amount due (the “First Payment”) due and payable prior to the Commencement Date (as defined below).

Event: Completion of work outlined in the Scope of Work to the reasonable satisfaction of CUSTOMER and receipt of invoice: Payment Amount: $[       ] amount equal to 50% of total amount due or the total due on final invoice if accompanied by a “change order” signed by both parties (the “Last Payment”).

“CONTRACTOR and CUSTOMER agree to cooperate with respect to the means to be used for making any payment required hereunder.  CONTRACTOR agrees to accept any of the following payment methods: credit card, certified check, bank transfer or any other means agreed to between the parties.”

Give yourself the ability to purchase materials

Sometimes a big part of your budget can be paying the upcharges that contractors charge for buying materials on your behalf.  You should give yourself in your contracts the ability to buy the materials for your projects.  This can result in big-savings, earn you additional points with credit cards or store discounts and is also a great learning experience for understanding the costs of materials.  This is a simple enough process to manage. Have your contractor call you when they are at Home Depot at checkout and pay the representative over the phone. Just make sure to schedule with your contractor when this will all occur so you are available and respectful to your contractor´s time as well.

Sample contract language to include in your next contract:

“CONTRACTOR agrees that CUSTOMER shall have the option to purchase the materials required in connection with the Services directly or in conjunction with the CONTRACTOR.  CONTRACTOR and CUSTOMER will order such materials prior to the payment of the FIRST PAYMENT hereunder and the First Payment will be reduced by the amount of the materials plus any difference between the actual cost of such materials and the estimated cost thereof provided for in the Scope of Work.  Moreover, the First Payment shall be further reduced in the event that such materials are to be delivered to the Worksite at the expense of the CUSTOMER by an amount equal to the labor costs of the CONTRACTOR related to the obtainment of the materials as provided for in the Scope of Work.”

Cooperate together on purchases of materials to avail yourself of all contractor discounts

Your contractor should be looking out for your best interests.  To the extent you are able, as they purchase materials you should be able to avail yourselves of the discounts that they have available to them.  Handle this situation with this language:

Sample contract language to include in your next contract:

“CONTRACTOR and CUSTOMER agree to reasonably cooperate with respect to ordering all materials to minimize costs and avail themselves of all available discounts with respect to such materials, including, but not limited to store discounts and frequent customer discounts available to the CONTRACTOR.”

Contractor responsible for its subcontractors, including any delays to the project.

If you are like us, real estate is supposed to provide an income stream for you that also does not have to become a day job.  The work you go through to hire a contractor should not have to be duplicated to then manage the subcontractors they hire. Contractors also should know in advance what subcontractors they expect to work with are likely to charge.  Surprises stemming from a lack of knowledge are unacceptable. Make sure the contractor you engage understands that management of its subcontractors is their responsibility alone:

Sample contract language to include in your next contract:

“CUSTOMER shall not be responsible for any additional payment hereunder as a result of CONTRACTOR hiring, utilizing or contracting with any other service provider to provide the Services, and any payment arising therefrom shall be made from the payment amounts included herein by the CONTRACTOR and shall be the sole responsibility of the CONTRACTOR.”

Contractor responsible for overages absent a change order

Your contractor should not be doing work that you have not previously approved. You do not want to see items tacked onto your final bill that were never discussed.  Make sure that is clear upfront. 

Sample contract language to include in your next contract:

“CUSTOMER shall not be responsible for any additional payment hereunder as a result of CONTRACTOR hiring, utilizing or contracting with any other service provider to provide the Services, and any payment arising therefrom shall be made from the payment amounts included herein by the CONTRACTOR and shall be the sole responsibility of the CONTRACTOR.”

Set a specific timeline for breach of contract 

Unfortunately, contractors are notorious for delays, sometimes justified and sometimes not.  Make sure that you are clear with your contractor upfront that delays are not acceptable.  This really comes down to treating your investments like a business.  Substantial delays can cost you money on the back end in the form of lost rent,increased holding costs and decreased cash flow.

Sample contract language to include in your next contract:

“In addition to any other right or remedy provided by law, if Contractor fails to complete the work required hereby within [     ] calendar days from the Due Date (as defined below), CUSTOMER has the option to treat such failure to pay as a material breach of this Contract, and may cancel this Contract with no further payments due hereunder and/or seek legal remedies.”

Method of Communication

Another important question when negotiating with contractors – how are you going to communicate with me? You must know how they are going to contact you about the project. It may be through daily emails, scheduled weekly meetings or even phone calls will do. The main point is, you receive project information regularly in the format that you prefer as the customer.  Note this in your contracts as well with a simple “Contractor shall provide Customer with updates regarding the project at least [weekly] by [phone call/email, etc.].”

Incentive/Penalty provisions for Timely Work

We love this one. Why? It is amazing to see how people respond when the opportunity to gain or, maybe even more powerfully, lose cash, is on the line.  Tie your interests to those of your contractor with the incentive/penalty language we always include in our construction contracts below.  Paying this incentive should also go a long way of building a relationship with a contractor that you work well with and that delivers on time.  We like a 5% bonus for smaller jobs ($15K in rehab or below) and decreasing from there for larger jobs.

Sample contract language to include in your next contract:

“TERM. CONTRACTOR shall commence the work to be performed on included agreed date for start of construction (the “Commencement Date”) and shall complete the work on or prior to include agreed end date for construction (the “Due Date”).

In the event that the CONTRACTOR completes the items required by the scope of work on or prior to the Due Date in a matter reasonably satisfactory to the CUSTOMER, CUSTOMER agrees to pay to CONTRACTOR a bonus payment equal to five percent (5%) of the total payment amounts to be paid to the CONTRACTOR hereunder.  In the event that the items required by the scope of work are not completed prior to the Due Date in a matter reasonably satisfactory to the CUSTOMER, the Last Payment due hereunder shall be reduced by five percent (5%) thereafter and an additional five percent (5%) for each additional calendar week that CONTRACTOR fails to complete such items in accordance herewith.”

Protection of the Property

This may apply best to the homeowners who are trying to remodel their homes. You need to have a clear idea of how the construction area will be cordoned off from the other parts of your home, or how you’ll be able to move throughout your house while the construction is ongoing. You wouldn’t want to have any of your stuff or furniture be damaged while they are working. 

Sample contract language to include in your next contract:

“Contractor shall be responsible for any and all damages to the Property resulting from the performance of the Services hereunder or otherwise for its own part and those caused by the actions or omissions of its employees, agents, contracted parties or other representatives. CUSTOMER shall be entitled to withhold any and all payments otherwise due hereunder until such time as such damages are remedied by the CONTRACTOR to the reasonable satisfaction of the CUSTOMER, all such determinations hereunder to be made in good faith by the parties.”

The importance of formalizing your relationship with your contractors to avoid leaving these important items to chance is crucial.  What else do you need to make sure to cover? How to process change orders, responsibility for damage; right to inspect work, time to cure any defaults, prohibitions on assignment of work/subcontracting. 

Check out the links in the “About the Authors” section below to piggyback off our experience and resources so that you are putting yourself in the strongest position possible as an investor with the “how” and “what” of negotiating with your contractors. 

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Excited about BRRRR investing and want to include all this same language in your next construction contract? Get a free trial and lifetime access to our Deal Analysis and Legal Solution to do more BRRRRs than ever before!  Learn more. 

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About the Authors:

Alpesh Parmar is an entrepreneur, real estate investor, business owner, author, mentor, and podcast host who is passionate about wealth, life, and health. Alpesh is Host of the real asset investing Podcast – “Wealth Matters”. Alpesh is also co-author of Amazon # 1 Bestselling book – Resilience: Turning Your Setback into a Comeback. He has invested in the USA, Belize, Panama, Paraguay, and India. He owns and manages a portfolio of duplexes and small to medium-sized apartment buildings in Birmingham, Atlanta, and Dallas markets.

In 2018, Alpesh Parmar decided to share his story with others by co-authoring a book with other well-respected authors and industry leaders. This book “Resilience – Turning your Setback into a comeback” hit Amazon # 1 best seller in multiple categories.  You can get a free copy here.

Adam Jason is an entrepreneur, attorney, real estate investor and the founder of BRRRRInvest.com, an all-in-one deal analysis and legal solution for buy-rehab-rent-refinance-repeat investors (BRRRR) that he built through his ten years of experience as a BRRRR investor and attorney to help others find financial freedom through the BRRRR strategy. Aside from BRRRRInvest, Adam is also a partner and head of legal for Lifeafar Investments, a real estate investment firm based out of Medellin, Colombia that specializes in real estate opportunities for investors interested in emerging markets such as Colombia, Puerto Rico and Portugal.

Want to make sure you include the contract provisions you saw in this article in your next construction contract? Hire right by using the contract templates, tools and other resources available with your free trial at BRRRRInvest.com. Watch the demo.  Get access to our Deal Analysis and Legal Solution and take advantage of our “One-Year, One-Deal” Guarantee.  Learn more.

If you enjoyed this article, you may also want to check out our podcast episode together where we talk about how to simplify the BRRRR process for investors.  

Must read books:

Never Split the Difference: Negotiating As If Your Life Depended On It
by Chris Voss, Tahl Raz

The Book on Estimating Rehab Costs: The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs
by J Scott

 

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