Finding the Right Contractor: The Essential Facts - Part Three

How a contractor is willing to work with you in terms of bidding and pricing a job may be another determining factor in whom you decide to hire. It’s important for any landlord to have a good understanding of what some of these options are before you need work done on your investment property. There are also issues related to how payments are actually made for the work being done on your rental that a landlord should know about.

The method of pricing usually is directly related to the complexity of the job and/or the number of possible unknowns. For instance, painting an apartment prior to having a new tenant move in is a straightforward task and a contractor should give a fixed price for that service. Remodeling original rooms in old buildings are projects that likely will be chock full of surprises and may require different modes of assessing costs.

You really need to have a realistic budget for your projected work. Any legitimate contractor will ask you what your budget is. Sometimes consumers are anxious about this. They fear that the contractor is just trying to find out how much money they have. Nothing could be farther from the truth. Mutual transparency is a key ingredient to successful relationships between landlords and contractors. Legitimate contractors really need to know your budget. It’s one of the way’s they can help you figure out what you can really afford to do; falling under the rubric of client education. Let’s say you want to remodel the kitchen in your rental. Maybe you’ve seen pictures of something fabulous in a magazine or on one of those TV shows and you’re feeling inspired. Great! Your contractor, if he or she knows what you’re really prepared to spend, can tell you if your figure is realistic or if you have champagne tastes but a beer budget.

Let’s take a quick peek at some of the various ways the costs of your work can be handled and the pros and cons of each.

Time and materials (T&M)

Pros:

Gives you more direct involvement with the job
Greater control over costs
You only pay for work done
Shares risk more evenly between Landlord and contractor

Cons:

Takes more time to manage
A bad contractor could drag the job out to bill for more hours than needed.

Not to Exceed Arrangement – A variation on the basic T&M contract, in which the contractor and landlord agree on a pre-set spending limit for a given project. For example, a project billed T&M with a not to exceed limit of $5,000 means that if materials cost $2500. The amount of labor billed cannot exceed $2500.00

Pros:

You only pay for the work done
Assurance of knowing that there is a spending cap in place.
Helps focus attention for decisions to be made within budget constraints
Contractor will advise landlord as work progresses nearing spending limit

Cons:

If unexpected problems arise, then costs may be forced above expected limits. (This goes back to the principle in investing that you should never “bet” more than you can afford to lose. When you buy a rental, you need to have cash on hand for repairs and maintenance. Even the best plans may present the unexpected.)

Flat/Fixed Price

Pros:

You know right from the beginning what the cost will be
Have a schedule of known, fixed payments
Changes to original plan are executed and paid for through specific delineated Change Orders
Contractor bears risk for giving accurate estimate for price. If the job costs more than expected, the contractor may have to eat that loss.

Cons:

Cost will generally be higher than T&M because of the need to incorporate every potential problem into the estimate (the What If Factor)

There are lots of arguments about how to pay or not pay contractors and most of them arise from fear. There are loads of books out there that make it seem as if contractors are one step removed from the devil himself and then, only just barely. These books and articles generally advise never to pay a deposit up front and to withhold payment the minute you are unhappy. These kinds of preconceptions can become self-fulfilling prophecies. The best scenario is to do your homework so that you select a contractor with whom you feel comfortable. Work out a plan for your project that makes sense and have a clear knowledge of when payments are to be made. It is standard practice in the industry for an initial deposit to be paid before work begins. The amount of the deposit varies with the size and cost of the job. It’s fairly standard to pay 50% up front and the final 50% upon significant completion of the job. If the job is very large the amount may vary. Sometimes a contractor will ask for a deposit between 25 to 50 percent of the total expected costs and then follow up with scheduled weekly or bi-weekly payments. Everything can and should be spelled out in clear, simple language in your contract. This way everyone knows what is supposed to happen and when, how much it will cost and what the rights and responsibilities of all the involved parties are. This kind of clarity and transparency generally makes for smooth and happy interactions with contractors and helps create long-term working relationships that can last for years. This presents the added benefit of having a contractor who really knows you and your property and who can make suggestions based on that knowledge.