You’ve invested significant capital into a property—whether it’s a New Construction, BRRRR, or a fix-and-flip renovation—and the quicker you sell, the higher your profit. But even if you’re new to the industry, you know that: Renovation delays are the norm. And the last thing you want to do is unnecessarily miss your peak buyer window.
One of the most important variables in this equation: Your contractor.
The real estate investor-contractor relationship is crucial to balancing time, money, and quality. Yet, finding a qualified contractor within budget is only step one. Once they start the job, unexpected repairs or supply chain shortages can stress your timeline. Without a clear Scope of Work (SOW) or communication channel with your contractor, even a minor mistake can derail returns for weeks.
The good news is that there are ways to drive success—and they don’t necessarily require extensive work on your part. Streamlined contractor management can help you stay on budget and complete your projects on time.
Before we jump into solutions, let’s break down the common challenges of managing contractors for real estate investors and why they happen.
5 Common Challenges When Working With Contractors
It’s often better to plan for risk than hope against it. Working with contractors presents unique risks for investors, including:
- Scope of Work and budget overruns
- Miscommunication or vague contracts
- Missed deadlines or poor work quality
- Limited availability of trusted crews
- Inflation of material and labor costs
Some of these can be accounted for in the planning stage. For instance, you can offset miscommunication through building secure and timely communication schedules and insisting on clear contracts. Poor work quality or crew availability, meanwhile, can be difficult to ascertain ahead of time.
These issues rarely crop up due to malice. More often, there is misalignment between the contractor and investor. While an investor is looking for a balance of quality, budget, and timeliness, contractors are dealing with:
- Juggling multiple projects
- Pride in their work, which can hinder their ability to “say no” or admit they aren’t the right person for the job
- Hidden cash flow issues, causing them to take on too many projects or reduce their quality
- Varying systems – some contractors work within a rigid, standardized system and communicate regularly. Some are working on the fly.
5 Smart Tips for Managing Contractors Efficiently
Hiring contractors for real estate projects is just the first step in the management process. With these 5 tips, contractor project management can go from chaotic to the epitome of efficiency:
Vet Contractors Thoroughly
The easiest way to build a list of pre-vetted contractors is through referrals. Other trusted investors and real estate agents likely have a long list of potential contractors, from plumbers to finishers, to help you complete your project.
However, a referral is not enough. And in cases of low crew availability, you may need to source new professionals. You’ll want to check their contractor licensing, insurance, references, and portfolios. In some cases, you can begin with a small test job—but that is not always the case. It can be helpful to ask if they have a current project, and if you could visit the worksite to get a feel for their process.
For out-of-state investors, this time investment can be both cost-prohibitive and exhausting. Investing in a local foreman or project manager will add to your total cost, but can alleviate the burden of vetting individual contractors.
Create Detailed Scopes of Work
If the devil is in the details, getting the Scope of Work (SOW) correct is the cornerstone of sound real estate investing and flipping. You should always provide a detailed, written SOW to your contractors to eliminate assumptions. Itemized tasks, materials, and timelines offer security and a clear point of reference in case of scope creep—when project scope (and costs) begin to grow uncontrollably past the original agreement.
You can use this initial SOW to draw schedules, incentivize milestones, and provide a reference when unexpected events crop up. One study of over 300 construction practitioners found that organizational factors, such as compiling a robust SOW, have the strongest influence on successful projects.
Build in a Budget Buffer
Unexpected expenses can feel like a fact of life. It is incredibly challenging to plan around things you can’t control, like inflation, shortages, natural disasters, and innocent mistakes. Since unexpected costs are a norm in construction, with 98% of projects facing delays and cost overruns, it’s prudent to allot a 10-15% contingency fund in your renovation budgeting.
You can test this contingency budget with sample budget scenarios. For example, if you are flipping a property in Southern California, you may want to run a scenario analysis of potential wildfire damage before the project is completed. Or, you may want to consider what will happen if the price of lumber increases over the next six months due to policy changes.
Communicate Early and Often
Communication is where much of the scope and budget creep begins. Poor communication practices create bottlenecks in the project and increase delays. But this can be remedied with the right processes and technology.
Weekly check-ins, photos, and progress updates ensure that you can keep projects on schedule—or at least get detailed updates on potential issues. There are many project management tools available to ensure everyone on the project knows the current status of your project.
For out-of-state investors especially, don’t just rely on photos and texts—you need someone local to keep eyes on the property, pay in draws instead of upfront, and always have backup contractors lined up. In this case, you may want to invest in a local project manager or foreman.
Pay in Stages — Not Upfront
Milestone-based payments reduce risk, and it’s easy to see why. Advanced payments incentivize the project timeline. A lump sum at the end can quicken the process but sacrifice quality.
A milestone-based payment system takes a little more work to set up and maintain, but encourages both quality work and timeliness. For this to work, you’ll want to tie payments to draw inspections or walkthroughs. Virtual draws can streamline this process.
You’ll also want to include a lien waiver in your payment documentation. This will protect your property in the case a contractor fails to pay a subcontractor or vendor, who might submit a lien on your property. This will make you liable for paying these costs. A waiver relieves you of this liability.
Bonus Tips for Fix and Flips
Flipping differs greatly from New Constructions primarily because it deals with so many unknowns. Simply not knowing how much work is required, and having no way to know until you’re in the thick of it, is the main budget and timeline stressor.
But your contingency budget doesn’t just have to be about paying for last minute expenses. You can also leverage bonuses to incentivize timely work. Bonuses for finishing on time and on budget, or for finishing ahead of schedule, can overall decrease costs from holding a property longer than expected.
While it’s impossible to know everything about your real estate rehab property, it’s important to use technology and property history to get a full picture of your investment before turning it over for work. The more information you have on the front end, the fewer surprises and unexpected costs.
Lay a Successful Foundation with Contractors
Your contractor relationships are a long-term investment. A successful relationship translates into crews that will stick with you through thick and thin. And it’s not just about the upfront costs. You also save time in not having to vet and check your contractor’s work every moment of the project. A trust build that enables you to focus on growth, rather than just project completion.
But that relationship hinges on proactive planning and communication. And, as with all things in real estate, this can require a little capital to get right.
Like with contracting, having a financial partner that understands your goals and constraints provides a foundation for success. Our real estate finance experts at LendingOne have extensive experience in helping real estate investors fund growth. For example, our investors benefit from:
- Up to 92.5% LTC and 100% of rehab funds
- Expedited appraisals
- No interest charged on undrawn rehab funds
- 12-month interest-only loans with no prepayment penalties
Ready to discover how you can tap into our funding and optimize your renovation budget? Speak with a loan advisor today about your next fix-and-flip project.
