Any successful property transformation will rely on a successful relationship with your contractor. While many investors still pride themselves on “handshake agreements” within their local professional community, a solid, written agreement will protect you. It also shows professional courtesy to your team members (contractors) and indicates that you want to both protect them in the event of a disagreement and reward them if a project goes even better than expected.
While there are dozens of important items to be included in your contractor agreement, four stand out as imperative. Some of them may seem too obvious to be included, but I have seen legal battles lost and won when they were left out. Here are four crucial things to include in a contract in order to optimize your chances for a profitable, productive, successful real estate transaction once the repairs, renovations, and upgrades are complete:
#1: The Basics
Don’t forget to put in important items like property address, date the contract was created and agreed upon, and names and addresses of the customer (you or your business) and the contractor. Furthermore, specify at the outset who has each title, meaning identify yourself as the customer and the contractor as (usually) the contractor, although some investors refer to them more generically as service providers.
Why it matters: Most agreements will not stand in court if these items are not specifically in the contract.
#2: Background and Scope of Work
Your contract should describe the job in detail and indicate why you believe the contractor has the tools, experience, and qualifications for the job. Identify not just what is going to be done (i.e. plumb the bathroom), but also what brand will be used for the fixtures. Furthermore, scope of work should also include what will not be done (i.e. if you do not need a waterproofing membrane between the top and structural concrete slabs in a home, that membrane should be mentioned as not being part of the job).
Why it matters: This greatly minimizes future discrepancies regarding duties and obligations of both parties.
#3: “Time is of the Essence”
Identify not just how long you expect the work to take, but specify a start date, a date of completion, and intermediate milestones for structural work that may be affected by the changing seasons. For example, a contract for a new roof installation should specify the project be completed before the local rainy season and firmly establish a date. This clause also specifies the size of the crew the contractor is expected to bring and how all requirements will be met.
Why it matters: This type of information gets everyone on the same page in terms of timeline. It also will be of service if, during the project, things get behind and you must leverage financial penalties. Without clear dates and expectations, you will have trouble enforcing those penalties. (See #4)
#4: Liquidated Damages/Incentives Clause
This clause places a penalty on the contractor if work is not completed and incentivizes on-time (or ahead-of-schedule) delivery. It basically states that if the work is not completed within a certain number of days of the day of commencement (start date), the contractor will either be obligated to repay monies to the owner or forfeit a certain amount of money for each day they are late. This item also details monetary incentives for early delivery, such as an extra flat payment (i.e. $50) for each day early the project is completed.
Why it matters: You now have placed a slight “cushion” between your returns and a potentially overdue project and, at the same time, offered your contractor a tangible reward for getting done early.
As I mentioned, there are dozens of items that can (and in most cases should) be included in your contracts any time an extensive series of repairs or renovations is in order for a property. These four are just the beginning, but they can play a critical role in the success or failure of a project just by helping you and your contractor get on the same page with the same goals in mind.