Commercial Real Estate Mastery: Episode 38
The Art Of Winning With Contractors
Regardless of what sector of real estate you are engaged in, working with contractors is a necessary part of the job and one that comes with huge financial and risk ramifications. In this Commercial Real Estate Mastery podcast we’re going to review the necessary steps and strategies required to make your contractor interactions highly successful.
Episode 38: The Art Of Winning With Contractors Transcript
If you're going to be in commercial real estate, I don't care what sector or what niche of commercial real estate you're going to be in, you're going to have to deal with contractors. It's just a very real necessity that you're going to have to hire people to do things, maybe paving streets, changing the outer surface of the apartment building, whatever the case may be, you can't do these things yourself. You have to employ others. But the way you structure and work with contractors can seal your fate of either being a success or a failure. This is Frank Rolfe, with the Commercial Real Estate Mastery Podcast. We're going to talk about the art of winning with contractors, how to get the job done, how to have a win-win structure with contractors in which you get a job at a fair price, they get a happy client, and you can move on to the next project.
Now, I've been in the commercial real estate space now for almost half a century, so I've had to work with contractors more than most people have. As a result, I've learned a lot, many through painful lessons. But there are some lessons learned you need to know. Number one, you have to build a really big list of players, because the whole key to being a successful contractor supervisor is having plenty of contractors. You need them to get bidding down, you need them as replacement options in case your contractor goes bad. So build a big list. A lot of people make the mistake. They need to get something paved, they find a contractor, or maybe two. If you want to succeed, you need more than that. You might need five, you might need 10. You can actually, in fact, never get enough contractors. So you have to cast a really big net.
Number two, you've got to get at least three bids. This is one of the biggest problems many real estate owners have, is they don't like spending the time to get multiple bids. They get one bid in and they go with that. That's not how it works. You have to get at least two, preferably three, because the next step is you've got to play them off against each other to get the price down. You have them give you a bid, parts and labor, all bills paid, here's my price. And then you go back to the bidder, even if they gave you the best price, and say, "Well, you're still not as low as the other people, but I really like you best, could you go lower?" And by using these people against each other, you can typically get the price down, often substantially down. But you need to have multiple bidders to pull that off. Also, once you get your winning bidder, you must get a contract completely in writing, which includes parts and labor and everything on it. And you also need to have on the contract a start date and a completion date. Not until you have those items do you really have anything to work from. I cannot have an open-ended contract which is parts plus labor by the hour because I don't know how many hours they're going to claim that it's going to be. And if they don't give me a start date and an end date, what's the point? They may never even get the deal done in my lifetime.
But here's some other things you need to know about working with contractors, assuming you already have that agreement with them, we have the final parts and labor pricing. We're still not even done. Number one, you must never let your manager on the property amend that agreement. They all want you to do that. Often the contractor will go to the manager there on site and say, "Hey, wait a minute now, wouldn't it be nice if I went ahead and striped the parking lot? What if I put a skim coat of tar on it, make it beautifully black, and then stripe it?" And if your manager agrees to these changes, your contract is void. Now your contract isn't just fixing the potholes. You're going to be doing all these other things and striping, and you're going to get in a bill that you thought would be 3,000 and it's in fact 15,000. Make sure your manager knows they cannot do that. And also put in your contract that it cannot be amended by anyone but you. No other amendment will be honored.
Also, you have to be a stickler on their promptness. If they say they'll start on a certain day at a certain time, they better show up. And if they don't, you need to be on the phone harassing them, saying, "Where are you? Did you quit? I'll go ahead and go to my other bidder, bidder number two, he was almost the same price as you. Or do you want to get in here and get started?" Contractors love to play their customers off against each other to see who they can push around. And the person they can push around, what they'll do is they'll use that as a fill-in, a stopgap between their other customers who push them more, and then they'll come and do your job after the other one is completed. You have to be a real stickler on them showing up. You also have to continually inspect their work.
Now, you can inspect it in-person, but why do that when you can inspect it on FaceTime or with a text or a video from your manager? If you don't have a manager there, get it from them. Have them put you on FaceTime and show them what they have. You'll always get a clearer picture of what's going on on a video than you will on a still photo. You can go in and get a still photo and make almost anything look good. Right angle, right lighting. Videos, it's much harder to cheat. So I would definitely prefer, if you're going to look at their work and you don't have a manager present, or even if you have a manager present, for you to see it on FaceTime or at least through videos. And if the work is not perfect, don't pay them until it's fixed. You don't have to accept imperfect work. Don't let them pressure you and say, "Well, it's almost good." No, that doesn't count. You paid for X, and if they're delivering Y, demand that they make it back to X. And if they then don't fix it, if it's still not perfect, you need to get a cost reduction. You shouldn't be paying for something that's not what you ordered. If you ordered a cheeseburger and they bring you out a hamburger, you need to get a price discount because you didn't order hamburger, you ordered cheeseburger. It's no different when you work with the contractors.
You also can never pay them until they are done, completely done. I have a million stories of contractors who came to us and said, "I'm almost done. I'm only an hour from done. Can't you pay me? I gotta go somewhere. It's the weekend." Don't get in that trap. The minute you pay them, you may never see them again. I just know this from the school of hard knocks. Instead, if they say, "I'm only an hour away from completion," say, "Well, then get going. You'll be done in an hour." We have a story of a guy that was doing some very, very expensive stonework on a property. He came to us with the same pitch. "Hey, I'm almost done. Can't you pay me?" We said, "No, we can't pay till you're done." Well, he drove off and he never came back. He never presented us a bill for any of the stonework. We're not really sure what happened to him. Maybe he ran off, maybe he was put in jail. I have no idea. But you can never pay someone until they're done, because the minute you pay them, you may, in fact, never see them again.
But here's the biggest problem you have with contractors. Even if you follow everything I just said to the letter, you have to keep doing that on every job. Where a lot of people in commercial real estate screw up is they get this contractor, they go through the cycle we just described in detail, and they latch onto them and say, "Okay, you're my electrical guy. You're always gonna be my electrical guy. No more bidding, no more pushing, no more 'when are you gonna show up?', 'when are you gonna complete it?'" The minute you go down that route, you've ruined everything I described. Your costs are gonna go up 20, 30, 50, 100% because they know that you're no longer doing competitive bidding, and they know that that means they can give you any price they want and you're gonna run with it. They can not show up and you'll forgive them because now you are their buddy. You cannot get into that zone. That's what a lot of big companies do. That's why big companies fail frequently, is because they don't keep doing the process. You can't do it one time and then be set for life and say, "I don't have to do those things anymore. I don't need to get three bids. I don't need to play them against each other now. No, I'm just gonna go with this guy." The minute you do that, the minute you align all your loyalty to that one contractor, then you're doomed. This is Frank Rolfe, with the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.
