Selecting Your Contractor - First Development
Importance in Selecting a Good Contractor
Selecting the contractor for your real estate development is one of the most important things you will do for each real estate investment you start. The wrong contractor will not only cost you time and money, but also provide such an unlimited amount of aggravation that you will question your decision to ever get involved in commercial real estate. Screw this up and odds are real high that you won’t make those profits you were counting on.
The problem in selecting a contractor is that you have to weigh and compromise on numerous selection criteria such as:
- Cost
- Quality of the work
- Track record for meeting schedule commitments
- Change order reputation
- Warranty responsiveness
The reason you are developing real estate is to make a profit. It is so tempting to bid your work and chose the contractor with the lowest bid price. Don’t Do It! Your low bid contractor is not going to look so low if he is 4 months late and your interest carry costs are running you $3,500 or so per month. If he’s late, odds are the quality is suffering as he is trying to make up schedule. Then I would bet you will also be seeing an increase in change order requests as he tries to make up for his months of lost overhead costs. Lesson learned - A low initial bid doesn’t always mean a low final price.
Our Steps in Choosing a Contractor
There are great contractor’s out there. Don’t settle for less. Do the due diligence to find them. Here’s what we did:
We asked the sales team at the development for their list of contractors working in the development and went and inspected all of their projects. This review of the quality of their work narrowed our list to four potential contractors. We then met with the sales team and quizzed them on the performance of the four contractors as to our selection criteria. We also asked about any rumors or scuttlebutt out there. Sales people are always talking with people and are typically active in the rumor mill of any industry. On the two homes that had sold we also talked with the owners. This narrowed our list to three potential contractors.
We went through the same exercise talking with a number of architects that were working in the development. Likewise with a number of high-end architects from the nearest city. Architects really know who does quality work and who is difficult to work with. This added two more potential contractors not currently working in the development to our list of potentials.
We then set up meetings and interviewed the five potential contractors. We made sure we were able to get the following information from each contractor:
- References
- Last three projects completed
- Architect on those projects
- Expected timeframe to construct our custom lake house
- Expected cost per square foot for the house
- Subcontractors used for major trades
- Insurance limits
Although we checked references, we expected them to be good. What contractor would give you a reference that he didn’t know would be positive? That was the reason to find out their last three projects. We could then check with those owners and architects and find out how the contractor really performed.
Two contractors were eliminated based on their estimates of the schedule of construction and the square foot cost. I am sure they were good contractors, but like I said above, you are doing real estate development to make money. If it takes too long or costs too much, there is no reason to continue.
This left us three contractors. Two were currently working in the development and one was a high-end builder but hadn’t worked in that development yet. Once our design was complete, we would bid it to these three qualified contractors and the lowest bidder would be our contractor. It may seem like a lot of work, tracking down all those references and feedback. Let me tell you - It could be the most profitable thing you ever do. No one gives away money. Remember - - you always have to work for it.
