Don’t Sign Your Contractor’s Contract Until You Know These 5 Things

Over the years that we’ve been flipping houses, Christina and I have been incredibly lucky with our contractors. Thanks to our own connections and tips from other people in the real estate industry, we’ve always hired really great guys who’ve done great work at competitive prices. Unfortunately, we’ve also seen other house flippers deal with really terrible situations, and we’ve seen what can happen when you rush to hire a contractor before you’ve read all the fine print.

Hiring a contractor really doesn’t have to be a gamble, though. In fact, if you know a few things going in, you can rest assured that you’ve made a good decision and that your contractor will get your work done on time and on budget (excluding any unforeseen issues with the house, of course). So, before you sign, make sure that you know these things and that you have them in writing.

A Specific Description of the Job

Make sure that the contract includes a very specific job description that states what your contractor is responsible for and what you’re responsible for, including providing access to the property. This part of the contract will also detail which parties are authorized to sign, change, or amend the contract.

Start and End Date

The contract should detail a specific start and end date for when the contractor will have access to the property to complete the work. As I’ve learned over the years, you’re probably going to have to update the completion date, but it’s good to have it in writing at the beginning.

Terms of Payment

According to one statistic, something like 70% of contractors don’t tie their payments to job completion, which is a really bad deal for you. If you don’t make sure that your payment dates are tied to the completion of the job, you’re going to have to pay them on the agreed-upon date whether the job is done or not.

That doesn’t mean that you have to withhold all payment until the job is done. After all, your contractor is going to need some cash to buy materials and pay his or her subcontractors. However, you should withhold at least 10% until everything’s done and you’re happy with the job.

Proof of License, Insurance, and Bonding

Don’t ever hire a contractor who isn’t licensed, insured, and bonded. If you do, you could be looking at a lot of problems. The work could be subpar, and if your contractor isn’t insured and someone gets hurt on your property, you could be liable for it. Not fun. So always make sure that your contractor’s license is up to date and valid, that he’s insured, and that he’s bonded. If you don’t know all three of these things, don’t sign the contract.

Termination Clause

Finally, there should be a clause in the contract that allows you or your contractor to terminate the contract under certain circumstances. If the job is dragging or you’re not happy with the work, you can fire your contractor, and if you don’t pay on time, they can walk away. A surprising number of contractors don’t include this clause, which is surprising since it protects both you and them.

If you make sure these five things are included in your contract, you’ll be on your way to a healthy relationship with a good contractor. And don’t forget to be loyal to contractors who do good work for you—they’ll be likely to give you better rates and the same great service if you keep using them.