Contracts for Contractors

August 14, 2008 · 12 comments

Now that I’m officially closed on my first house, it’s time to start focusing on getting my contractors moving and getting this rehab project underway. I picked a GC earlier this week after several weeks of walk-throughs, bids, and negotiations (I wasn’t very efficient with this the first time around). Tomorrow, I will be meeting with him at the property to sign the contracts, give him his first payment, and review his schedule for the project (so I know what to expect and when).

While I’m sure I’ll deal with plenty of contractors who insist on using their contracts and forms, the GC for this project was perfectly amenable to my creating the contractual agreement, as long as it included his bid as an addendum. I know of several investors who don’t think much about the contractual side of the business, and essentially sign whatever the contractor throws in front them, or in many cases, don’t sign much at all. Considering I have a good bit of money on the line if I get sued (or worse yet, if I get audited by the IRS), I try to be very careful with my contracts and documentation.

For anyone planning to get into this business (even as a hobby), let me recommend that you have a consistent contract regimen with every contractor you work with, regardless of whether it’s a $500 project or a $50,000 project. The risks are the same, and amount of effort to mitigate that risk is really not too great. With that in mind, here are the documents that I require every one of my contractors sign before they start on a project:

IRS Form W-9

A W-9 form is an IRS form that is used to collect information about your contractor (name, address, SS#, etc) that can be used at the end of the year to create and issue tax forms to the contractor and to the IRS. Without the W-9, you risk not being able to get in contact with the contractor at the end of the year to provide him with a statement of earnings for the year. You also run the risk of having no proof of Independent Contractor relationship with the contractor, and may end up paying payroll taxes for that contractor and any wages you paid him.

Some people figure that they’ll be able to collect the contractor’s information at some point in the future, but remember, a contractor may be just as happy if you can’t file tax information about him, so it may actually be more difficult to collect this data after the contractor has completed your job. A W-9 only needs to be filled out once (and kept on file); it’s best to have this filled out by the contractor prior to handing him his first check.

Independent Contractor Agreement

This is a big one, and should be created and signed before each project begins and with each contractor you will be paying. The Independent Contractor Agreement basically lays out the contractual relationship between you and the contractor. Besides containing all the details about the specific project at hand, it clarifies that the relationship between you and the contractor is not employer/employee, but instead an independent contractor relationship. This is very important, both from a legal and a tax perspective. From a legal perspective, it provides you some protection against lawsuit, workman’s comp suit, etc. And from a tax perspective, it will likely save you quite a bit of money in payroll taxes that you’d otherwise pay if the contractor were considered an employee.

Plus, as I mentioned, the Independent Contractor Agreement lays out the specific contractual terms for the project at hand. For example, the contract specifies such things as:

  • List of specific services to be performed
  • Compensation terms
  • Terms around who provides tools, materials, etc
  • Penalties assessed for missing deadlines
  • Insurance obligations
  • Description of how change orders are done
  • Etc…

This is the primary contractual document between you and your contractor(s).

Scope of Work

This document may be included as part of the Independent Contractor Agreement or it may be a separate document (usually referenced by the Independent Contractor Agreement). The Scope of Work defines the specific set of tasks you are hiring the contractor to complete, and is essentially his checklist against which he has created his price quote and against the tasks he will be expected to complete to get paid.

The Scope of Work should be as detailed as possible, and should even contain specific information about the materials to be used, where to procure them, etc. If you ever go to court against this contractor for failure to complete his job, the judge is certain to want to see the Scope of Work and compare it to the job performed. The more specific the Scope of Work is, the more likely the contractor will live up to expectations, and if it should ever go to court, the more likely you are to convince a judge that the job was not properly completed.

Payment Schedule

This document may also be included as part of the Independent Contractor Agreement or it may be a separate document (and again, usually referenced by the Independent Contractor Agreement). The payment schedule clearly defines the milestones the contractor needs to hit to get paid, and exactly how much he will get paid at each milestone. What the payment schedule looks like is up to you and your contractor, but suffice it to say, you should be looking to pay as little as possible until a substantial percentage of the job is complete (and of course, the contractor will likely want as much money as possible upfront and early in the project).

When you work with a contractor for the first time, you may find the need to have many payment milestones. For example, here is the payment schedule I try to use when I work with a contractor for the first time:

  • Milestone #1: 10% paid when these documents are signed
  • Milestone #2: 20% paid after the first day of work is successfully completed
  • Milestone #3: 30% paid after half the work is completed
  • Milestone #4: 30% paid after substantial completion of the project
  • Milestone #5: 10% paid two weeks after substantial completion of the project

Paying essentially 30% at the beginning of the project generally appeases the contractor, and withholding 40% until the end of the project usually encourages the contractor not to slack off or leave your project for another job. Certainly, after working with the same contractor on several jobs, you’ll want to make things simpler by consolidating to just a couple milestones (if not a single milestone); perhaps 50% upfront and 50% at the end of the project.

Insurance & Indemnification Agreement

This form is used to ensure that the contractor provides a reasonable amount of insurance (both liability and workman’s comp) for both himself and any of his subcontractors, employees or agents. This form also obligates the contractor not to sue you for any actions that he or his crew might take. Basically, this is a cover-your-ass document that ensures that the contractor will take responsibility for his crew’s actions and also will provide adequate insurance should there be an accident on the job site.

A lot of people will not use this particular document, but remember, all it takes is one lawsuit to put an end to your business and your savings.

Lien Waiver

A lien waiver is a document signed by the contractor at the end of the job stating that they have been paid everything due to them. By signing this document, they are agreeing not to file any mechanics liens against your property (a mechanics lien is a claim made against your property’s title and can keep you from being able to sell it until the lien is cleared). Make sure that your contractors sign a lien waiver prior to getting their last payment. And refuse to provide payment until the lien waiver is signed, especially if you don’t have a good relationship with that contractor.

Other Documents to Collect

The documents above are the primary documents you need to have signed when working with any contractor. In addition to those documents, you should collect some important information from the contractor and keep it on file in the case where any legal issues later arise. Those documents you could get a copy of from your contractors include:

  • Proof of License
  • Proof of Liability Insurance
  • Proof of Workman’s Comp Insurance
  • References

12 responses to “Contracts for Contractors”

  1. A lot of people leave out the importance of getting that lien waiver, but it’s hugely important, so it’s a good sign you know what you’re doing that it’s included.

    One thing to keep in mind is that the law of each state is unique, so forms and procedures from one state often don’t apply to the state next door. In Illinois, for example, waivers are taken not just at the end of the job, but at every progress payment as well. The law also requires that the contractor deliver an affidavit that lists out all the subcontractors and how much they have paid to each. Contractors don’t always like that, but it does provide a nice protection to the owner.

  2. Mike says:

    Good info. What about lien waivers for all the subcontractors? Do you feel that’s not necessary?

  3. J Scott says:

    Hey Mike –

    I do list lien waivers as important to get signed for each project (it’s at the bottom of the article).

    That said, I tend not to use them. For the most part, I use the same contractors on all projects, and I’ve built up a level of trust that I believe supercedes the use of lien waivers. In other words, I think that by using them, I would do more harm to our relationship than the benefits I’d be getting from getting them signed. Because I’m careful to use clear contracts and document all my payments to my contractors, I think that goes a long way towards mitigating any risk of having liens put on my properties.

    Of course, for a new flipper or when working with contractors for the first time, using lien waivers isn’t a bad idea. Some contractors consider it an insult, but when you explain it’s mutually beneficial in the long-term, they’re generally willing to sign them.

  4. Good post.
    The hardest thing in flipping properties to get good at is the construction phase (most important is knowing pricing).

    The phases can be broken down into

    Awarding the bid(s)

    Just like yourself I always require them to use my contract, it’s VERY thorough and attached is a scope of work, etc.

    I always make sure I have paid the contractor less than the work that they have done and I explain to them that they can always attach a lien to the property if I don’t pay them. If they don’t finish it’s much harder to get them to finish.

    Generally I will order the materials. This accomplishes 2 things.
    1 – It allows me to pay the contractor less until the job is done and removes the chance they will take off with the money.
    2 – it protects me from the contractor ordering building materials for another job and using my properties name as the property. I have had a contractor do this to me and I had to pay $10,000 because the supplier liened my property even though I could prove it was never delivered or used. Good thing I owed the contractor more money and have a good attorney.

    Oh yeah constructions the most stressful part of it.

    Great post

  5. Vlad says:

    where can I get a good contract from? I’m in IL, Chicago area.

  6. J Scott says:

    Vlad –

    Check out this article (including sample contract) that I wrote for back in February:

  7. Rozlynn says:

    I have 3 questions:
    For Second Chance house…who wrote up the organized Contractor Scope plan…you or your contractor? Who did the floor plans and what program was used to do the floor plans?
    Does your GC work on projects other than your projects? Do you have a crew devoted to you? If the answer is yes, how do you keep them from getting other projects and then not focusing on yours therefore costing time?
    Did you move to GA for the sole purpose of RE investing?
    Thank you.

  8. J Scott says:

    Hi Rozlynn –

    The Second Chance House was a LONG time ago…we’ve actually done over two dozen houses since then, and in that time, a lot of our contractors have come and gone. Here’s the answer to your questions:

    1. I do all our Scopes of Work. These days, I don’t write them out like that; instead, I have a spreadsheet template and because our contractors have been with us for a couple years now, they know pretty much exactly what we want without us even having to tell them. But, when we need written floor plans or Scopes of Work, I generally do them. Unfortunately, I don’t remember what software was used for that floorplan, though I’m pretty sure it was something free off the web.

    2. We now have two crews that do most of our work. They do other work in addition (in fact, we often refer them out to other investors) but because they are getting most of their work from us, they are very loyal. They’ll schedule our projects first, they’ll commit all resources to our projects when necessary, and if they’re doing other stuff, they’ll figure out how to help us when needed.

    3. We were ready to move and investing was what we wanted to do. We made a list of cities that we’d consider moving to, and then at the very end — when we had a short list of cities that we’d be equally happy with — we used the real estate market as a determining factor.

  9. Sophia says:

    Getting ready to work on first small scale rehab. Thanks for your wonderful website. I have been able to utilize your system, and keep a bit of sanity through the process. I always come and search for one last round before I start next phase.

    Thanks for the article and list! Do you have a template for other recommended documents for contractors, such as Payment Schedule, Insurance & Indemnification Agreement, and Lien Waiver?

    Thank you!

  10. J Scott says:

    Hi Sophia,

    The payment schedule and insurance requirements are all captured in the Independent Contractors Agreement that I provide here. As for Lien Waiver, I don’t generally use these, so I don’t have a template…sorry…

  11. Casey says:

    Hi everyone! I’m just getting started with the whole idea of real estate investing. I don’t know if I’m posting this question in the right place or not so please excuse. The problem I’m trying to get through in my head is funding for investment. I’m looking to become a real estate agent, which I hear can be very beneficial. I do hear it’s very plausible to invest with no money in pocket such as using hard money lenders, and private money lenders. But with all the interest, just how much money would I potentially earn?
    Maybe some examples would be me tremendously. Thank guys!

  12. J Scott says:

    Hey Casey,

    For questions like this, I recommend heading over to and taking a look at the forums. It’s a great place to get all your questions answered…

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