Mitigating Risk When Working with a Contractor

When choosing a private lender for your project, you will find Lead Funding doesn’t just lend money, but assists small and large investors in a variety of ways that are truly unique. Among other complimentary services, we provide industry forms such as contractor agreements and lien releases, a “Proof of Funds” letter and “As Completed” valuation report. Than Merrill‘s excellent article “The Independent Contractor Agreement & Every Document You’ll Need To Work With A Contractor” recommends six critical documents to help reduce your exposure to risk.

1. Independent Contractor Agreement (ICA) is a contract between the real estate investor and the contractor. The ICA should identify every stage of the rehab. It will serve as a blueprint for the contractor and the investor – what needs to be done on a timeline and what materials are needed. Barring any unforeseen problems, the investor can make sure the contractor get the job done on a agreed upon schedule. A well-drafted ICA will detail all aspects of the project to include:

• Permits – The contractor is responsible for pulling permits and scheduling inspections
• Materials – The agreement should delineate who selects and purchase materials
• Insurance – Which insurance and workers compensation requirements must be met by the contractor
• Subcontractors – The ICA should state that no subcontractors should be hired without your approval, how subcontractors are to be paid, and that all
subcontractors must sign a lien waiver as applicable.
• Work Schedule – The work schedule identify when the contractor  is and isn’t allowed  to work on a the project
• Completion Schedule – Identify specific milestone completion dates as well as a final project completion date.
• Arbitration – An Arbitration clause will detail how any disputes will be settled
• Responsibilities – So there is no confusion on what needs to be done, and how it will get done.

2. Scope Of Work – Details the work to be completed. The scope of work can detail everyting the you need done to what materials will be used. it can be as detailed as item numbers, SKU numbers, paint colors, and specific materials etc.

3. Payment Schedule – A list of milestones that need to be completed before the contractor can expect payment. Than describes a schedule that works for him

• First Payment: Demo and Frame out (15% of total payment)
• Payment 2 – Insulation, sheetrock, doors and tirm (20% of total payment)
• Payment 3 – Install kitchen and bath ameniteis (20% of total payment)
• Payment 4 – Countertops and Flo0ring (20% of total payment)
• Final Payment – Punchlist and final closeout (25% of total payment)

4. Insurance Indemnification Agreement – A document that requires the contractor to carry the appropriate insurance.

• Proof of Liability Insurance
• Proof of workers compensation Insurance
• Certification of Insurance

5. W-9 – This will allow you to collect the appropriate information form your contractor and document it correctly on you taxes

6. Final & Unconditional Lien Waiver – Instead of risking being confronted with liens that may impede the title of the property, get a final and unconditional lien waiver signed before committing to the contractor’s final payment.

Following these recommendations should facilitate a smooth process, and help you maintain a good relationship with your contractor.

When you choose Lead Funding as your private lender, you will work with a staff that has decades of experience in all areas of real estate, including valuation, budgeting, scope of work, and project execution.

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