How to Hire a Contractor
Landlords have limited time and a large investment in their business. This is why you must know how to hire a contractor. Here's a checklist for things to consider, some of which you can exclude for small jobs.
Do they have Workers' Comp and Liability Insurance?
No matter how small the job, you want to know that all people working on the premises are covered for the specific job they're doing. This means liability and workers compensation insurance. Professional companies should be willing to provide a copy of their insurance certificate.
We've heard some fantastic reasons why a contractor can't give us proof of insurance. One said, "I've been in business 35 years" and proceeded to rant about how offensive it was that he should be asked for proof of insurance. Another said their insurance company wouldn't allow them to give out copies of the certificate, and even had a phony insurance representative call us to confirm this unfortunate "fact." If someone refuses to prove they have insurance, they don't have it.
You can still hire someone without insurance. But if you do and if something gets seriously broken, or if someone gets hurt, you will be on the hook to pay the damages. Or your insurance will. So in terms of settlement value or future premiums, you will pay the price.
One final note: workers compensation is extremely specific. You must be sure that the contractor is insured to work on your building type. Someone cleared to work on residential buildings cannot necessarily work on the ninth floor of a high-rise. You must also be sure they have listed their job skills for the insurer. An insured secretary cannot mow the lawn.
Are they Licensed for this Work?
In Massachusetts, electricians, plumbers and deleaders especially must be licensed. So must many other kinds of contractors. If you hire someone who isn't licensed, and a tenant has a problem with the work, this will impact your standing in court and when it comes to security deposits. Always hire a licensed professional.
Who Pays Which Taxes?
You want to collect a W-9 from the contractor before the job starts. This will let you issue them a 1099 at year end. All individuals and partnerships paid over $600 must be 1099'd, and it's good practice to issue 1099's to everyone. If someone is an LLC or a Corporation, they might have partnership taxation status, so you still want a W-9 from them.
Usually the purchaser of services will pay sales tax on raw materials. Sometimes the contractor also asks you to withhold and pay income tax on their behalf.
- Related Article: How to Spot at 1099 Contractor
What about Building Permits?
Unless you like hiring shady contractors, insist on pulling a permit so that the contractor stays honest. Decide in advance who will pay for the permits. Tie contract payments to the permit inspection points. This way, if the work doesn't yet pass inspection, the job isn't yet paid for.
How are we Going to Handle Changes to the Plan?
All change orders should require preapproval and sign-off. This means that no one is asking for more or doing less than expected unless both parties agree.
There should be penalties for changes to the original timeline or budget. Be careful about putting in bright finish lines, at which steep penalties come into effect. Instead ease penalties in gradually so that there isn't a huge incentive to cut corners.
For instance, a 2% price reduction that kicks in if the job finishes one month late might be enough to create a mad panic the week before the "one month late" mark. You'd be getting crummy quality of work. It would better to start with 0.1% penalties for each day late centered around the one-month mark. This smears out the penalty and reduces the urge to cram in a bunch of work on any given day.
What if we disagree?
Call for arbitration and indemnification. Arbitration avoids court and all the expenses involved with it. You still get to present your case. Indemnification causes each to hold the other harmless for things they don't do. These clauses are necessary to reduce unanticipated risk.
Who is notifying the tenants?
All of your tenants should be treated by the contractor like valued customers. Will they be able to see construction materials? Will there be noise coming from adjacent units or buildings? Do they need to be notified about lead paint hazards, electrical outages, or water shut-off's?
You want to write down all of the expected interruptions and their timeframes in advance. You then want to agree on the method of communication (text messages, phone calls, robocalls, US mail, posted notices, or some combination of these). Proper notice will reduce complaints or calls to your office. It will help tenants feel like a part of the process rather than a collateral victim of noise and service interruptions. Tenants who receive good communications about things that affect them are more likely to remain long-term.
What does the job look like when done?
The best thing to do is to show a contractor an example of a finished job. For instance, if you're gut renovating a building, take them to one of your finished buildings and show them the level of workmanship that you require. Create a punch list that you will each use to inspect the work as it progresses so that there are no details left unfinished at the end. This matters a great deal if you get into painting, wood trim, and other finished surfaces.
So for more advanced landlords, hopefully that gives you some food for thought on how to hire a contractor.
- Related Page: Julio Vega speaks in Worcester on How to Hire a Contractor.