When we lend to a rehabber who buys, fixes, and flips properties, we always ask for the rehab budget as one of the four initial pieces of information we use to screen a deal. (Check out our previous post to learn about the other things we request for screening a deal.) However, if you have ever done a rehab project with a contractor, you probably know that once you start the project, the rehab budget may change. Recently, I asked a rehabber what he does to keep the changes to a minimum. Every contractor's first response to changes is to submit a change order because it is always easiest for him to ask for more money. Here's what Jeff does to keep costs and change orders under control:
1. He makes his contractors submit alternate plans rather than submit change orders -- that's harder for them than just asking for more money.
2. For every item that is added to the budget, he requires that something else must be taken out of the budget -- that's super-hard.
3. He tells his contractors that if they submit a change order, they won't get any more work from him, which forces them to reconsider asking for more money and instead to do some creative brainwork. On the other hand, he doesn’t make his repeat contractors competitively bid for their next job with him. This works when you are consistently doing lots of projects. Jeff tells his contractors that sometime they will make a lot of profit and sometimes they make less, but they keep consistently making money.
1. He makes his contractors submit alternate plans rather than submit change orders -- that's harder for them than just asking for more money.
2. For every item that is added to the budget, he requires that something else must be taken out of the budget -- that's super-hard.
3. He tells his contractors that if they submit a change order, they won't get any more work from him, which forces them to reconsider asking for more money and instead to do some creative brainwork. On the other hand, he doesn’t make his repeat contractors competitively bid for their next job with him. This works when you are consistently doing lots of projects. Jeff tells his contractors that sometime they will make a lot of profit and sometimes they make less, but they keep consistently making money.