The Renovation Choice: Contract or T&M?
Unless you’re doing a major renovation, most contractors will offer a choice of options for their services. You can either set up a contract detailing all work to be completed, or you can pay as you go, also known as “time and materials,” or T&M. The best investment property advice says that both options have their good and bad points. Here are the most important ones to consider when hiring your particular contractor.
Contract for services
Contracts offer pricing protection for property investors. That is their number one feature. But in order to protect properly, they need to be spelled out in great detail. The vaguer the agreement, the greater chance your contractor can add overage amounts to the original contract. Even if you both had discussed the work to be done, and you thought it would be included in the original contract. All your contractor has to say is, “we had a misunderstanding.” And you’re screwed – stuck paying for overages you thought were part of the contract. My investment property advice is to be sure to add any necessary language to any contract you feel is not detailed enough…prior to signing it of course.
The biggest drawback to contracts is that contractors need to protect themselves from their own human error in estimating the time and materials necessary to get the job done. So they always build in an extra amount for this “fudge factor” to make sure they don’t get burned financially. That said, with contractors who estimate properly, you’re effectively overpaying on your project. In theory, if you get bids from several contractors, the competitive bidding process should help keep their fudge factor amounts relatively low. But be aware that in all cases, you may be overpaying to obtain the safety net a contract provides.
Time and materials (T&M)
The greatest feature of hiring your contractor using the T&M method is price. In theory, that is. In a perfect world, since there is no contract price, and no fudge factor built in, you should be saving on your contractor’s services. And the savings can be substantial – think 10 to 20 percent less than what a contract may cost you. And that may certainly be worth the riskiness of going this route versus signing a contract. In addition, you can set up an account at your local hardware/building supply house for your contractor to obtain his materials. So while you may be paying retail price on materials, it’s still less expensive than paying the contractor price of materials plus his mark-up on them (which is what you’d be paying built into a standard contract).
However, the main potential problem with T&M is that it’s ripe for abuse by an unscrupulous contractor. Or maybe even worse, a decent, well-meaning, but slow contractor. Both can kill your budget in…some time. Obviously, this method of paying for services requires trust on your part. And usually, trust needs to be earned. If you’ve worked with a contractor on many projects and trust them implicitly, then T&M is a great way to go. If you feel you have a great referral from someone you trust, then this too can work well. But overall, T&M should be avoided if you’re using a contractor for the first time. Or if you’re using someone without any referral at all. Some good investment property advice is that you need to be careful, because a slow contractor can bleed you dry by taking forever to complete a project. In effect, you become the hostage of the contractor.
photos courtesy of renovation-headquarters.com, the smarter wallet.com, nahbmonday.com, latesthomeandgarden.com, bobsbestlist.com