Contracts For Your Contractors

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

20 thoughts on “Contracts For Your Contractors”

  1. hi,
    your website is full of good info, esp for a newbie like me. thanks for this article. question: do all of these apply to general contractors/handyman or only to the GC?

    1. I get these contracts and documents signed by EVERY contractor who sets foot on my projects…it doesnt matter if hes a GC or not…

  2. i read your article on BP regarding contracts. also a good post. a question i have would be for materials, we would like to buy the fixtures myself esp on the first house that we will be doing because we want to lay out the template of what fixtures we will be using – sinks, light fixtures, faucet, door, window, bathtub, etc… – can we buy these ourselves and not be construed as an employer? thanks in advance for your advice.

    1. Newbie –

      Great question! There are several schools of thought on whether you should purchase materials for your contractor or whether you should let your contractor purchase the materials. Ignoring the question of whether it will make you look like an employer for just a minute, my personal opinion is that you should be buying all your finishing materials yourself (not letting your contractor do it). Not only can you likely get better prices if youre doing a decent number of houses, but this way you can avoid contractor markup and you can ensure that the finishes in your houses are appropriate for your rehab. Like you mentioned, we always use the same finishing materials in every house, which provides some additional benefits; letting the contractors choose our materials would negate those benefits.

      Now, as for whether there is a risk of looking like an “employer” by buying your own materials, its certainly an issue. The IRS uses many criteria to determine is someone youre paying is an employee or an independent contractor, and there isnt any single one of those criterion that will make or break an argument that the IRS might take. Instead, they will look at the whole picture, and based on ALL the data, theyll make a determination.

      So, while the IRS normally would look at someone who buys materials to more likely be considered in the “employer” category, as long as the bigger picture makes the relationship look like an independent contractor relationship, you should be okay. This means having an ICA, not providing tools, not withholding taxes, not dictating how work gets done, not dictating hours, ensuring that your contractor takes other jobs, not paying for your contractors insurance, etc. If you ensure that you adhere to all those other rules, the fact that you are providing materials shouldnt be a major issue to the IRS if they ever need to make this determination.

      All that said, Im not a tax attorney or CPA, so if you have any additional concerns, definitely talk to a tax professional…

  3. Another great article.

    J. Scott briefly touched on one of the key determining factors the courts look at to determine if someone is an employee: The control of the details of the work.

    You can specify you want a particular task accomplished and the types of materials, but try not to get much more detailed than that or you risk being viewed as an employer. Why does that matter? For on thing, your responsible for the torts and actions of your employee.

    1. Bilge –

      I wrote up a draft of what I was looking for in an agreement, and gave it to my attorney. By the time it came back to me, I barely recognized the document, but it included everything that I wanted plus all the stuff he thought was important to have as well.

      This is generally how I deal with legal docs — I write a draft and then give to my attorney to “fix”…

  4. So every contractor on your jobsite is required to sign your ICA, even if you are not the one paying them? I had a house where a contractor brought in the guy to install new gutters and another to install new garage doors. I did not pay these people and just my contractor. Would you have them all sign the ICA?

    On the lien waiver, do you get everyone to sign this? Same situation as above where I only pay my contractor. I think that anyone doing work on a job can file a mechanical lien, like if I pay my contractor but he doesnt pay the sub.

    1. Matt –

      I only get ICAs from the contractors Im paying…if they bring in sub-contractors, I wont get ICAs from the subs. That said, I *will* require proof that the subs are insured (either independently or through the GC) and I will do my best to ensure that the subs get paid by the GC.

      I generally dont ask for lien waivers, as Im not too concerned about contractors filing false liens (and there are other defenses against this anyway). But, if youre going to require lien waivers, the key is to get *every* contractor to sign one. And dont pay the GC until he gets his subs to sign the lien waivers…that will protect you in case the GC doesnt pay the subs with your money…

  5. What if I am hiring a GC to do the whole project who then may sub out other work. That work will be outlined in the contract with my GC. Do the subs need to sign this?

    1. Hi Carl,

      No, subs dont need to sign your agreement with the GC. Since the GC is an Independent Contractor, he is legally allowed to sub out any work he wants, though hes still ultimately responsible for it. That said, you should ensure that the subs sign lien waivers before paying the GC if youre concerned about the GC paying his subs. Without a lien waiver, in many states, the subs can sue YOU if the GC doesnt pay them.

    1. Hi Lynn –

      We will typically do hourly for minor work. We can use the same contract, and the scope of work just specifies the hourly wage.

  6. Greetings, Im new to this (its a big scary abis!) But I took a loan via Hard Money Lender & construction loan. The contractor I hired ran off with my 1st draw! I just hired a new one. But I havent presented him with ICA. I wanted to outline the info. youve provided but wasnt sure how to write it up or on what to make it legal. What/How should I do now that the contractor has been on project for 2 weeks now (with 1 guy doing tile work, when he said he had a team!?!) So I need to protect this project before it gets too costly & becomes a flop! I just literally stumbled onto your site (thank goodness!). Where on here do I get a ICA? Im looking now….

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