Subcontractor Work
Owner builder construction loans provide financing for people who want to eliminate the costs of hiring a licensed builder for the construction of their new home. In other words, owner builders will act as their own general contractors, managing the Subcontractors themselves.
Hiring only reputable sub-contractors with a good track record will save you many headaches later in the project. Find two or three of these companies in each job category and have them submit bids, based on your building specifications.
Types of Subcontractors
Owner builders will need to review each bid line by line, making sure that the Subcontractors 1) understood the full scope of the work, and 2) did not change anything in the bid specifications.
When ready to hire a Subcontractors, owner builders need to draw up a contract to cover the specifics of the job to be performed. Here’s a breakdown of the items you should make sure are included in every sub-contractor contract you sign:
1. Price – owner builders must know the total price to be paid for the complete job. Most likely, you will supply the materials, and the sub-contractor will provide the labor.
Owner builders who allow the sub-contractors to provide the materials often get stuck paying inflated costs. If you do decide to go that route, make sure the sub-contractor itemizes the materials and their costs for you.
2. Specifications – the contract should spell out the exact materials to be used, the brand names, sizes, model numbers, colors and every other detail of a specific work item. Leave no gray areas, or you will most likely be unhappy with the final results.
3. Insurance – owner builders should insist that all companies working on the home carry workers’ compensation insurance and sufficient liability insurance. Have their insurance company send you a copy of their binder or insurance certificate prior to the date they are to begin work.
Since owner builders are the general contractors, they will have to cover the project with Builder’s Risk insurance. This type of insurance will protect the house while it is under construction.
If you have any questions about the insurance you will need in order to qualify for an owner builder construction loan, be sure to speak with your lender about the specific requirements for financing.
4. Time Frame – specify the amount of time it will take to complete the work. It is very important for all of your subs to stay on schedule.
Owner builders should consider adding a penalty clause in terms of dollars per day for work that is not satisfactorily completed by the scheduled date.
Remember, when one sub falls behind, other sub-contractors behind him will probably have to delay their work. As the general contractor, it is the owner builder’s job to keep these people on track.
5. Warranties – specify how long the sub-contractor will cover his work for defects. Will they come back and replace items that are still under the manufacturer’s warranty without charge?
Be sure that your subs take delivery of any materials that you supply and sign off on the fact that they are in perfect condition (or note any problems) before they start.
At this point, the materials should become their responsibility. They should then be willing to honor any warranties just as if they had supplied them.
6. Payment – virtually the only language that Subcontractors understand is money.
Owner builders should always hold 5 to 10% of the contract price for two weeks after work is completed. This will allow you to detect any problems with the work.
Often, owner builders will not find a problem until the next trade is working in that area.
Have it in writing right up front that this is how you pay. This is a common practice and should not be a problem for a reputable company. Also remember to specify in your contract that no payments will be made until the work is completed.
Remember, owner builder construction loans are designed to provide you, the owner builder, with draw money only after you submit a draw request upon completion of the work item. It will take approximately 3-4 days in most cases for you to have the money in your account to write a check.
7. Clean up – all Subcontractors should be required to clean up before they leave the job. Owner builders can easily designate a spot for trash, or have them haul all off their own debris from the site.
You will need a dumpster on site for small things, but you should be clear that all of the debris that a sub-contractor produces is their responsibility to remove.