Rehabbing is one of the most trying and most important parts of the real estate investing business. Quality construction will make your property shine in the retail or rental market. However, achieving that quality rehab can try your patience. Perhaps the project runs behind schedule, and costs rise beyond what you predicted. Or there’s a dispute with a general contractor over when and how the work should be completed.
Smart investors preemptively solve these problems by stealing a project management strategy: creating a scope of work. And not just any scope of work—a thorough, detailed document that prevents many eventualities. Many times, I’ve seen investors hire contractors with final scope looking something like this:
- Exterior (repair fence, replace shutters, repair rot, landscaping): $2,400
- Interior (paint, replace windows, replace damaged doors, etc.): $4,300
- Kitchen (cabinets, appliances, countertop, flooring): $5,900
- Bathroom (toilet, shower surround, vanity, toilet paper holder, door stop, towel rod, soap holder): $5,200
- Bedrooms (build closet in left bed, flooring, etc.): $3,500
- Total: $22,400
That’s it. And that’s not enough.
What is a “scope of work”?
A scope of work—also called a SOW—is a detailed description outlining all of the various parts of a rehab job. It can eliminate headaches for both you and your contractors, and should be an essential element of every new construction project.
Let’s say you have a relatively simple job, like painting a room. Instead of using a scope of work, you simply ask the contractor to “paint this room.” But what does “paint this room” mean? You and your contractor may have differing opinions. For example, what color should be used? What grade of paint? What finish? Should the trim be painted as well? Should the trim be the same color?
If you leave these decisions up to the contractor, you may be in for a surprise. Why leave details up to chance?
Instead, outline all of those decisions in a defined scope of work.
In the above example, your scope would specify paint color, finish, and paint grade. By providing all this information up front, contractors have a clear understanding of the project goals and the expected duration of construction. This helps them pull together an accurate, realistic bid based upon the actual material and labor needed to complete the job.
Why is a vague scope of work bad?
Most of the time, vague bids like that leave a lot of knick-knack work undone at the end of your construction project. Expect confusion regarding precisely what you and the contractor agreed to—especially when it comes to the details, like materials.
You may even have trouble settling on location. A friend told a contractor to install the laundry hookups on the first floor. Instead, he put them in the basement, despite the verbal agreement. Location wasn’t listed in the scope, so there wasn’t much that could be done besides argue.
Furthermore, those paragraphs of to-dos hide costs. If you’ll notice above, that “bathroom” category contains a lot—but mostly petty items, like the towel rod or toilet paper holder. Unless you are installing a diamond-encrusted toilet or a solid gold shower surround, none of that should cost $5,200. But it’s harder to spot these sorts of things when a contractor is quoting multiple items at a time.
This is why demanding individual line items is so important:
- It’s much easier to spot things that are overpriced. You can also bid things you are on the fence about and see whether the price makes it worth it to do or not.
- It’s easier to compare one contractor’s bid to another. They’re bidding the same thing.
- It reduces miscommunications, and you can make sure the contractor is bidding all of the work you want done.
So how do you put together a scope of work? We’ll start with your first walkthrough—before you’re even under contract.
Estimating rehab costs
J. Scott’s book The Book on Estimating Rehab Costs lays out 25 different expense categories. I’ve added a few to create my walkthrough list:
- Gutters, soffits, and fascia
- Exterior paint
- Decks and porches
- Septic system
- Interior paint
- Carpentry and framing
- Sheetrock and drywall
- Flooring—consider separating hardwood, carpet, vinyl, and tile into their own categories
- Cabinets and countertops
- Termites and pests
I put together a one-page form that allows me to quickly estimate the rehab costs. First, I note a project description and the property basics, like the asking price, beds, baths, garage, neighborhood quality, along with any relevant information, and then put together an estimate on each of those items mentioned above. I’ll also write a brief statement about anything additional that the project may require. Then I add in a little for extra knick knacks, a sewer line contingency (if the house is older), my estimated holding costs, and a general project contingency (usually 20 percent). Then I add them up for my total estimate.
Here is what the estimate sheet for an entire project looks like:
For example, if all the line items add up to $20,000, the final part of the scope would look like this:
- Rehab estimate: $20,000
- Knick knacks: $1,000
- Sewer line contingency: $500
- Holding costs: $2,500
- Project contingency (20% of rehab estimate): $4,000
- Total rehab estimate: $28,000
Don’t skip the contingency unless you’re a true estimation pro. Unforeseen items and things I missed usually add up to about 20% of the estimated costs.
Precisely estimating expenses is tricky. Your number will depend on your materials, contractor, and location. Analyze every contractor quote and head to big-box stores for a gut check on basic pricing. As a real estate investor, you’ll need to learn this skill.
With this checklist, you can make offers with confidence. However, this list alone isn’t something contractors will bid on. For that, we need to put together a scope of work.
Creating your construction scope of work template
When creating a scope of work, you want to catch every little item. For this reason, make sure the utilities are on when you visit the property, so you can see if the plumbing and electrical work properly and include them in your project scope, if necessary.
I use a large, six-page checklist. Following it involves visiting each room in the house and making detailed notes about each item in each room. Tedious process, yes—but being thorough avoids later headaches. Some people bring a notepad for notes, but I find the checklist more helpful. I’m less likely to forget anything.
For example, when I look at the property’s lot, I’ll examine the:
- Tree trimming
I will make notes when I spot something not listed on the checklist—every property is different, and even the best checklist won’t encompass everything.
Don’t rush this process. One property can take between 30 minutes and two hours, depending on the size of property and how much work it needs. You’ll also want to spend some time thinking about your timeline. Make smart goals—and quantifiable goals—to ensure the project comes together as you envision, in a way that suits your investment schedule.
Creating a template for your contractors
Once you’ve completed your checklist, transcribe it into a project overview that includes all the project deliveries and the project schedule—and, ideally, delivery dates. Our final product looks like this:
We separate each item out into four sections:
- Pre-construction: Things like fixing the electrical so the power can be turned on, which is usually done before the scope is put together.
- Construction: The bulk of the to-dos.
- Vendor items: Anything your main contractor or their subcontractors don’t do. It might include things like painting, flooring, appliances, foundation repair, and tree trimming. If your main contractor does everything, this list is unnecessary.
- Punchout: The last items that need to be done after the painting and flooring. This includes things like outlet covers, door stops, installing appliances, and cleaning carpets.
After the scope is done, we send it out to any contractor that is going to be bidding the project, and insist they put their bid into the template. We also create an upfront budget to ensure the quotes are in line with your planned expenses.
Early on, it may be hard to demand a contractor you’ve just met use a specific template—but I would still make the request. It is much easier to compare different quotes when they’re on the same template. The vast majority of contractors we’ve met have had no problem with doing this.
After a project is accepted, we also ask contractors to put any add-on requests at the bottom of the page.
Regardless of whether you want to use a scope-of-work system like ours or develop your own, it is important to be thorough and consistent. A messy scope of work leads to a messy budget—and a messy budget leads to a blown budget.
As Abraham Lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” Do the leg work up front, and the project will go smoothly more often than not.