Don't Hire a Contractor Without These Documents

TLDR

Before you pay any contractor, get four documents: a W9, a general liability policy, a workers comp policy, and a business or personal license. Skip workers comp and a guy falls off a roof on your property and you are the one getting sued.

Table of Contents

• The Four Documents
• Why Workers Comp Is the One That Saves You
• Who Needs a License, and What Kind
• The Process: How to Collect Without Looking Like a Jackass
• Never Pay In Front
• The Cash Discount Trap

The Four Documents

I’ve been a real estate investor and a GC for 15 years. I have flipped over 300 houses and paid literally hundreds of contractors. Here is what you have to collect before you hand anyone a check.

1. W9. This is how you get the info you need to send out a 1099 at the end of the year. Any third-party vendor you pay more than about 500 bucks needs to be on a 1099, and the W9 is where the numbers come from.
2. General liability policy. Covers damage to property.
3. Workers comp policy. Covers injury to the people doing the work.
4. Business license, or if they are a sole proprietor, a personal license.

Four documents. Collect every one before money leaves your hands.

Why Workers Comp Is the One That Saves You

General liability covers property damage. If a contractor torches your drywall, general liability pays.

Workers comp covers people. This is the one you cannot skip.

Here is the scenario. A contractor has a guy working for him. The guy climbs on your roof and falls. He breaks his neck. His family sues. The contractor has no money and no workers comp policy. So the family walks up the chain looking for money. Who has money? The guy who owns the real estate.

If the contractor has a workers comp policy, his policy takes care of the injured worker. If he does not, the liability can land on you.

Common Mistake

Skipping workers comp because the contractor “seems like a good guy” is how investors lose a house over one fall. The policy is not about trusting him. It is about a legal barrier between you and someone else’s injury.

Why GCs Care So Much About This

If you are a GC like I am, you hold a general liability policy and a workers comp policy, and you get audited at the end of every year. The auditor looks at every person you paid. If you cannot produce their workers comp policy, you have to pay for it retroactively on your own policy.

Different trades have different percentages. A roofer might be 30 percent. A plumber might be low single digits. An admin worker is the lowest of all. If I paid a roofing crew 10,000 dollars without workers comp proof, I might be on the hook for 3,000 at audit time.

You as an investor without a workers comp policy are not going to get audited that way. But the liability for someone getting hurt on your property is real, and the policy is the cleanest defense.

Who Needs a License, and What Kind

There are two kinds of license, and they are not the same thing.

Business license. Allows someone to operate a business in a specific county or city. If they have an LLC, the license is on the company. If they are a sole proprietor, they need a personal business license instead.

Trade license. Allows them to do and pull permits for specific trades. A general contractor can pull building permits. A master electrician can pull electrical permits. A master plumber can pull plumbing permits. HVAC guys rarely pull their own even though they can.

If you act as your own GC, you are the one collecting all this from hvac, electrical, and plumbing. If you hire a GC, they collect it from their subs and you just verify that they are pulling permits on your job.

Pro Tip

You can verify any trade license on the state’s website. Every state I have lived in lets you search by company name or license number. If they will not give you the license number, that is the answer.

The Process: How to Collect Without Looking Like a Jackass

Leading with paperwork kills the negotiation. The contractor thinks you do not trust him. Prices go up. Schedules get weird. You do not want that.

Here is the order I work in.

1. Walk the property. Do the scope of work in three ways: written, verbal, and on video.
2. Ask for the price. Only the price. We are not talking about schedule or paperwork yet.
3. If the price works, talk pay schedule. How many checkpoints, how much at each checkpoint.
4. Now ask for the four documents. Tell them clearly: I cannot cut you a check until I have these in my hand.

You can mention the docs earlier during recruiting if you want. “You got all your stuff? W9, GL, workers comp?” They will always say yes. They are probably scrambling to figure out how to get them. Fine. The real pressure moment is when the first check is due.

You always let them know up front, very clearly, that no documents means no check. Because for me as a GC, I have to prove the paper trail to my insurance auditor every year. You are protecting yourself in the same direction.

Never Pay In Front

The money is the power in this game. Not in a negative way. These contractors have ten things going on, and you get put on the back burner the second the money leaves your hands.

A lot of contractors are going to ask for money upfront. Here is the script: “I can’t pay upfront. I have been burnt too many times. I am not doing it. What I can do is set up a pro account at Home Depot for materials, and I pay for them over the phone when you go to pick them up.”

That way he is not fronting material cost, and you are not fronting labor.

Breaking Down the Pay Schedule

If it is a new contractor and trust is not there yet, break the project into very small checkpoints. “How about we settle up at the end of every day you are on site? You did the work we agreed on, here is the check.”

I would not run a long-term relationship that way because it burns too much bandwidth. But for a new guy, breaking the checkpoints down shows that you are a good payer, which is the reputation you want. Over time, bigger checkpoints, less overhead, same money flow.

Key Concept

The money is the only real lever you have on a 1099 contractor. Protect it. Never pay for work that has not been done yet.

The Cash Discount Trap

A contractor says the job is 10,000 dollars. Pay cash, it is 9,000. Sounds like a 1,000 dollar win.

Watch what actually happens on a flip.

The 1,000 dollar discount cost you 5,000 dollars in taxes because you can no longer expense the full rehab. That is a bad deal.

The only way a cash discount works in your favor is if he comes way down. Not from 10,000 to 9,000. From 10,000 to 5,000. No contractor has that kind of margin, and if he does, you are already being ripped off on the base price.

Some people think, I’ll just pay him cash and report the cash to the IRS. That kind of defeats the cash discount he was giving you, and also puts you in the middle of his tax situation. Not your problem to solve. Use QuickBooks, write checks, keep your books clean, and you will start to build a real radar for what jobs should cost.

FAQ

Do I really need all four documents on every contractor, even my friend who helps me for a weekend?

Yes. The workers comp exposure does not care about friendship. If he falls off your ladder and ends up in the hospital, you are the one with the house he can sue. If he is truly just a friend with a one-off, make sure he is on his own homeowner’s insurance or yours covers it.

What do I do if a contractor does not have a workers comp policy?

Tell him you cannot pay him without it. He can get one in a few days by calling his insurance broker. If he refuses, find another contractor. Some investors will accept a signed waiver from a sole proprietor with no employees. That is between you and your lawyer, but a real policy is cleaner.

How do I verify a trade license?

Your state’s website. Search by company name or the owner’s name. Every state I have lived in has this online. If the contractor will not give you the license number, that tells you everything you need to know.

What’s the right first payment amount on a new contractor?

Zero for materials, because you set up a Home Depot account for those. For labor, break the job into small daily or bi-daily checkpoints until you trust him. A day’s work for a day’s pay is fine as a starting point. The goal is to prove you pay reliably so you can move to bigger checkpoints later.

Just starting out. Does this process feel like overkill for one house?

It feels like overkill until the first time a contractor disappears with your money or someone gets hurt on your property. Build the habit now with a small scope and a small dollar amount. It is the same process whether you are paying 5,000 dollars or 50,000.