Contractor $100,000 over budget on major remodel-- options???

6 years ago

(Thank you in advance for any advice-- I know that this is a long post.)

We're in the final stages of a major remodel that involved adding a second story to and renovating an old craftsman. The initial estimate that we received from our general contractor was $220,000, and we are getting close to $320,000 (or perhaps even more, as we haven't had a bill recently-- more on this below), and he is also ~6 months behind schedule at this point.

Some relevant details:

1) We had him over multiple times to work out the estimate. His initial estimate of $220,000 was in line with at least one other bid that we received and lower than at least one other estimate. He's done good work for family and friends, which is the primary reason that we went with him. His work does seem to be high quality.

2) Each month, we discussed the budget and told him how much we had left in our construction loan; he repeatedly told us that we were on budget for several months, and at our request, he provided us with an estimate of the remaining cost mid-way through the project, which indicated we were right on budget.

3) In early summer-- after we had already made some decisions that we probably wouldn't have made if we knew we were so far over budget (e.g. we'd already purchased our slab and purchased a steam generator for the shower)-- he, at our request, provided us with an updated estimate. That estimate was for $65,000 over our original budget. We were upset, but told him we would find a way to make it work, in part by doing some of the work ourselves, and we indicated that this was absolutely as much as we could go over budget and that there's no more money once that's gone. We acknowledge that there were perhaps some unexpected issues that came up given that it was a major reno, although it's hard for us to know what should have been expected versus a surprise (nothing seemed all that surprising or unusual to us though...).

4) To reduce costs, we've done all of the interior painting, put in all of the wood floors (1100 sqft) upstairs, tiled 2 of the 3 rooms that required tile, done 75% of the upstairs trim, dealt with the yard and landscaping, and handled all remaining trash removal for the past few months, etc. Basically, we've done everything that we could reasonably manage that was still left to do after he gave us the estimate starting we'd be over budget by 65k.

5) ~6 weeks ago, when we paid his bill that month, we let him know that there was $25,000 of the $65,000 left. We also very clearly told him that we would not be paying him anymore until work is done, and to his credit, he hasn't given us a bill since then. At that point he indicated that likely wouldn't be enough, and he sort of partially abandoned us. He'll deal with things when I call, help with tasks that I indicate we can't handle, and he has left us his tools to use, but he's not regularly working on the house anymore.

6) The house should have been done in March and it's nearing completion now, and will likely be done early October. Our construction loan is ending soon, so we need to refinance ASAP, and his poor time management has put us in a very stressful situation with regard to this as well.

7) Nothing major has changed in our plans, at no time have we been asked to approve anything that cost more than what's budgeted, and I'm not even counting some of the items that we purchased early in the process in our total cost. Importantly, nothing at all-- except for the fact that we've done a ton of work ourselves-- has changed since he told us we were 65k over.

As a final note, we expected to go over ~20-25% or so and were prepared for that, so I don't think that we're being too unreasonable. But who has an extra $100,000+ sitting around!?! I also, perhaps naively, don't think that he has intentionally done this, although he has refused to take responsibility for the situation (he blames the plumbers, cost of materials, cost of tile installer, etc., even though that stuff is coming in right on budget; it's really his labor that's through the roof). He's nearing retirement, he had a heart attack a few years ago, and I think that he really overestimated his current abilities, which is what has caused things to take so long and caused his labor costs to go so far over budget.

I need advice! What should I do? Pay him what's left of the extra 65k that we implicitly agreed to earlier in the summer, which is probably ~15k at this point? Add up his profit and deduct that from the amount that we're over? Try to work out some other agreement? I don't think that either of us will be inclined to go to court, but I guess you never know. Any advice is welcome.

Thanks for making it through this long, detailed post!

Featured Answer

_sophiewheeler

6 years ago

last modified: 6 years ago

Wait, so he is GCing this, and supplying labor crews? (Not uncommon in a fixed bid situation.) But. His labor bids as the subcontractor to himself should have been fixed bids within the cost plus arrangement. He's turning his own labor crew into time and materials, which is NOT how a cost plus works.

You need to talk to the construction lawyer that vetted your contract PRONTO. He should not be charging time and materials for his crews. Unless that is what you agreed to in the contract. In which case, you need another attorney as well as contractor.

Comments (14)

_sophiewheeler
6 years ago
last modified: 6 years ago
What kind of contract do you have then? A cost plus? Time and materials? Because that is the only type where you pay the running cost of everything plus fees. Most home improvements contracts are fixed cost. In either case, estimates are not contract amounts.

But, sounds like you're not dealing with any "old house contractors" who could give you a truly realistic budget. Because 200K almost nothing.

The options are that you get a personal loan to pay him or you may get a lien put on your house. Or sued. Or both.
hope625 thanked _sophiewheeler
hope625
Original Author
6 years ago
Thanks, Sophie, for your response. It's a cost plus contract, which is where it sounds like we went wrong. I agree that 200k is not that much, but labor around here is fairly cheap and three of our nearby neighbors have done similar 2nd story additions on comparable houses for 190-290k, so I don't think that his initial estimate was all that crazy for our area. I'm surprised that there is no legal expectation that he provide an estimate that is within some professionally acceptable range of the actual cost, particularly since we haven't changed anything substantial, or that he provide relatively accurate info when we request updated estimates. Sounds like we'll be using some of our remaining savings that we'd intended to use to pay him with to seek legal advice... Thanks again for your input.
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Joseph Corlett, LLC
6 years ago
Terminate and don't pay. He may huff and puff, but at his age, he'll be secretly relieved. Poor reviews are no leverage with a man on borrowed time.

I damn near quit this month and would have if I wouldn't have found affordable liability insurance at the last minute. 62 is a month away; my morale is wavering.
hope625 thanked Joseph Corlett, LLC
hope625
Original Author
6 years ago
Joseph, thanks for your comment. I do feel like he got in over his head and really just wants the situation to be done with. He's a builder, his dad was a builder, and this line of work has been his life, so I think it's hard to retire. Maybe we should just cut him loose and hope for the best. Thanks again, and good luck keeping your morale up.
_sophiewheeler
6 years ago
Part of the reason for doing cost plus is do the homeowner can go over the bids, and potentially reduce or expand the scope depending on real life bids. It takes someone skilled in self control to do cost plus. Otherwise, costs spiral out of control. The weekly progress meeting where you go over the coming work and bids and ultimate costs is the most important board meeting that you will ever attend.
hope625 thanked _sophiewheeler
hope625
Original Author
6 years ago
That's good info to know about the benefits of cost plus, as I wasn't really aware of why you would do one versus the other. We have been disciplined if bids came in high (e.g. we changed our AC because that bid did come in high and we modified our trim materials to stay on budget), but all of the other bids have been pretty spot on or in some cases even less than was budgeted for (e.g. electrical, plumbing, roofing, siding materials, tile, floor refinishing, cabinets, gutters were what we expected and had budgeted for). Countertops were $2000 over budget, but that's really the only sub-contracted thing that was more than expected (and that's a fairly minor amount given how far over we are). It's really his labor cost that off. For example, we exceeded the budget for siding because it took him months to finish it, in part because he only had two guys working on it many days, which meant one would often be on the side of the house, and for each cut the other guy would have to crawl through a window, make the cut, crawl back though, and this inefficiency just added a lot of time and cost. We talked to him about this, but at the time he assured us we were on budget. There were also similar issues with framing. It was only months after all this that he told us that we're way over budget. Given that we've started doing so much work ourselves, I'm just not sure what else we could have done to prevent this other than going with fixed cost. I have a hard time believing that he didn't know that we were over budget until 6+ months into the project, and I wish that he would have let us know earlier, but I'm not sure there would have been a good option even if he had let us know. It is was it is now, so hopefully we'll be able to figure something out with him.
harry_wild
6 years ago
Get a lawyer! Have him/her talk to the contractor! The lawyer can take carry of this matter much better then you can now and probably save you money and time.
Shawn Lagemann
6 years ago
I agree with Sophie on the cost plus basis. For example the siding should have been a fixed price regardless of how long it took the subcontractor to finish. Where things can run amuck are items not called out in the original bid process. For example: Say electrical, the plans were given to the electrician with amps, and all "regular" items needed for electrical rough in, and then changes are made like generators or heat pumps etc. Then there would be overages from the original bid. However, with a construction loan, there should have been a schedule made for the bank along with plans and the bank would have had the project appraised. As the bills come in and are presented to the bank, they double check the scheduled items and as progress id made on the build; they have inspectors that check the progress and make reports. If 50% of the money is gone and 50% of the job has not been completed they usually step in. I'm not sure how you got so far over in a 6 month time frame without somebody noticing. Billing from subs can take awhile, but not 6 months. I agree get a lawyer, but I'd also involve the bank. They are at risk just as much as you are. What if you can't come up with the extra money to finish, and what if there are mechanical liens, which means you can't have a clear title? Bad news. To anyone out there building, please consult a lawyer who specializes in real estate construction contracts before you enter into one and make as many adjustments as needed on your own behalf, and make sure you understand what you are signing. So sad, and I'm so sorry.
hope625 thanked Shawn Lagemann
hope625
Original Author
6 years ago
Thank you all for the recent comments, and it's very helpful to know from Sophie and Shawn that the general contractor's work that he was paying himself for should have been done at a fixed price. We unfortunately didn't have a lawyer look over the initial contract, which was obviously our mistake. The subs have gone over a very small amount in a few places (maybe $2000 total), but in most cases we've been able to offset this (e.g. cabinets came in higher than expected so we went with cheaper pedestal sinks in two bathrooms to cut those costs, tile was higher than expected so we did a lot of the tiling ourselves to stay on budget, etc.). Anyway, it is a mess and it's helpful to have other recognize this, as I've been feeling like I'm the one who is crazy and/or unreasonable at this point. Our bank is a small bank that is very hands-off. They inspect about once every two months but often just have us send them pictures and a description of the progress. But, we will likely have to involve them. At this point, we're working day and night (when not at work...) to finish things up, and we should be able to get our final inspection this week. Of course, we still have to get things in better shape before the refinance and appraisal happens, as there's a lot of detail work to take care of. Is is very sad, though, and I definitely now appreciate the value of hiring a lawyer on the front end. We definitely screwed up by not doing that.
toxcrusadr
6 years ago
Shoot my house is probably not worth $200k. Nice to know that's 'practically nothing.' Yikes.

Anyway good luck with this, it must be tough to go through.
hope625 thanked toxcrusadr
Don
6 years ago
Good advice in this thread. I'm a retired builder. It is, um, not good to sign a six figure contract without consulting an attorney and carefully watching the budget.

The best attorney to use to review the contract is a litigator who has substantial experience with builders. Don't use a real estate attorney. Don't use cousin Eddie the tax guy. The goal isn't to litigate, but to have someone who throughly understands the issues and remedies.

Most small law firms have a litigator who handles disputes with builders. These attorneys have "what are my options with the contractor" discussions literally every work day. Hire an expert and follow their advice. This approach will relieve stress and will likely achieve the best realistic outcome.
JB Raeb
4 years ago
I know this threads almost a year old but I'm going through almost the same situation and would like to hear how this all turned out.
Did you get the build finished? Did you hire a lawyer?
Any updates or advice would be greatly appreciated.
jrb451
4 years ago
JB Raeb, are you using "cost plus" as well?

Contractor $100,000 over budget on major remodel-- options???

_sophiewheeler

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Contractor $100,000 over budget on major remodel-- options???

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