ESTIMATING ERRORS & COST OVERRUNS

(or Why Jobs Go Over Budget)

In This Article
Omissions
Wrong Assumptions
Inadequate Allowances
Price Changes
Unclear Plans and Specs
Cost-Plus Bids
Hidden or Concealed Conditions
Construction or Design Errors
Design Changes                            View all ESTIMATING articles

Cost overruns from estimating errors are an unfortunate fact of life in construction. There are many ways for jobs to go over budget – that is, cost you more than you or your contractor (or sub) estimated. While some of items discussed below are not typically considered “estimating errors,” all can drive up costs beyond the estimate or bid price. That means someone need to come up with additional money at the end of the job. Either the contractor makes less profit or you have to come up with extra cash. Who pays for cost overruns is largely determined by your contract.

If you are working with a contractor who has given a fixed bid, then most cost overruns cut into his profits, although many can still be passed on to you. If you are your own contractor, or working with a time-and-materials or cost-plus contract, then most of the cost overruns will come out of your pocket. Cost overruns are probably the most common cause of disputes in building and remodeling projects.

The main types of estimating errors are:

  • Omissions: These are items accidentally left out of the estimate – either soft costs (permits, fees, etc.) or hard construction costs. Omissions may be due to items missing from the plans and specs that were, therefore, not included in the estimate and bid.
  • Wrong assumptions: These are items that you assumed were covered under a contractor’s or subcontractor’s bid, but aren’t. Or you may have assumed that a standard septic system would be approved, but a $30,000 mound system is required.
  • Inadequate allowances: You may get an estimate from a contractor or subcontractor with a material allowance that’s too low, a very common problem.
  • Price changes: Material cost or labor costs may rise between the estimate and the project.
  • Novel materials/techniques: Every new material or building technique has a learning curve. Even allowing a little extra time, you may find that it takes a lot longer than planned.

Other reasons that actual costs may exceed estimated costs include:

  • Unclear or incomplete plans and specifications: The absence of clear plans leaves much room for disagreement about what, exactly, was bid on. This can lead to change orders and extra costs for extra work.
  • Cost-plus bids: Unless you have a guaranteed maximum, the final cost is unknown, and often more than you estimated.
  • Job-site surprises: hidden conditions (insect damage or wood decay in remodeling, underground ledge or water problems, etc.) In some cases, these could and should have been detected by more diligent investigation.
  • Construction/design errors: If you build something wrong, have to tear it out and build it again, you may be able to get someone else to pay – the architect, a sub, a supplier – but most likely you’ll end up paying for it twice.
  • Owner changes: You, the owner, may decide to use better windows, roofing, flooring, etc., during the project; or decide to move walls, windows, etc., after installation.

OMISSIONS

It’s easy to accidentally leave things out of an estimate, especially soft costs, but construction items are also easy to forget, especially for the inexperienced. As for soft costs, don’t forget all your permits and fees, which can add up to many thousands of dollars. Then there are the not-so-obvious costs like temporary power, dumpsters, and site prep.  Land development costs are often much higher than expected.  Finally, basic construction items like fasteners and hardware, window jamb extensions, or household exhaust fans are easy to overlook, as are finishing touches like bathroom accessories or topsoil and landscaping. Each mistake can range from a few hundred to thousands of dollars.

Some examples: One contractor I know forgot to add sales tax to his entire materials estimate for a new house – ouch! On one project I forgot to add the cost of the well pump, trenching, and plumbing to the house from the well. On a house I had built by a contractor/developer, I did not know the town had a per-bedroom impact fee of a few thousand dollars. It was not included in the supposedly “turnkey” price.

My advice: Your best tool to help avoid omissions is a good checklist and detailed plans and specifications. If items are not included in the plans and specs, the bids you receive may are likely to also exclude these.  You can use the list in the estimating worksheet as a starting point.

WRONG ASSUMPTIONS

This is a broad and potentially costly category that takes vigilance to steer clear of. If you hear yourself saying, “But I thought that was included in the price” then you’ve experienced this first hand.

These problems are usually related to unclear communication of expectations via plans, specs, and work descriptions (scope of work) in the contract.  It turns on what you expect that a contractor or subcontractor will provide for the price quoted, and what items may cost extra – or are specifically excluded from their scope of work. An experienced contractor knows what to expect from his subcontractors, and which details must be put in writing in the contract.

It’s hard to generalize as to what is a standard scope of work for a certain trade, as these things vary from region to region, and to some extent from sub to sub. Some subs hang and finish drywall; others to just one or the other. Some foundation contractors will provide excavation, formwork, concrete delivery, dampproofing, drainage, and backfill; others will do just the formwork, and you will need to hire an excavator, order concrete from a ready-mix company, and hire another company to damp-proof or waterproof the foundation. Again, the key is to make sure that every step in the construction process and every material is covered under someone’s bid.

Some examples: I recently spoke with a new homeowners who were hit with a surprise $20,000 bill for “cut and fill” that the general contractor did not include in his estimate and bid. They assumed anything related to rough grading would have been included in the earthwork estimate, but not in this case. The cost of fill happened to be very high in their area. Early in my building career, I assumed the well driller on a new home project had included the well pump, trenching, plumbing to the house, and pressure tank in his bid. Turns out it included just the well, casing, and cap.

On another house I contracted, the leach pit had to be located partway under an unpaved road that occasionally carried garbage trucks, UPS trucks, etc. As they were completing the job, I asked the installer if the cap could handle vehicle traffic. “No, but we’re just putting in what was specced.”  I had assumed that the septic system designer and installer, both of whom were very experienced and knew the area,  would have caught this. Luckily I did and we were able to install a truck-worthy cover along with the required vent for a modest upcharge.

My advice: The best solution to these oversights is clear communications in the plans, spec, and contract, so that all parties know what is expected.  If you are hiring subs directly, you should  provide each sub with a full written description of his or her scope of work, along with detailed plans and specifications. That should eliminate most of these misunderstandings. Make sure each subcontractor’s bid includes a full description of what exactly they are providing (or not providing). Don’t make any assumptions – ask a lot of questions (So, this leach field can handle vehicle traffic, right?)  If anything on your  list is not included in a subcontractor’s bid, you will probably end up paying for it as an “extra.” The same goes for your contract with a general contractor or construction manager. In construction and real estate, if it’s not in writing, it’s not worth much.

INADEQUATE ALLOWANCES

To keep their bids attractive, many contractors put in unrealistically low allowances. Let’s say your contract contains a $5,000 allowance for kitchen cabinets, but you end up choosing cabinets that cost $8,000.  You now owe $3,000 extra, plus taxes, and even more if the contractor charges markup on allowance upcharges. He may even charge extra to install the more expensive cabinets.

My advice: Find out beforehand how the contractor prices allowances – and start out with realistic allowances for the quality level you want. The best solution, when feasible, is to pick materials early so the estimate reflects actual costs. In a competitive bidding situation, some contractors will purposely put in low allowances to keep their overall bid low. Read more about allowances in the Contracts section.

PRICE CHANGES

Prices of some building items, especially commodities like drywall and plywood, can undergo dramatic price swings due to real or perceived shortages. And prices of everything else tend to rise over time. Best to check material prices before committing to an estimate and to negotiate with suppliers to lock in prices for the project.

UNCLEAR PLANS AND SPECIFICATIONS

This is a very common problem on small jobs where people don’t want to take the time to specify every detail. However, it can be a much more expensive problem on large jobs where there are more dollars at stake.

Some examples: A contract with the vague specification to “Replace one window with comparable and patch to match existing” could lead to disputes about what type of window and how closely the contractor is to match the existing trim and finishes. The difference in cost between the contractor’s and owner’s interpretation of the contract might be a few hundred dollars. On a home with 25 windows, an unclear window specification could lead to a disagreement over thousands of dollars – for example, when the contractor was thinking solid vinyl windows and the owner was thinking vinyl-clad wood windows.

On one of my very first jobs as a contractor, my partner and I were repairing two bathrooms in a factory damaged by fire. When it came time to install the faucet sets, mirrors, towel racks, toilet paper holders, etc., we had in mind basic “builder grade” items, which we had based our bid on.  Our customer had in mind high-end commercial-grade, chrome hardware with all the bells and whistles. Since we did not write a clear spec or include an allowance clause, we ate the extra cost. An expensive lesson learned!

My advice: Specify, specify, specify. Be very clear about the products you want installed, how you want them installed, and what the final job should look like. Be wary of phrases such as “in a workmanlike manner” or “match existing” without a clear and objective description of materials and workmanship.

COST-PLUS BIDS

As the old saw goes, if you’re not sure how long a job can take, hire someone hourly. Avoid these types of bids if at all possible. If a sub refuses to give a fixed bid, find another who will – or who will at least provide a guaranteed maximum.

There are, however, a few legitimate cases where a fixed bid is difficult to provide. For example, some ledge may be visible may be visible at the surface or in test pits, but how much will need to be removed underground is unknown. Or where some structural damage from insects or decay is visible, but the extent cannot be easily determined. Even if a contractor were willing to make a fixed bid, it might be unreasonably high to protect himself from the unknown.

My advice: Hire a reputable and knowledgeable contractor. Spend a little extra up front to gather as much information, and eliminate as much uncertainty, as possible. Dig more test pits to locate the ledge. Do more examination and test borings of lumber to evaluate damage to framing. Call in an expert if necessary to assess the damage. Then negotiate either a fixed price or a price defined by measurable parameters. For example, the cost to replace rotted sills will be X dollars per linear foot of sill replaced. The cost of removing ledge will be X dollars per cu. yd. of ledge removed. Then ask for a cap on the bid.  Read more about cost-plus bids.

HIDDEN OR CONCEALED CONDITIONS: JOB-SITE SURPRISES

These are sometimes referred to as Hidden Conditions or Concealed Conditions in contracts. In remodeling, examples include such things as concealed insect damage or wood decay, concealed electrical or plumbing lines that need to be replaced because they are damaged or out of compliance with modern codes. In new construction, it may be conditions under the ground – ledge, poorly compacted fill, spring water in the excavation, or even radon.

If the contractor’s bid has a Concealed Conditions clause, these costs will be passed on to you. Without such a clause, who pays for it would be solved by negotiation or, worst case, litigation.

Examples: On a recent job in my area, a customer was unhappy to discover that ditching for utility hookups included a $3,000 extra charge for blasting through ledge. The owner (and maybe the contractor) assumed no ledge would be encountered.  On a new development in an upscale suburb, the home buyers were distressed to discover that all the homes on one side of the street were built on uncompacted fill and needed many thousands of dollars of work to shore up the foundations (the cost was picked up by the developer).

On a much smaller scale, I often found concealed problems on remodeling jobs: decay and insect damage hidden under perfectly good looking aluminum coil stock covering the eaves; ancient knob-and-tube wiring illegally buried in blown insulation in an inaccessible attic. One fairly new house I inspected for a potential buyer had massive decay damage that was invisible from both the interior and exterior – see A Rotting Timber Frame case study.

My advice: Hire a reputable and knowledgeable contractor. What is hidden to some, is apparent to others with more experience and a trained eye. Most of these problems have telltale signs. If you or your contractor suspect there will be problems, but are not sure of the extent, bring in a specialist for an hour or two: a geotechnical engineer for subsurface water issues, a licensed termite inspector for insect damage, etc.

Get a handle on the probably scope of work so you can establish a fixed price for most of the work, combined with a reasonable pricing structure for the unknown portions – for example: X dollars for each linear foot of sill or floor joist that needs replacement. Or X dollars to install a curtain drain or sump pump if subsurface conditions require this. The idea is to link specific prices to specific conditions rather than an open-ended time-and-materials or cost-plus contract.

CONSTRUCTION OR DESIGN ERRORS

An old contractor buddy used to say, “My crews like their work so much, they do everything twice!” In this case, the contractor ate the cost – if you are your own contractor, you will have to absorb the cost, unless it was clearly the fault of the architect or a subcontractor. And even then, it’s not always clear who pays for errors (as the standard  architectural contract relieves the designer of most design errors).

Examples: On a large Victorian I renovated, the architect drew a new 3-story stairwell that looked like it would fit, but didn’t – without cutting into the owner’s grand staircase hallway.  The cost of the extra work was modest (I absorbed it), but the client was not too happy about the appearance. On another remodeling job where I was the general contractor, a plumbing subcontractor cut through every floor joist in a large room in order to get adequate pitch on a bathroom drain. I brought in a structural engineer for quick consult and we were able to fix the mess by removing the plaster ceiling below and screwing heavy plywood to the underside of floor joists to create box beams. More recently, a local contractor installed a skylight on a nearly flat roof, telling the client, “The manufacturer does not recommend installing this skylight on less than a 15% slope (about 3 in 12), but I’ve done several this way and never had a problem.” Needless to say, the skylight leaked, and after several repairs, the extension curb recommended by the manufacturer was installed, solving the problem.

My advice: Hire good people who know what they are doing – they are less likely to make major blunders. Most contractors hate “callbacks,” and will do whatever they can to avoid them. But sometimes the desire to maximize profits (or reduce losses on a job they underbid) motivates tradespeople to cut corners.

Clear and complete plans and specifications will help. Include language that the contractor is to “install all products and materials according to the manufacturer’s written instructions.” If anything seems fishy to you in the plans or during construction, don’t be shy. Ask the installing contractor a lot of questions. If you’re not satisfied with their answers, get a second opinion. Check with your local code official, structural engineer, or other professional before proceeding. Or call the product manufacturer or their regional rep – they want their product installed correctly. It’s time and money well spent.

DESIGN CHANGES

A change to the plan, once construction begins, usually generates a change order, and a price increase. Some changes are required due to design errors or omissions. Some are required by code officials who rightly or wrongly say that some aspect of your house is in violation of the building code (many code regulations are open to interpretation). However, the biggest cause of changes on most jobs are you, the owner, who decides late in the game to use better windows, roofing, flooring, etc; or decides to move walls, windows, etc., after installation.

Some changes, for example, to use more expensive wood flooring, can be handled by a simple upcharge or an allowance, if one was written into the contract. Others, like changing from vinyl flooring to tile, might require tearing out and replacing the underlayment as well as structural reinforcement to make a stiffer floor. It’s understandable that once you are able to walk around in your newly framed home or addition, you might realize the view would be so much nicer if the big picture window moved over a couple of feet. Or that you’d like a little extra elbow room in the bathroom or walk-in closet. If so, don’t wait – the sooner you make the change, the cheaper it will be.

My advice: Plan, plan, plan, and make as many decisions as possible before starting construction. It’s much easier and cheaper to move a line on a drawing than to move a real wall or window. With today’s 3-D design tools, it’s easier than ever to visualize your new space before digging a hole or banging a nail. Most programs let you walk through the imaginary space and view it from any angle.

While I find these tools fun to play with and very useful, whenever possible I also like to experience the real space – or as close to it as possible.  Regarding views, chalk or string out the house (or addition) footprint on the lot, draw the rooms with chalk and walk around. Climb a tree or A-frame ladder to get 2nd story views.  Regarding room sizes, mark them out in your current house – use furniture, boxes, masking tape, or string to help you visualize the space. For sinks, showers, tubs, and other functional items where a few inches can make a big difference, try to see the actual item in a showroom. Don’t be shy — walk or climb into the sample on display. If that’s not possible, get the dimensions from a catalog, or online, and make a model out of cardboard or plywood.

I recently installed a 42-in. neo-angle (corner) shower stall and discovered in my research that some 42-in. units were 30% larger than others. The smaller ones were uncomfortably small; the larger ones just right. I’ve done similar testing with soaking tubs which range from shallow and short to deep and spacious. Do you want to fit one or two people? How many gallons of water do you want to heat? Do the research to find the right balance between gallons and comfort for your particular needs.

Along these same lines, visit home shows, home centers, and suppliers of flooring, windows and doors, and other materials to see the products you are considering. There’s no substitute for putting your hands on an actual sample. The more you can nail down before you start building, the less you will spend on changes during construction.

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Comments

  1. Should I Pay A Bill Triple the Quoted Price?

    My brother owns a construction company. I asked him to quote demo work in my backyard: demo and remove a wood shed, above ground oval pool with wood deck and demo, remove and build a new 12’x16′ deck with steps on both sides of new deck. He asked me to send photos of what needed to be demolished. He also came to my house to check it out. He quoted me (in writing) $6850 for demo and removal, plus topsoil and seed and new deck. I thought that was a good deal. The entire job was completed in 6 days. They did an awesome job! After the work was completed my brother kept saying to me he needed to discuss the bill because the materials cost more than he quoted. Not once while the guys were working did he or they ever tell me that the deck was costing way more than quoted. For three months after the job was completed I kept asking my brother for the invoice. Finally I just gave him a cashier’s check for $7000 and asked again to send me the invoice. Two weeks before Christmas he has his accounting person send me an invoice with a balance of $11,500 owed!!!! That is the balance after paying the $7000!! So he ended up charging me almost three times the original quote!! What kind of recourse do I have?

    • buildingadvisor says:

      The short answer is that the written contract, if you have one, should provide guidance on how to proceed. If you do not have a written contract, then it is more difficult to establish exactly what was agreed to and you will need to negotiate a solution.

      The main issues are these:
      1) Was this a fixed-price bid for a clearly defined project (scope of work), or a non-binding estimate for a cost-plus (time-and-materials) job. If it was a fixed bid, then the contractor is obligated to complete the job for the quoted price.

      2) Did you or the contractor change the scope of work during the course of the project: make it larger, fancier, nicer wood, etc., which would have led to a higher price? If so, these changes and the changed price should have been discussed and agreed to (preferably in writing via a change order) before proceeding with the revised plan.

      Unless you agreed, under a cost-plus contract, to pay whatever the job ended up costing, or significantly changed to plan, then you should not be liable for the extra charge. Even if you did agree to a cost-plus arrangement, you should have been informed that the job costs were significantly exceeding the estimate. While a surprise invoice like this may not be illegal, it is certainly unprofessional even if it was allowable under the contract.

      The first step is to get clarification from the contractor about how he can justify these added costs and why he did not inform you sooner. If he cannot provide a valid explanation for the surprise cost increase, you would have a strong case for withholding some or all or the extra cost. Before withholding payment, you might want to briefly consult a lawyer about the proper procedure that will best protect you against claims and liens filed by the contractor.

      The fact that your contractor is your brother certainly complicates things, but I’m not able to offer any useful advice in this area. I just wish you luck in finding a workable solution that you both can accept and move on from.

  2. Contractor Wants $1000 Extra For Floor Prep, Not in Bid

    A contractor we hired bid to install carpet and tile. The estimator visited the job site several times to measure and estimate. The contract was signed and accepted. Now on installation day, the contractor is asking for $1,000 more for floor prep. Is this legitimate?

    • buildingadvisor says:

      No, this is very unprofessional behavior. Either the estimator overlooked the need for this prep work, despite several visits to the job, or he intentionally left this work out of the bid in order to keep the bid low and get the job. Either way, you should have the right to back out of the contract or renegotiate the price. If the contractor fights you on this, or fails to return your deposit, you may need to seek legal advice.

      There are situations in remodeling where there are legitimate “hidden conditions“, that could not be easily anticipated by the contractor until the building was partially disasembled or until soil was excavated. Even in these situations, a good knowledgeable and conscientious contractor will typically alert the owner that there might be additional charges if they find rot in the framing, ledge in the earth, etc.

      Best of luck in getting your flooring installed properly and for a reasonable price.

  3. Should I Pay for Contractor’s Pricing Error?

    Hi,
    I live in Connecticut and hired a contractor to build a deck for my house. Initially, he quoted me a price, and then a month later, they said, due to state permitting requirements, they had to add something and increased the price. Even though I thought it was crap, I was fine with this and agreed. I put my deposit down and the company laid the foundation for the project. The contract specified that the materials and labor were included in the price, and specifically set out the materials that were to be used, including a specific type of wood I requested. They were supposed to start actually building the deck tomorrow, but today, they called me and said they had to increase the price because Home Depot gave them the wrong price for the wood (they priced them for a different kind of wood than the type specified).

    I would just ask for my deposit back, but I’m afraid he will charge me an unfair amount for the work he’s already done… What recourse do I have? Does he have to finish the job? Do I have to pay the extra? Can I hire another company and have the original contractor pay any additional costs I paid the new contractor(above the contract price)?

    • buildingadvisor says:

      Basically, if you and the contractor have signed a fixed-price contract that clearly describes the work to be completed and materials used, the contractor is legally bound by that contract. If there is a change in the contract price, the contractors need to justify this with a change order or, at a minimum, a verbal agreement with you regarding the change in price.

      “I got the wrong price from Home Depot” is not, in my book, a legitimate reason to adjust the price. In a fixed-price contract, the contractor the risk for estimating errors, unless they are caused, at least in part, by acts of God, changes in the plan by the owner, or other changed conditions specified in the contract.

      On the other hand, if you believe this bid was made in good faith, and that the mistake was made by Home Depot through no fault of the contractor, then you might choose to be flexible and pay for at least part of the price change.

      I have cut contractors and subs some slack in this area if I believe that they made a legitimate error (rather than a low-ball bid to get the job).

      Other than simply paying the surprise upcharge, your choices are to (1) negotiate to seek a compromise – that is, split the difference, (2) demand that he complete the job for the original price, or (3) pay for the work completed and find someone else to finish the job.

      The amounts of money involved do not justify going to court, although you might want to have a brief conversation with a lawyer if you choose options 2 or 3 since these options could result in a legal dispute, even if a minor one.

      Based on your description, it sounds like this contractor is a bit disorganized and has not mastered the business end of the business, although he may be a good craftsman. This is not uncommon with small contractors. So it’s a judgement call as to whether it’s preferable to work things out with your current contractor or to find a new one. To get out of this contract, you will need to agree on a reasonable price to pay for the work completed. If you cannot agree on a price, this is another area where you may need to get the opinion of another professional (a second contractor) – and may want to consult a lawyer if you cannot agree on a price and mutually agreeable terms for terminating the contract.

      Negotiating a mutually agreeable solution is always the best course of action. If you terminate the contract unilaterally, you will not get the contractor’s cooperation in ending things cleanly, and could be sued for breach of contract, although this is unlikely given the amount of money involved.

      Best of luck in finding a mutually acceptable solution.

  4. Pamela Matallana says:

    Architect’s Mistake or Contractor’s?

    We are in the process of building a new home. There have been numerous changes due to the original bid for a $650K for a 1620 square foot home. RIDICULOUS to say the least even for California! It originally had a crawlspace, detached garage, and an unfinished second story which a new owner could choose to finish some day. We now have an attached garage, just a slab foundation, and no stone on the front. Also, originally the hallway was wider so the stairs to the attic could be installed. When changes were made, I told the contractor to extend the living room (Great Room) out the extra foot. It appears that did not happen so the great room is smaller than anticipated. All of the other rooms are the correct size or very close to it. However, in looking at the plans my husband thinks the room is off by 3 feet in length.

    There is no way to describe the nightmare and cost off this project. We ended up doing the project for $350k with us buying appliances, granite, bathroom fixtures, and flooring, so basically it is still a $400k construction project, not to mention the engineering cost with changes. Who should I go to check to make sure who’s interpretation of the plans is correct? I think the architect made the mistake. What can I do at this point? How can I tell if I have the correct square footage. They are getting ready to put up the trusses and the nightmare continues….

    • buildingadvisor says:

      Sorry to hear about your situation. You touch on a lot of issues that are difficult to fully understand at a distance. It sounds like the current situation has resulted from a series of communications problems between you, the architect, and the contractor.

      If the architect was hired for a full-service contract, including supervising administration, then it would be the architect’s job to confirm that the building conforms to the plans. If, on the other hand, you have hired the architect for a more limited role and then turning the the plans over to the builder, then it becomes your responsibility to see that the construction work meets industry standards and conforms to the plans. You could hire a construction manager, engineer, or building consultant to take on or assist you with that responsibility.

      When you asked the contractor to vary from the plans, did you document this change in writing? Did the contractor provide a written change order? If not, you will have a difficult time establishing exactly who agreed to what.

      I am not able to follow the issue of who made the “mistake” or what the mistake is. When you say the room is “off by 3 feet”, do you mean relative to the plans or relative to the size you anticipated.

      From a legal standpoint, the builder is obligated to follow the plans, unless you agreed in writing to vary from the plans. If the plans do not conform to your expectations or discussions with the architect, then that should have been resolved prior to construction. Once the contractor has agreed to build according the plans, any changes would require a change order and price adjustment.

      If, on the other hand, the builder has made an error and did not follow the plans, then you may have a legal right to have him correct the work. However, getting him to do this at this point would be costly and complicated and may require legal action. Negotiation is almost always a better course of action than a lawsuit to solve this type of dispute, but a brief conversation with a lawyer might be in order to help you understand your options.

      In any event, you should be documenting as much as possible to establish a clear paper trail of events. Keep copies of all drawings, keep a log of all verbal communications, communicate by letter or email as much as possible, and take photos of any important construction details and errors. Clear documentation will be useful whether these issues are resolved by negotiation, mediation, or legal action. Although verbal communications don’t carry a lot of weight in construction and real estate disputes, a written and dated record of communications is better than “I think he said this…”

      Bottom line: Schedule a meeting right away with the builder to express your concerns. Bring along any drawings or other documents that support your position. If interior partitions need to be moved, it may be doable. If load-bearing walls or exterior walls need to be moved, it is probably too costly to consider. If changes are to be made, you will need to agree on who will absorb the added costs. Since responsibility for the errors may be shared by more than one party, hopefully you can negotiate a sharing of the costs.

      Best of luck in finding a workable solution!

  5. Contractor Bought Wrong Material and Wants Us to Pay

    Hi BuildingAdvisor 🙂

    We are finishing up a deck project that ran 41% over the original cost-plus estimate. A portion of the overages is due to not originally including the fascia in the original estimate which we were told by the lead carpenter we needed to have. Since our deck is made of an exotic hardwood, our contractor said that the wood for the fascia had to be delivered from CA and cost about $1500. However, once the wood arrived and after it was oiled, the lead carpenter said that if we apply the wood the way that the manufacturer of the wood and our contractor suggested, that it would not weather well and that we should alternatively use Douglas Fir with a stain for the fascia. We are now stuck with $1500 worth of exotic wood that I do not believe is our responsibility. Unfortunately, I did not see anything in the contract that would help us navigate this type of issue. Any thoughts? Thank you for your help.

    • buildingadvisor says:

      It sounds to me like you got caught between advice given by the GC and his authorized representative, the lead carpenter. They should have worked out this difference of opinion between themselves before presenting the information with you.

      On the other hand, once you got contradictory advice from the lead carpenter, you should have brought the GC into the loop to discuss the problem, potential solutions, and any changing in pricing.

      There are two related issues here. First, the GC left this item out of his estimate, and second, you got conflicting advice on what the item should be. There is no crystal-clear answer to your problem and I am not privy to the specific language in your contract. However, in general, I think you have a strong case that you should not have to pay in full for this wood, or its preparation, since it was not used on your job – following the advice of the lead carpenter

      If you had independently changed your mind in the middle of a project, you would be fully responsible for any cost increases. But since you were following the company’s direction (confusing as it was), I think they should be at least partially responsible. How you split the cost would be a matter of fairness and negotiation.

      I would recommend documenting everything in writing, including who said what to whom and when. Then sit down with the contractor to discuss your concerns face-to-face. Hopefully, he will be open to compromise. If he refuses to absorb at least part of the cost overrun, you will need to decide whether to withhold money for the unused materials. It’s always a good idea to briefly consult with a lawyer before withholding funds – potentially a breach of contract.

      I hear from a lot of people about overruns on cost-plus work. In a cost-plus contract, all or most of the risk for cost overruns is assumed by the customer. For that reason, I don’t recommend cost-plus contracts for large jobs unless they are absolutely necessary, which is rarely the case. They are necessary on design-as-you go jobs, but these are a bad idea unless you have absolutely have no time to complete the design or don’t mind an open-ended budget.

      Best of luck in reaching a mutually agreeable solution.

      Related links: Cost-Plus FAQs     Cost-Plus Bids

  6. Should We Pay for Unapproved Changes?

    We are at the end of a full-house renovation. The work done is excellent and we have no complaints about it. We did go over-budget by $55k, however. Of that, $31k consisted of costs that we were unaware of until the general contractor (GC) presented us an overage bill. Some things went over the original estimate given to us by the GC. Fpr example: Original estimate for chimney and liner repair was $1,800; actual cost was $3,700. The GC never told us of the cost change prior to work being done.

    The other reason for cost overruns was that we exceeded the GC’s allowances on several items. Example: We chose the stone tile for kitchen and two bathrooms in April and May. The GC did not inform us that we went over our allowance by $4,200 until Oct., after we had chosen and bought the materials, and the sub had partially installed the floor and wall tile, lighting, and hardware.

    We paid the overage bill at the time in part because we were caught off guard and because the work was done and we believed the subs should be paid, regardless of the GC not informing us of cost changes prior to the work being done. The GC told us prior to us hiring him that he did not use written change orders (yes, we know NOW what a big mistake that was) and we were OK with that, with the understanding that he would inform us of big overages prior to work occurring. Sometimes he did, sometimes he did not.

    When the GC gave us the $31k overage bill in December he told us that this was the 4th time (in his 18 years in business) that he had to present a client with this type of bill and all times involved a full house renovation. We believe the first time he encountered this was a mistake but subsequent times was his choice to do so.

    In addition, when the GC presented us the overage bill, he said that he would understand if we believed that we should not have to pay some of the charges. He never offered any compensation but rather put the onus on us to decide if we should withhold any charges. We paid the bill in full at the time because we felt the subs should be paid. We would like to be partially compensated for his failing to inform us of these substantial overage costs prior to work being done.

    We still owe the CG one final payment of $9,100. We would like to with hold $3,100 (10% of the overage bill). Is it reasonable for us to do this? Thanks for any advice you can offer.

    • buildingadvisor says:

      The answer to your question lies in the written agreement (and to a lesser extent, any verbal agreements) you made with your contractor. In general, only the written agreements would be legally enforceable.

      Was this a fixed-cost bid with a binding price or a cost-plus job with a “guesstimate”. Unfortunately the term “estimate” is often used imprecisely and may refer to either.
      Assuming that you had a fixed-price bid, the contractor should have informed you of any cost increases ahead of time, whether they were caused by choices you made, subcontractor or material costs, or whatever.

      It sounds like you agreed, verbally or in writing, to forgo written change orders, but that the contractor agreed to inform you of any large price increases. This is where it gets vague and this is the heart of the matter. What exactly did you agree to and how is that agreement documented?
      Regardless, it sounds like the GC was pretty sloppy in his billing and documenting of costs. Unless you specifically agreed to pay whatever the final cost was, I believe the contractor did not hold up his end of the bargain by keeping you apprised of cost increases.

      Bottom line: In my opinion, you are certainly justified in holding back some of final payment. It sounds like your contractor realizes that he did a poor job with billing and feels he same way.

      Best of luck in working out a mutually agreeable solution.

      Read more on  Dispute Resolution  Competitive Bidding   Cost-Plus Bids

      [Follow Up Email from Jo on 3-18-16]
      Thank you so much for your reply. We did end up with holding 10% of the overage bill in our final payment. We wrote the GC a letter that said we were very pleased with the work done (9+ on a scale of 1 to 10) but the bulk of the letter was our dissatisfaction with how the budget and time frame were handled. The GC’s response: “I received your check in the mail today. Thank you for the nice letter. I fully understand your explanation and wish I would have handled that better. As I’ve said from the beginning, the most important thing to me is the satisfaction of the customer so I am very glad to get a 9+”.

      Our conclusion is that he is very unprofessional when it comes to the business of end his business, and that he simply does not care about budget overages and missed deadlines. It is apparent that he is unconcerned with our dissatisfaction, as he asked if he could use us as a referral for future customers. Wished we had withheld 15%. Silly us – thought that perhaps he would offer some compensation for his part in the overages. Lesson learned.

  7. Are We Liable for Allowance Overage We Never Approved?

    We have a hybrid fixed-cost contract with allowances. We are running into cost overruns on two major allowance items and wondering if we are liable. We made it clear from the beginning that we would not exceed our allowances unless it was completely necessary. First, for our floors, the contractor ordered flooring that was $10,000 over our allowance without our approval and then charged us the extra cost once it arrived. Second, we were told the our allowance for site prep was on target and shown the spreadsheet four months later and it showed that we met the allowance. However, two weeks before the close of the house, the contractor says that the bill is actually $10,000 higher. Are we liable for these overages? Thanks so much for you advice.

    • buildingadvisor says:

      From your description, it sounds pretty clear that the contractor has been sloppy about contract administration – at least with respect to allowances. In general, no item should exceed the allowance price without the express consent of the owner. Unless you said something like “I want cherry flooring and I don’t care what it costs, just bill me,” then you are not at fault.

      Once you made a flooring selection, the contractor should have informed you that the flooring choice would exceed the allowance by $10,000. If you did not agree to that price, then you should be liable for the cost overrun.

      The same is true for the site work. If the contractor told you that your choices were within the site work allowance, then you should not have to pay the extra charges.

      It is clear that there has been a breakdown in communication. Good communication is a shared responsibility of both parties, but it is the contractor’s responsibility to communicate your options and deadlines for making allowance decisions and to provide pricing information before proceeding. Ideally, all of this is documented in writing. Change orders are used by some contractors to formally document the price adjustment.

      Without knowing the specific contract language and who said what to whom, it’s difficult to say anything definitive. Also I’m not sure what you mean by a “hybrid contract” so perhaps part of the work were based on time-and-materials rather than allowances.

      These are legal questions and I am not a lawyer. But it sounds like you may have a reasonable claim to withhold these funds. Before withholding $20,000 in payments, however, I strongly suggest you speak with a lawyer about how best to proceed. You might also consider negotiating a compromise solution with the contractor if you feel that he was operating in good faith and made these pricing errors for some plausible reason.

      Read more on Allowances     Resolving Disputes     Model Contract Language (scroll to section on Allowances)

  8. Deborah says:

    City Renovation $30K Over Estimate

    I own a building in Brooklyn. I contracted with a friend (first mistake) for renovation of an apartment 60 x 19. The project included gutting completely, removal of debris and installing new walls, floors, kitchen and bathroom. The project developed a few hidden and unexpected issues as the building is 130 years old and as such had some unforeseen problems.

    Some of it I understand was not expected. However the project has one: take 8 months when predicted to take 3 and the cost has risen from 60K to 95k.

    I understand there were multiple layers of issues: using a friend, getting a soft estimate, not clearly defining the scope of the work, very old building which required steel reinforcing, etc.

    What is the industry standard for the difference between estimated and actual costs?
    This is more than a 50% increase and I would not have gone forward with the project if I knew the true costs.

    Thanks

    • buildingadvisor says:

      Unfortunately, a cost-plus job with an unclear Scope of Work is a recipe for disaster when it comes to cost overruns.

      I am not aware of any industry standard or benchmark for comparing estimated costs to actual. There are simply too many variables to come up with a meaningful number. However, I can say that a 50% cost overrun on a job of this size is well above average and would be troubling to any homeowner.

      You have clearly identified many, if not all, of the key factors that have contributed to cost overruns on your project. To sort out specifically where the additional money went, you would need a detailed breakdown of your contractor’s billable expenses, along with the contractor’s original estimate similarly broken down – if such a detailed estimate exists.

      On a cost-plus (time and materials) contract like this, it is customary for the contractor to provide the owner with invoices and other documentation for materials which should help you identify where the extra money went. If most of it went to structural repairs, I would question whether the contractor should have anticipated these repairs. What is a “hidden” condition to one contractor might be less hidden (or discoverable with a little investigation) to another.

      There are ways to minimize these kinds of overruns beforehand, but there’s not a lot you can do at this point. Perhaps if the contractor had more experience with this type of building, he or she could have better anticipated the “hidden” and “unexpected” conditions and given you a more realistic non-binding estimate. It may be that a structural engineer could have looked at the project ahead of time and told you that structural reinforcement would be necessary — as it often is with 130-year-old houses, especially row houses.

      Also if the Scope of Work was not clearly defined, and the design and details were to some extent made up as you went, the contractor might claim that your decisions and design changes contributed to the higher cost.

      On this type of job, it may be difficult to get a fixed price for the entire job, but you are usually better off getting a fixed price for most of the work, with specific allowances for specific unknowns. For example “If joists are found to be decayed and in need of replacement or reinforcing, they will be replaced or repaired at a cost of $x per linear foot.” The more costs that are nailed down and the outset the better. But, of course, that doesn’t help you much with your current project.
      If a large portion of the overage went to changes in the scope of work – for example, you upgrades from vinyl to ceramic tile and laminate to granite, then you would be responsible for this portion of the overage.

      However, this is largely academic, as the contractor is your friend and you probably wouldn’t have legal recourse anyway unless the contract had a fixed price, guaranteed maximum, or some other contractual price controls. That does not mean that you cannot negotiate with the contractor for a reduced price to the extent that the overage was the result of bidding errors rather than truly “hidden” or “changed conditions” or changes in the Scope of Work initiated by you, the owner.

      If it’s any consolation, it doesn’t sound like you got a bad deal in the end. Perhaps your friend’s bid was unrealistically low. According to Remodeling Magazine, which does annual surveys of costs, the average cost of a mid-range kitchen remodel in New York City ranges from $25,000 for a minor remodel to $70,000 for a major remodel. The average cost for a mid-range bathroom remodel was $53,000. If you add in the structural work, your job appears to be in the ballpark for a job of this scope in your area.

  9. Contractor Over Budget and Used Subpar Materials

    We are trying to finish a remodeling project and the contractor is stating that we are over budget by $10,000. We have not asked for any extras, and in fact found out that in two specific areas he chose subpar products to what is in our estimate (low SEER A/C unit and single-hung vs. double-hung windows).

    Our contract states that any sort of changes would require a change order. Now here we are with siding, flooring and touch-up work, and he is saying that he didn’t budget enough for the siding (even though our estimate states “match existing siding”). We have asked for receipts, but what he gave us were primarily his own receipts without details….a few are for the supplies and subcontractors that did framing, foundation, etc. Some of the receipts, which are from places like Home Depot, included items like tools, drinks, and items we don’t know were used at our job site. Help! What should we do, as we don’t feel we should pay a single cent out-of-pocket for his under budgeting and now made-up receipts without detail.

    • buildingadvisor says:

      Sorry to hear about your situation. The best solution to these problems is always prevention. Owners can prevent, or at least minimize these problems by taking the following steps (in order of importance):

      1) Do your homework to find a competent and trustworthy contractor.
      2) Start with detailed plans and specifications that clearly document what is to be built with what materials.
      3) Sign a contract that establishes clear ground rules, especially about pricing, payments, changes to the plans, and other money issues. The larger the job, the greater the need for a full industry-standard contract such as an AIA contract, which covers every possible issue including dispute resolution.

      For better or for worse, you and your contractor will be business partners for the duration of a project — a marriage of sorts that in this case might be headed for divorce, amicable or otherwise. Since it is impossible to specify every last detail on any job, there will always need to be some give and take, which is why choosing the right partner (and being a good partner) are so important.

      Unfortunately, prevention is not an option now that you are in the thick of it. So you need to focus your efforts on damage control. Keep your sights on the goal of getting the job completed correctly for a reasonable price – but perhaps more than you originally planned. Although it may be difficult, try to stay cool-headed and businesslike in your negotiations, always the most effective approach.

      You have two main options: try to work things out with the current contractor or terminate the contract and hire a new contractor to finish the work. It will be less complicated if you can work things out with the current contractor, but if that does not seem feasible then you should terminate the contract as soon as possible. It sounds like your relationship with the contractor has slid pretty far and will be difficult to get back on track.

      Hopefully you have not paid out more money than the value of the work completed properly. Owing the contractor some money gives you some leverage that you should hold onto until a resolution is at hand. You should always try to retain enough money to get the job completed by someone else if necessary.

      If you haven’t done so already, start documenting the problems in writing with dated notes, dated photos, and any supporting documentation of who said what to whom, what was promised verbally or in writing, and what work was done correctly, incorrectly, or not at all. You will need these if you end up in arbitration or court (hopefully neither), and may also find them useful in your discussions with the contractor. Hopefully, you have a written contract, drawn plans, and/or written specifications that tell what type of windows, SEER ratings, etc., were agreed to, and at what cost.

      Once you have your ducks in a row, schedule a meeting with the contractor to express your concerns and your proposed resolution. If you can work out a mutually acceptable solution, great. If not, then you will need to focus on terminating the work due to the contractor’s breach of contract.
      At this point, it would be wise to consult with a lawyer so you do not expose yourself to liability for your own breach of contract. Construction laws are different in every state and it is important to follow the proper procedure.

      You goal at this point would be to retain enough money to complete the job for the original contract price. You will still need to pay the current contractor for the work completed, but should try to deduct enough money to fix work done wrong and to replace incorrect materials.

      It’s unclear from your post as to whether this was a fixed-price or cost-plus contract – or some combination. If it was a fixed-price contract, and the contractor underbid, he is legally bound to complete the job for the quoted price. However, as a practical matter he may never do so or will try to make up his losses with questionable change orders or other extra charges.

      If it is a cost-plus (time-and-materials) contract and the “estimate” was non-binding, then you are obligated to keep paying until the job is complete or until you terminate the contract. On a cost-plus job, you are only obligated to pay for legitimate expenses that are properly documented by the contractor. This might include things like saw blades and drill bits used up on your job, and maybe small tools bought just for your job, but certainly not food and drinks.

      If the contractor cannot provide clear documentation of charges, and you don’t trust that he is being honest, then you should not to pay until you receive a legitimate bill with proper documentation. It is his responsibility to keep good records and document his costs.
      You also have the right to get the type of windows and A/C unit called out in the plans or specs. Although a verbal agreement about these details is legally binding, it is much harder to prove who said what.

      Ideally you would have objected, verbally and in writing, to the improper materials as soon as you saw them and requested that they be corrected. If the contractor refused, you would have strong grounds to terminate the contract. Since you have to some extent “accepted” the work, the contractor might argue that you have agreed to the changed specs.

      Resolving these problems in arbitration or court is always a last resort – it will cost you more in time, money, and peace of mind than you can imagine. It’s always best to work things out by negotiation and compromise if at all possible.

      A brief conversation with a lawyer would be a good idea at this point to help you evaluate your options. Contrary to the ambulance-chasing stereotype, I’ve never met a lawyer who encouraged me to sue anyone – just the opposite. Of course, you need to choose your lawyer as carefully as your contractor (and no, I’m not a lawyer).

  10. Who Pays for Delivery Problems Over Unpaved Road?

    We are finishing the building of a log cabin with a contractor. When the logs were delivered for construction, the contractor realized that the road was not suitable (he did visit the area before) for a truck of 17 meters. As a consequence they had to place the logs in a parking space which took 25 hours of labor to get them to the site, plus they had to cover the garden pavement with plywood and rocks. This material is costing more than $20,000 US including the labor. Our contract does not specify, of course, problems with delivery and who should pay. What is your advice? Thank you so much for your comments.

    • buildingadvisor says:

      Ideally, this sort of situation would be covered in a construction contract that stated something like: “Logs shall be delivered to the work site” or “Logs shall be delivered as close to the worksite as is practical with standard delivery trucks. Additional charges may apply for hard-to-access sites.”

      If who pays the extra delivery charges is not clearly specified in the contract, then it becomes a point of negotiation or – in the worst case, arbitration or litigation. This is a legal question and I am not a lawyer, so this represents my personal opinion based on my experiences with these types of disputes.

      That said, if the contractor provided the contract for this job, and the contract price included delivery of the logs and other building materials as is customary, then in general, it would be his responsibility to pay for delivery – assuming that you did not misrepresent to him the size of the road or character of the building site.

      If the contract was silent on who pays for delivery, or on the impact of site access problems, then the responsibility would still be the contractor’s as delivery of goods to the job site by the contractor is customary practice. Furthermore, there is a principle of contract law that roughly states that, if a contract is unclear on a certain point, (like who pays for delivery problems) then the party who wrote the contract is generally responsible for the associated cost.

      It seems to me that a log home builder, or any rural builder, should be used to rural building sites with poor quality roads and similar access problems. Also the builder should be familiar with the type of equipment his log supplier has to get the logs and other equipment to the site. Therefore, it should be their responsibility to check out the site ahead of time, or at least ask you about the site and discuss the site of access issues. If the builder and log supplier made unrealistic assumptions about the site, in my mind, it would be their mistake and they (the log supplier and contractor) need to work out who should absorb the extra cost.

      I’m confident that a court would agree with me if the dispute went that far. As a practical matter, however, it probably won’t because there is not enough money involved to justify a lawsuit, at least here in the U.S. (except, perhaps in small claims court). However it is a large enough sum that you may need the help of a lawyer and the threat of a lawsuit to work out a favorable settlement.

      At the end of the day, you will need to work this out with the contractor. If you agree to pay some of the extra cost, I would make it clear that you are doing this in spirit of cooperation, while explaining that it really was his responsibility to check out the site ahead of time. In fact, any building site can have access issues for tools and materials and this should be accounted for in a builder’s estimate. If he chose not to visit the site, he chose to take this risk.

      If you do agree to pay a portion of the bill, however, I would be careful to withhold enough money (as part of your retainage) to cover your half of the delivery overcharge. That will protect you in the event that any other improper “extra” charges pile up over the course of the job. Having a brief conversation with a lawyer wouldn’t be a bad idea either. Contrary to popular belief, most lawyers that I have dealt with have not been ambulance chasers, but reasonable people willing to give you practical advice on the best and cheapest way to settle a dispute.

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