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 We Pay for Unforeseen Condition?

    Hi. We hired a contractor for a portico addition and a new walkway. They chose not to have the person doing the design drawings visit the site in person. When we had the site visit with the sub, the project manager caught a problem that a major pipe line needs to be moved. He even, rather unprofessionally, pointed out that this was the sales manager’s fault for not catching it himself and not having the designer on site prior to the estimate and contract signing. We now have to have far more plants relocated temporarily while they dig a 6-8 ft. hole and relocate this pipe. Additional permits will also be needed. I just received the change order for the contract and they want $2,000 for the relocation of the pipe and permitting, but said that they are taking care of the landscaping for free. Had we known the cost of this project was going to be this high, we probably would not have gone forward, but we’re stuck now because if we cancel, the contract says we have to pay them 25% of the original estimate. Are we getting ripped off? It’s a nice gesture for them to handle the landscaping, but on the other hand, they should have known about these problems from the start. They were knowable issues and avoidable on their end. Should we push back?

    • buildingadvisor says:

      This type of issue is considered a hidden or changed condition in construction contracts — or may be called a “concealed” or “unforeseen” condition. Many contracts have language that try to pass these costs along to the owner. If the condition was truly hidden and not easily anticipated, or was incorrect on the plans drawn by a third party such as an architect, then the owner often ends up paying – possibly shared by the designer if he made the error.

      Architects try to avoid responsibility for this type of error by stamping the plans with language such as “contractor to verify all dimensions and conditions on site before commencing work.” Where a lot of money is involved, the architect’s errors and omissions insurance may cover the loss.

      In your case, it sounds like the contractor provided both design and construction services. If that’s the case, then it’s pretty clear that the contractor made the error. Unless the problem was truly hidden and could not have been reasonably anticipated, then the contractor should be responsible for the extra cost. Since the project manager quickly realized the mistake and attributed it to the salesperson, then it seems pretty clear-cut to me.

      The contractor saved a few bucks by not visiting the site while designing or estimating the job, but this was false economy. There’s no reason why you should pay for their error.

      So you are definitely justified in pushing back. Hopefully, the contractor will take responsibility for the error and pick up all or most of the cost. If not, you will have to decide whether or not to contest the final bill. Make sure that you withhold enough money at the end of the job to retain some bargaining power. If you choose to withhold some portion of the final bill, you may want to speak with a lawyer how best to protect yourself from any construction liens or legal claims by the contractor.

      Best of luck in finding a mutually acceptable resolution.

      Read more on Hidden or Concealed Conditions in construction contracts.

      • Hi Steve. I can’t tell you how helpful your advice was. I just responded to the contractor in email and pushed back on having to pay for this error, which was clearly knowable on their part. We do have a hidden conditions clause, but I don’t think that this is covered by that language. In my understanding of the contract terms, they’re in default if they use this as a reason not to proceed. Wish us luck!

  2. Who Pays for Error in Material Takeoff by Lumberyard?

    Contractor was hired to install siding and Versetta stone for new home construction. Bid was given based off house plan and material list from lumberyard. After install, the final bill for Versetta work came out almost twice the original bid due to an error in material estimates from the lumberyard. Who is liable for the increase in labor? I have already paid for the materials. Also, the final bill was sent prior to all caulking work is completed. Do I need to pay since technically job is not complete?

    • buildingadvisor says:

      With these types of problems, with multiple parties involved, it is difficult to say who exactly is responsible for an error. Responsibility may be shared. What typically ensues, however, is a lot of finger pointing. As the old saying goes, “success has many fathers, but failure is an orphan.” In other words, no one will jump to the front of the line and say “I screwed up here.”

      The legal answer may lie in the specific language of the contract, any disclaimers made by the parties, and any oral agreements that were made in lieu of a written contract. For example, blueprints are often marked with the words “Contractor to verify all dimensions,” in an attempt to get the designer off the hook for inaccuracies in the drawings. Similarly, the lumberyard probably has fine print somewhere stating that their material takeoffs and estimates should not be relied on for pricing or ordering.

      For example, here is a sample disclaimer from one lumberyard:

      ESTIMATE DISCLAIMER
      This estimate is designed solely to provide the contractor/consumer with a rough estimate of the amount of material used in the given project. The material estimate will be based upon calculations or data provided by the contractor/customer and such estimate assumes, among other things, normal and typical building and construction techniques. The actual amount of material used may vary from the material estimate due to a number of factors. Consequently, no representation or warranty has been made that the actual amount of material used will not vary from the estimate.

      Even though many lumberyards offer “free” material take-offs, few contractors rely on these for bidding as they are often inaccurate and lead to the kinds of problem you are facing.

      Also, it’s not clear from your letter whether the error was in the plans, the lumberyard’s estimate, or a change in the plans after the estimate was made – for example, you decided to use stone on a larger area than indicated on the plans. It’s also not clear if the contractor’s bid was a fixed-price bid or cost-plus (time and materials). If it was a fixed-price bid, you have a stronger case that the contractor should absorb the additional labor costs.

      If you can untangle all this, you may be able to figure out who is responsible for the error and the extra cost. As a practical matter, you will need to negotiate an agreement acceptable to all parties – or, worst case, eat the loss.

      As for whether you should pay in full before the work is completed, definitely not. Again, the key may be in the written contract if you have one. Sometimes, most of the money is due upon “substantial completion,” but you should still hold back a reasonable amount of money until the work is completed to your satisfaction. You can read more here on The Final Check.

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