Is Our Contractor Overcharging Us?

How to Avoid Changes, Extras, and Surprise Charges on Your Next Job

Q: We were hit with a $20,000 extra for changes in our new home after the framing was completed. We had a fixed-price contract. The changes including a revised stair layout (U-shape to to L), removing some windows, and moving a bathroom. The framing was completed, but no plumbing or electrical was done.  Does this seem excessive? — A.C.

A: It’s a rare construction job that does not run up a bill for “extras”.  Sometimes these unanticipated costs are modest; other times they are excessive.  It’s the nature of the beast. Because extra costs are the norm, construction loans typically include a 5 to 10% contingency fee. Some custom contractors recommend adding 10 to 15% to your budget or as much as 20%.

Good planning, a tight contract, and good job management can keep these costs to a minimum. Starting out with half-complete plans and a vague contract almost guarantee significant cost overruns.

Bid Low & Make Your Profit on Change Orders

There are many reasons why construction job often cost more than originally planned. In some cases, an unscrupulous contractor intentionally leaves essential work out of the contract in order to present a low bid – with the intention of making their profit on the “extras” that will be needed to complete the job.

This is common on large government projects, but can play a role in residential work as well. For example, you may learn during the course of the jog that the contract price does not include eaves flashing on the roof, stain on the deck, basic landscaping, a paved driveway, utility connections, and on and on. It’s like a car salesman asking whether you wanted a spare tire, radio, and back seat after you’ve signed the contract for a new car.

A well-written contract and detailed plans and specs are essential.  Still, it’s never 100% clear what exactly is included in the contract price and a less scrupulous contractor can take advantage of that ambiguity. He can nickel-and-dime you for every little detail not expressly listed in the Scope of Work.

The contractor has an unfair advantage as he knows so much more than the client about the work. Fortunately, most contractors don’t operate this way. Still, it’s all the more reason to choose your contractor carefully – there’s no substitute for integrity.

Common Causes of Cost Overruns

More likely, cost overruns stem from a variety of causes – some controllable, some not. These include changes requested by the owners, changes required by code or zoning officials, hidden or changed conditions,  incomplete plans, design errors, and price changes in materials. On a cost-plus job, cost increases can simply reflect the fact that the job took longer than the contractor estimated. We all tend to be optimists when estimating.

Another cost driver is inadequate allowances.  For example, the contract may allow $5,000 for bathroom fixtures and finishes, but the ones you choose cost $10,000. It’s always tempting to upgrade to the granite counters when given the option.

Owner’s Change of Plans

One of the most common drivers of cost overruns is owners changing their mind. Few owners can visualize their new 3D living space based on two-dimensional drawings. Fortunately, more and more designers and contractors are providing 3D illustrations made possible by design software.  But even these re not the same as walking into your newly framed building and realizing “Oh, this room would work so much better if we moved this wall back and slid this window over,  just a bit..”

This sounds like the situation in your case, but with more extensive changes.

Pricing Change Orders

The best practice for managing changes on the job is the issuance of a written change order – basically a mini-contract for the extra work, describing the work to be done, the itemized cost, and any revisions to the completion date caused by the extra work. The change order procedure, including how they are priced, should be outlined in your contract.

A change order that shows the breakdown of material, labor, and markup provides transparency and helps build trust between the parties. The extra work should not start until the owner authorizes the work by signing the change order. The procedure should be covered in your construction contract.

If the cost of the changes seems excessive, or you’re just not sure, it doesn’t hurt to get a second opinion from another contractor or professional estimator. You are free to negotiate the price with the contractor or try to work out a less expensive alternative plan. But your options are limited in the middle of a job.

If you really need a change to be made and contractor’s price is out of line, then you have the option of terminating the contract, settling up with the existing contractor, and hiring a new contractor to finish the job – not a very attractive option unless you are extremely unhappy with the current contractor.

Impact of Changes

Contractors expect a certain amount of fine-tuning and adjustments to the plan once a job has begun. Some of these may not add any extra costs, some will generate a modest bill.

The earlier in a job a change is made, the easier and cheaper it is to make the change. It works like this:

• Changing a line on a plan before anything is built may only require a pencil and eraser or a few clicks on a keyboard.
• Changing the framing before any electrical or plumbing is installed may require just pulling a few nails and relocating a few studs.
• Changing the location of a wall or window with plumbing, wiring, and drywall installed is much more complicated and expensive.
• Changes to the foundation, roof line, load-bearing walls, or building footprint can be very expensive and cause significant delays.

Contractors are not fond of extensive changes, especially if they are late in a project. They mess up their work schedule; mess up their subcontractors’ schedules. It may mean not starting the next job on time. Plus no one likes to undo work they just completed. Often one change requires others in a kind of domino effect. Moving the wall means moving the plumbing, means notching a beam, means reinforcing a post, and so on.

There’s also the increased administrative time of pricing and managing the changes, communicating with subs, and adjusted the schedule.

Too many changes can cause tension between the owner and contractor and, in some cases, lead to construction disputes. It’s best to keep changes to a minimum – or if feasible, to do them after the current job is done – maybe with another contractor.

How to Minimize Changes, Costs, and Headaches

Before hiring a contractor, ask how they handle changes and make sure you are comfortable with their policies and their style of doing business. No one wants a surprise bill for several thousand dollars at the end of a job, but this happens all too often Communication is key and give-and-take by both parties is essential.

Then plan, plan, plan before anyone starts digging a foundation hole or swinging a hammer. To the extent possible, make sure this is the plan you want. Even if you’re pretty good at visualizing 3D space, get out there on the job site and walk the plan. Mark it with strings, pieces of wood or whatever you have lying around.

Look at the view out of your proposed windows. Climb a stepladder or a tree to look at view.

Mark out the room dimensions on your new space on your current floor with blue masking tape. You can do this for both new construction and remodels. Mark windows, kitchen cabinets, shower stalls, and other details in full size.

Walk the space. See if it’s going to work for you. I find that there is no substitute for these 3-D mock-up. Is the shower big enough? The walk-in closet? The kitchen work area? And don’t forget that walls have thickness, typically about 4-1/2 inches for interior partitions and 7 in. for exterior wall — a fact ignored by many homeowners when reviewing plans. Those extra inches can make a huge different to a kitchen or bathroom.

Get or make scale drawings of the floor plan with actual room sizes (subtracting for wall thickness). You can use graph paper or an architect’s scale ruler, a nifty device for making scale drawings. Then use colored paper to cut out scale drawings of furniture, bathroom fixtures, kitchen appliances, or whatever you are designing. Bright colored Post-Its work well. Now you can easily move around these elements to find the best layout. You’ll be surprised how many ways there are to arrange a tub, toilet, and shower!

Also choose as many of the finishes, fixtures, and appliances as possible before the job begins. Avoid allowances as much as possible. Get real prices for the materials you have chosen. Hardwood costs a lot more than builder-grade carpeting or laminate.  Wood windows cost a lot more than vinyl. Better to know the real costs at the outset rather than get surprised at the end.

If you not ready, ask the contractor to delay starting by a week or two. Everyone is anxious to get started, but starting without a finalized plan is asking for trouble. Have a complete set of plans and written specifications, and a fixed price, before you sign the contract and start the project.

 Were We Overcharged for Changes?

But I never answered your question. Is $20,000 too much for the changes you asked for. Of course I cannot say because I don’t know the full extent of the changes requested and what other work these changes required. Changing a stairway layout is a lot of work. Moving a bathroom could require major changes to the framing and plumbing. And changing window orders might involve restocking fees in addition to the framing changes, as well as changes to the housewrap and wall flashing. Still, a $20,000 added cost sounds high and would merit a loud “Ouch!”.

It’s not unreasonable to ask for a detailed estimate (or invoice) for the charges, including materials, labor-hours, and other fees. This could lead to negotiation and adjustment of the price if it turns out that the contractor picked a number out of the air rather than complete a detailed estimate.

It’s possible that the high price was, in part, the contractor’s way of discouraging any more major changes to the plan. This is not a legitimate way to price extra work, but could start a productive discussion about the impact of changes, and possibly lead to a lower negotiation price.

Regardless of how the price was generated, you should ask for a detailed cost breakdown and express your concerns. It’s best to clear the air and to maintain a healthy two-way relationship between you and the contractor. Building a custom home or large remodel requires a close working relationship between the owner and contractor. Good communication and give-and-take on both sides are essential for it to work well. And it sounds like you still have a long way to go before the project is complete.

Summary: How To Minimize Changes & Cost Overruns

Changes to the work after a project is underway are a major cause of cost overruns.  Minimizing changes saves you money. To minimize the number and cost of changes:

• • Choose your contractor carefully. To succeed, you will need good communication, trust, and give-and-take by both parties.
  • Plan, plan, plan…then plan some more. Build the project in your head before building it on the ground.
  • Use 2-D scale drawings to help with space planning. Make accurate colored cut-0uts for furniture, bathroom fixtures, kitchen cabinets, etc. Move them around to find the best floor plan.
  • Request 3-D drawings to help you visualize the project from inside and outside.
  • Walk the site in new construction to check out views, grades, site plan, access, distance to neighbors, and other site issues.
  • Mark out room sizes, window locations, bathroom and kitchen fixtures, and other details on your floors and walls. Use blue tape, cardboard, scraps of wood, or furniture. Build full-size mock-ups of showers, bathtubs, closets, Don’t forget that wall thickness reduces room size. Make sure the plan works for you.
  • Make sure there is adequate wall space for furniture, kitchen cabinets, art, etc.
  • Make sure you have detailed plans and written specifications as part of your contract.
  • Ask your contractor what additional costs to expect. Get a written list of items excluded from your contract.
  • Make sure the plan will be accepted by the building department and zoning department. Meet with them early in the process to review the plan.
  • Avoid allowances. Choose as many products and materials as possible before starting work.
  • Don’t start until you have made all the big decisions and most of the small ones.
  • Avoid making changes as possible once the project is under way. If necessary, make them as soon as possible.
  • Get a written estimate of the changes before proceeding.

— Steve Bliss, BuildingAdvisor.com

 Read more about Change Orders and  Cost Overruns.