28% Builder overrun - any recourse

[Hobiedog]

Last year I contracted a local builder to construct a 2 car garage and bonus room. For the construction loan, the bank wanted a not-to-exceed detailed estimate, saying ‘… don’t come back to us for more money.” I conveyed that request to the contractor. He is a back of the envelope kinda guy and he gave me an estimate, but not detailed. So we had to go back and forth with the quotes, all the while increasing in detail and pricing, an obvious reaction to my conservative estimate request. I also suggested a 10% contingency to insure we didn't exceed the budget; naturally he agreed, and he submitted that to the bank. During construction, I kept asking him how we were doing on the budget. He would always say ‘just fine’, or something to that effect. At about the 75% complete point, I told the contractor that based on his draws and percent complete, we may overrun and dip into the contingency. He said, yes, we may use it all. I was a bit taken back but also I was aware of some of the potential overrun reasons and thought that some overrun would be expected. One of them was cost escalation either by a missed estimate or the fact that the construction took 9 months instead of his estimated 5 months. Some prices rose (escalation) within that protracted period. He’s a nice guy with a very good reputation and they do quality work. Problem is, after construction he hands me a bill which is about 10% higher than his original estimate including the contingency, making it ~21% higher than his 'conservative estimate'. He somewhat apologized saying that he should've known that his original estimate was low because it was significantly below the s.f. average. He also cited several other reasons for the overrun and his final price excluded any profit on labor. Also, I had purchased all of the laminated flooring and most of the light fixtures. All told, actual cost was roughly 28% higher than his purportedly conservative estimate.

Since the bank wouldn’t adjust the construction loan nor increase the mortgage, I’ve got to pay him out of pocket. It could not have come at a worse time. I’ve almost got the funds together to pay him, but today my wife asked if we had any recourse. She was talking to a friend who recalled a similar situation in which the homeowner got an attorney and sued. I told my wife that in my estimation, we had no recourse because we didn’t have a firm, not-to-exceed contract with the builder, but that I’d ‘look into it’.

Somewhat complicating the issue is some water damage to the original structure caused by the builder because he did not provide a watertight seal between the house and new garage. He knows about it and even mentioned pulling back the carpet and surveying the damage some months ago. I plan to hold back about 15% of that final payment until he remedies the situation to my satisfaction. I think that the damage will not exceed that 15%, but it may not. I’m considering how to approach that potential problem.

So here I am, asking you guys for your opinions, suggestions, or experiences. I'm all but sure I'm S.O.L. Oh well, live and learn.

[burrellski]

My parents ran into a similar situation a few years ago building a new house. In their case, they had a well respected contractor and detailed price information in the contract. Anytime something ended up costing more than was estimated there was to be a change order signed by both parties, and there were several. Somewhere along the way, the housing market took a hit and a few of the builders spec houses weren't selling. When the house was finished, he decided he needed another $60k from my folks. They went to court where the contractor produced a stack of unsigned change orders amounting to the $60k. There were several mechanics leans on the house since the contractor wasn't paying his subs, etc... a real mess. In the end, the court found my parents responsible for $40k of the $60k, not to mention all of the overrun they already agreed to pay before that. Makes me wonder what the point of a contract is.

In your case, I'm doubtful there is much you can do. Good luck.

[rnelson0]

I plan to hold back about 15100% of that final payment until he remedies the situation to my satisfaction.

You should never pay your contractors until they are done working. If you agree to payment schedules at milestones, fine, but otherwise do NOT PAY HIM. If the cost of fixing your stuff is greater than the 15% you're holding back, he will just disappear. If you hold back 100% of it, however, he's not going to walk away on 9 months of work without anything to show for it.

You should have a statement of work and some form of contract from when the work started. You should also have an invoice that he's billing you for now. Photocopy the invoice and mark "I dispute this invoice. Please contact me at ___" on it and send it back. You should probably engage an attorney if that 28% overflow is more than, say, $200, but holding back payment and marking it as a dispute should put you in fairly good legal standing to avoid a lien on your house or a ding on your credit report.

Never, ever, EVER, pay for a service until it is complete to your satisfaction. You must provide incentive for the service provider to fix the issue. This goes for contractors, your auto mechanic, your cell phone provider, etc. Even for monthly bills - marking a portion as disputed ensures that your service will continue, you can even pay the subsequent months bills, but the disputed amount will be suspended until the dispute is resolved.

In the end, the court found my parents responsible for $40k of the $60k, not to mention all of the overrun they already agreed to pay before that. Makes me wonder what the point of a contract is.

What was the judge's reasoning for allowing the $40k of charges? Or his reasoning for not allowing the $20k of charges? Was there an opening in the contract to allow for it, or had they signed something else agreeing to the work but not a specific price tag? There has to be some reasoning.

[Crash2510]

if there were not alot of changes, a contractual agreement allows for a 20% increase for overrun and no more. hopefully, you have a copy of the contract with the agreed on price, but you will still have to pay the 20% you should take this to your lawyer because their should be recourse especially for the damage the contractor caused

[cgallery]

I wouldn't pay one more cent until all issues are fully resolved, and an inspection is performed that indicates everything is good.

Watching "Holmes on Homes" (I'm new to the show) makes me think a real, qualified inspector would have saved some of those people.

[gjat]

I've done commercial/government contracting for a number of years, dealing with all types of sub-contractors. YMMV, but I'll give you full value for what you're paying for my opinion.

1.- The detailed estimate he provided for the bank is a good basis for your contract. If you made revisions to materials or design, that would be a change that is your responsiblity. If materials simply cost more than his esitimate, that is negotiable. He's the experience person, not you. You should be able to trust his estimate and knowledge.

2.- The project taking too long should not be your responsiblity unless you caused the delay. If you changed design or materials which stretched out the job, it's yours. If the job simply took too long, that's on him unless you signed a contact that made you liable for costs of delays that aren't caused by you.

3.- If he caused damage to your house through his actions, DO NOT PAY HIM A PORTION that is more than enough to correct any and all issues. DO NOT PAY HIM 100% until everything is 100%.

4.- Everything is negotiable at this point, if you haven't paid him. I understand you want to be fair to him, but you want to be paid fairly. Your only negotiating tool is payment. Withold payment until you are 100% satisfied. Put things in writing, don't just rely on verbal stuff. You'd be surprised how much weight a few letters carry if you go to small claims court or arbitration.

5.- BE NICE! Always be nice in letters and conversation. State that you want what you are paying for and express confidence that he can correct the situation. State clearly what 'extra charges' you would agree to pay, which you disagree to, and what repairs or work needs to be completed before you will pay your money.

6.- Don't let things be vague anymore. The original agreement may have been vague in certain details, but that can be remedied with letters. If you are reasonable, express your expectations of what you want to have done before completion, he implicitly agrees to that if he comes out and does some of the work.

7.- Don't forget that everything's negotiable. Keep communication lines open. Most time, people are as reasonable as the most reasonble person. If you are firm about not paying until your reasonable expectations are met, but don't get into a shouting match, things will usually work out eventually. He'll be motivated to get the rest of his money and will complete the work if he believes you are being reasonable and will appreciate his effort.

I've been on both sides of construction disputes many dozens of times. These things happen often. Homeowners tend to cave in to contractor demands because they aren't used to it, but are usually very resentful and things get ugly. Many contractors develop the habit of dealing with homeowners on an emotional basis, not business. There is a win/win or lose the least/lose the least solution to every conflict.

[Hobiedog]

A little more info...

The contracts were between the builder and the bank, and the bank and me; no contract between the builder and me. I'll have to go back and read my contract with the bank, but I don't recall much in my contract that refers to the contractor and his estimate. And.... the contractors estimate states just that; it's an estimate.

The contractor made draws on my construction loan by simply calling the bank's inspector and showing him what work was completed. For each line item that was completed, the contractor received payment. Only on the final draw did the bank ask for our approval. We approved it after asking and getting a few things 'straightened out'. It was only after all of this that the contractor came to my house with his 'final invoice' - the shocker.

Of course, I am holding that last 15% until he fixes the water damage. The suggestion about change orders; well, I was a Project Manager for a capital equipment manuf. until a year ago. I wanted a formal system in place to track and control schedule and cost, but my bank had specific terms and conditions that it normally uses with builders. I didn't have a choice if I wanted a loan from my bank.

[Hellrazor]

1. Don't pay another cent until the damage issue is taken care of.

2. If you are given a CC for $10,000, can you charge $12,000? Your builder was given $X with 10% extra for overages. How did he land up with 21% higher? He had to know there was a problem.

3. The 5 month project taking 9 months sounds like poor planning on his part.

4. If the "contract" was to the bank, ask the bank how THEY are going to handle it. I am sure they aren't going to pony up the extra $$.

I see crap like this all of the time at work. I order something on a PO with a quoted price of $500 and I get an invoice for $525. I won't pay the difference. The PO has a price quote backing it up.

[gjat]

Hobie,
It is implicit, not implied, that you were requesting a reasonable price quote for the work you wanted done. The contractor is experienced and was performing per industry standard practice, providing an accuate quote/estimate. The burdon is on him to justify the overages are due to your fault (for changes) or strictly due to material price increases if you two had a 'cost plus' agreement.

You and the contractor entered into a reasonable verbal contract that is documented with the contract you established with the bank to get a loan. Is the 15% you are witholding for water damage, 15% of the total final bill, or 15% of the original base amount.

You are on the right moral ground to want to be fair to the contractor. You don't want to 'screw him', just because you can. But by the same standard, it's not fair to you to have to pay for his inefficiencies or mistakes. You know the details, I don't. Sit down with the bill and try to establish what over-runs are due to your revisions, delays you caused, and what may be due to his poor execution of the project. I'm sure there is room to negotiate where you both give a little and you are happier with the final price.

The main thing is do not pay him 100% until everything is 100% done. You need to give him a letter of deficiencies in writing as well as him providing you notarized statement that he has paid all sub-contractors and material suppliers utilized on this project. If he isn't willing to do this, then you are dealing with a shady operator, despite what his reputation may be.

[jackellis]

The contracts were between the builder and the bank, and the bank and me; no contract between the builder and me. I'll have to go back and read my contract with the bank, but I don't recall much in my contract that refers to the contractor and his estimate. And.... the contractors estimate states just that; it's an estimate.

My opinion is also worth about what you've paid for it but if the above statement is factually correct, payment for the overrun is the bank's problem, not yours. Damage repair *is* your problem in the sense that you have to get the contractor to fix it.

[rnelson0]

The contracts were between the builder and the bank, and the bank and me; no contract between the builder and me.
...
It was only after all of this that the contractor came to my house with his 'final invoice' - the shocker.

That seems like a odd setup to me. However, if that was the setup, then you never had a contract with the contractor. If he comes to your house, turn him away. He should take it up with the bank, who is the person he has a contract with. It sounds like he's trying to fleece you. I'd bet a dollar that he tells you the bank told him to bill you direct.