Contractor underestimated how much it'd cost to build my house

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Contractor underestimated how much it'd cost to build my house

Jessie Newton
Member since 2018 · 5 posts · 1 vote

My husband and I bought some property in July 2017. We have a family friend who has been a contractor for over 16 years, so we chose him to build our house. He said signing a contract wasn't necessary, but did give us a cost estimate after reviewing a set of house plans. We knew we would make a good chunk of money off selling our first home, therefore we wanted to put that profit towards upgrading some things on our new house (metal roof, hardy siding, etc.) We are at the end of our construction loan (which has already been extended once due to our contractor taking FOREVER) and not only are we out of time, but we are out of money. He under quoted us about $50k, not including the upgrades we chose, since we had funds to cover that. The cost of lumber went up, he forgot about finishing out the upstairs bedroom, didn't put anything in the budget for the stair case and other misc. items. He has gone over budget with certain things and I just don't know what to do. He has barely any operating capital. He would front about $15k, and then pull off our house to go make money elsewhere since our bank wouldn't allow us to draw, being that he had not completed the current phase. Therefore, we had to move in a rental house and pay for storage for 3 months, on top of getting an extension on our loan, as well as increasing the amount we borrowed. Bottom line, who is responsible for the overages? Us, because we are the homeowners, or him, because he had a set of plans and didn't give an accurate estimate? We will never use him again. There are a couple of things that are left to complete, that we can find someone else to take care of. There are things I am not pleased with, that are either sloppy, or just plain NOT what I asked for. HELP.

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Milton RiveraPro Member
Professional · Atlanta, GA · Member since 2017 · 116 posts · 67 votes
8y

@ Jessie Newton

This is a classic scenario.  It does not sound like there is a clear contract and hence the remedies are limited.  Based on the information provided, you may want to cut your losses and move on. 

  • What is the process to replace the builder/contractor on the construction loan?  The bank should provide some guidelines on that.
  • All parties (contractor, bank, and homeowner) should draft the scope of work to be performed in as much detail as possible (example this type of carpet, this type of doors, etc.)
  • Once the scope is agreed upon, the contractor is to provide you an estimate and a schedule (consider using a guaranteed maximum price type contract, this basically holds the GC to a ceiling).  There are things that they would be entitled to in terms of a price adjustment (in your example, if lumber prices skyrocketed for a specific reason beyond his control then usually the owner is on the hook, however, there are measures to limit this exposure).
  • A contract can be drafted using the scope of work, estimate, and schedule (you can include liquidated damages - this is a sum (not a penalty) of what it would cost you if the project is not completed on time - think daily rent and storage rates). 
  • The new contractor may discover quality/installation issues from the previous contractor.  This is where you can try to force the old contractor to perform (let him know of the deficiencies and copy his insurance/bonding company) to get him out to correct.  Note this is a performance and not a subjective issue (example, the electrical panel was not properly installed vs. I don't like the tile color).
  • You can always file a lawsuit against him for non-performance and get his bonding company involved but this is a long process that may cost you just as much as the cost of repairs in legal fees. 
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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Jessie Newton if you have no contract with him I’m guessing you have no legal recourse, and even if you did have a contract you’d probably have to sue to enforce it. Which probably wouldn’t work well since you said he has no money
    0Reply
  • Milton RiveraPro Member
    Professional · Atlanta, GA · Member since 2017 · 116 posts · 67 votes
    8y

    @ Jessie Newton

    This is a classic scenario.  It does not sound like there is a clear contract and hence the remedies are limited.  Based on the information provided, you may want to cut your losses and move on. 

    • What is the process to replace the builder/contractor on the construction loan?  The bank should provide some guidelines on that.
    • All parties (contractor, bank, and homeowner) should draft the scope of work to be performed in as much detail as possible (example this type of carpet, this type of doors, etc.)
    • Once the scope is agreed upon, the contractor is to provide you an estimate and a schedule (consider using a guaranteed maximum price type contract, this basically holds the GC to a ceiling).  There are things that they would be entitled to in terms of a price adjustment (in your example, if lumber prices skyrocketed for a specific reason beyond his control then usually the owner is on the hook, however, there are measures to limit this exposure).
    • A contract can be drafted using the scope of work, estimate, and schedule (you can include liquidated damages - this is a sum (not a penalty) of what it would cost you if the project is not completed on time - think daily rent and storage rates). 
    • The new contractor may discover quality/installation issues from the previous contractor.  This is where you can try to force the old contractor to perform (let him know of the deficiencies and copy his insurance/bonding company) to get him out to correct.  Note this is a performance and not a subjective issue (example, the electrical panel was not properly installed vs. I don't like the tile color).
    • You can always file a lawsuit against him for non-performance and get his bonding company involved but this is a long process that may cost you just as much as the cost of repairs in legal fees. 
    2Reply
  • Jessie Newton
    OP
    Member since 2018 · 5 posts · 1 vote
    8y

    Thank you, Caleb, for your response! I am trying to avoid having to go down that road.. being that we wouldn't have the money to hire a lawyer either. And even if we did, I can agree with you that it would be a waste since he wouldn't pay. But at the same time, could he take us to court saying that we owe him the remaining $50k? We cannot close on our house if he puts a lien on it. I hate that he has put us in this position, due to his negligence.

    0Reply
  • Jessie Newton
    OP
    Member since 2018 · 5 posts · 1 vote
    8y

    @ Milton, thank you for your response!

    • The house is just about 100% complete, so no need to really hire another contractor to come in a finish. I'm talking paint, caulking, some things that we can take care of ourselves.
    • We have been researching on our end and creating an excel spreadsheet, and plan on meeting with our contractor once he does the same in order for us to see exactly what happened.
    • I have already printed off receipts from storage fees and other things to add in our discussion. But in the past, he has blamed this on the bank for not giving him money when he needed it.
    • It's not necessarily the fact that I don't like the "tile" so to speak, it's the fact that I sent him a picture of what I wanted and told him where to get it from, and he did something completely different, costing me a lot more money.
    0Reply
  • Jessie Newton
    OP
    Member since 2018 · 5 posts · 1 vote
    8y

    Also, I'm not sure how to "cut our losses and move on" when there is still a debt to be paid, that neither we or the contractor can afford to pay.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    8y

    @Jessie Newton even though you're not happy, you cannot put this on the contractor.  This is my brutal assessment of your horrible situation.

    You wrote:

    It does not seem like the sort of project your friend could handle.  Did you look at other, similar houses he had built?  He only gave you an estimate, not a fixed price bid.  Based on what you wrote, I think you are on the hook for the overages.  You don't have a fixed price contract, or seems like any contract at all.  If you sue him, I think a judge will say he only gave you an estimate and that's not binding.  You could spend a few hundred dollars to consult with an attorney, but I don't think you have a case.  He does.  He can indeed lien the property if you don't pay him, and foreclose if it comes to that.  My mom came close to going down the same road.  But after seeing nothing but a hand drawn sketch and some questioning of the "builder" it was clear he would be in way over his head.

    Building is never a cut and dried thing, so trying to get reimbursed for your extra expenses is unlikely.  

    If you wanted specific tile set in a specific way you should have verified he had the correct tile before he started setting it, and should have laid out a sample the way you wanted.  When doing any sort of building or rehab project, day to day supervision is often required.  Especially for finish details.  And because at the point where he's doing this finish work its clear there's a serious money problem.  Without a binding contract its to be expected that he will cut corners.

    No.  You put yourself in this position.  You hired him based only on an estimate.  The estimate was low.  They ALWAYS are.  That's why you need a specific, detailed contract and either a clear understanding of how overages would be handled or a fixed price contract.  And if you're doing a fixed price contract, you need to verify the contractor is financially capable of delivering.  Your friend is not. 

    You're going to have to somehow come up with the cash. Borrow from friends or family? 401k loan? Liquidate an IRA and pay the taxes and penalties? Something you can sell? Perhaps even this property?

    1Reply
  • Jessie Newton
    OP
    Member since 2018 · 5 posts · 1 vote
    8y

    @ Jon, Thank you for your response! We had seen houses he had built, and were impressed with his work. However, we did not know he had next to zero capital. It took him four months to get started, which he blamed on the weather, and we, unfortunately, accepted that excuse.

    My cousin is a state senator, so I have already spoken with him and gotten the same response. I can agree with you, it would be absolutely pointless to try and take him to court.

    The estimate, he assured us, was on the "high end." We even downgraded some things (concrete floors, rather than doing actual flooring) and saved money on things like that. So an estimate that was already on the "high end," plus saving money on other things, I just didn't foresee it coming to this..

    Basically, we take full responsibility for not having a contract drawn up. That's the plain and simple fact. I just thought that even with a cost estimate, there has got to be a threshold he can't cross. There has got to be a certain point where it gets out of hand, ya know? One of the many times we met with him to discuss the budget, I asked him why he didn't communicate to us that things were going over (not regarding upgrades that we had funds to cover, but other things that he just under quoted). His response was that he knew we were going to make a lot of money off selling our first house. I feel like that is none of his business, nor our intentions with that money.

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