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

[Jessie Newton]

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.

[Milton Rivera]

@ 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.