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Contractor suddenly over budget by 40%
Hi everyone
I’m in the middle of my first flip. I locked up a single family home (roughly 2600 sq feet) with 5 beds and 3 baths for $454,000.
The ARV for the area tells us we can probably sell the house for 685-700k on the other side. We underwrote at 650k to be safe.
My contractor initially came in with an estimate of 98k for the rehab. This would encompass new floors, dry wall, electrical/ plumbing, and two new kitchens (upstairs and mother in law suite). Keep in mind, this was for zero exterior work… which I was considering having cash on hand in case we needed a new roof. We couldn’t tell when we bought it cuz it was covered in snow.
Last week, he mentioned the budget was going over a little and we should talk about it. So we finally hop on the phone and tells me that we’re at 121,000 all of a sudden.
I was shocked. But rather than freak out I tried to navigate how we could make that money work for us. I also decided to do some light exterior work. So I told him “look - this ain’t great - but if we can cap this at 130k - and ALSO fix the exterior - then I can live with it.”
He then promptly came back with a bill for 142,000… 9,000 of which was “tax”
So he’s almost 50% over budget. And frankly, the more I think about it, the less I understand HOW this number has blown up.
We’ve had a couple overages, but not many, and most of the stuff we’ve done was completely within the scope of work in the initial bid. He also has only taken two draws at this point - for a total of 40k. That 40k has covered the demo of the house, dry wall, and handled most of electrical/ plumbing. We’re *basically ready for cabinets and flooring at this point, and then paint and fixtures.
So I don’t really understand where this extra 100k would need to go. Or how he ever let it blow up to begin with. I went through the budget with him, but frankly it still doesn’t make sense. The budgeting seems VERY loose. And that 10k tax? As soon as I brought it up he went “oh good catch” and then eliminated about 6k of it. To me, it doesn’t make sense to pay ANY tax… I pay materials and labor and whatever tax there is should be included in that no?
This is my first flip and while Iv tried to implement all the strategies Iv learned about on BP, this one is throwing me for a doosie.
What are my options for a contractor who’s this much over budget? I really like this guy - and had thought we would work together on more projects - but this is pretty inexcusable. He’s taken a deal I worked hard to get, where I thought my floor profit was 50k, and made it so now i could LOSE money if we get stuck holding the property too long.
Do I fire him? Refuse to pay the overages?
Any insight would be really helpful. Thanks in advance.
Did your overages come from the increase in material costs? Or was the increase in labor cost? For materials you can suggest the contractor use similar products at a cheaper rate to keep the cost online with the first quote? Did the changes come from surprises once you started moving walls? I would through and see where you can save money. Tax is on him not on you.
I just want to make clear - we’ve only spent 40k so far. So one of the things I’m wondering is are we speculating on this extra 100k? Cuz we can’t have spent that yet. He’s only used 40k on the draw.
It’s part of what’s making it so confusing for me. Why is his estimate now growing by 50%?
Quote from @Allister Long:
Did your overages come from the increase in material costs? Or was the increase in labor cost? For materials you can suggest the contractor use similar products at a cheaper rate to keep the cost online with the first quote? Did the changes come from surprises once you started moving walls? I would through and see where you can save money. Tax is on him not on you.
Thanks Allister
to my knowledge we have had no significant issues arise once we’ve opened walls. Had we found asbestos or a foundation issue, I would have better context here. But nothing of that nature has happened.
I am not clear if materials or labor shot up on him. I will get a better picture of this in my next discussion .
As for tax… do I simply refuse to pay? Is there anything specific to Utah law (I’m in SLC) that would justify extra tax? Or is this all phooey?
Do you have a Statement of Work that goes with the initial contract? If he's now saying it will cost substantially more, then I would think there should be a written Change Order getting generated to document exactly what alterations to the original SOW are being requested (ie increases to labor/materials for X task in Y room). That should let you highlight what projected costs have gone up by comparing the new document to the original SOW. Did he ever supply something detailed, or was the contract bid on with just a ballpark number?
Quote from @Lucas Dalton:
Do you have a Statement of Work that goes with the initial contract? If he's now saying it will cost substantially more, then I would think there should be a written Change Order getting generated to document exactly what alterations to the original SOW are being requested (ie increases to labor/materials for X task in Y room). That should let you highlight what projected costs have gone up by comparing the new document to the original SOW. Did he ever supply something detailed, or was the contract bid on with just a ballpark number?
Hi Lucas
we definitely had an itemized scope of work to begin with. And - now that you mention it - there were never change orders issued at all.
It was quite literally “hey we’re moving along great” to “hey bro - let’s hop on and talk about the budget cuz some things are growing” and then that number was 35k higher.
He acknowledged to me on the phone that it was his fault, and is now trying to find ways to penny pinch. But I don’t really don’t understand what caused the massive overage that put us in this position to begin with.
I’m considering letting him go and just sub contracting the rest of the work. Between his “taxes” and fee I could significantly reduce the budget.
General contractors scare me because of this very reason. I'm by nature a pessimist. I would be walking the site as much as possible asking questions and reviewing invoices. At this point the only way to know if he is being honest is to review the books number don't lie. I would also speak with another contractor who is reputable and get there opinion. With that said it would probably cost more to stop and start again with someone else. If you find out he is playing games you can go after his reputation by letting people know what he did wrong. I'm very interested in how this turns out please post a follow up.
Was it something like:
"Hey Chuck, what do think it will take to do X, Yand Z plus A, B and C, but not the outside, to get this place ready for rent (???)
Chuck: ah, about 60 grand or so, but I can't start until next Wednesday.
You: OK Chuck, see you on Wednesday, and we will have draw too!"
[OR]
Do you have a written contract with him; if so what does the contract say about overages (???)
There are a few standard ways these things are contracted for in the industry, depending on who will eat the overage cost.
If the contract leaves you on the hook for them, you're on the hook.
Good Luck!
(Chuck like a Drill Chuck)
You should look at your contract. If you have a fixed price contract, he is responsible for getting the job done at the agreed on price. If he is not financially strong himself he may not be able to cover his mistakes.
That said, you should ask him where the overages came from and understand what happened before doing anything else.
If he is cooperative and it's possible to find a way through, you might be able to work together to exit the project and limit losses, even though it's not ideal it may be the lesser evil.
#3 Managing Your Property Contributor
did you do any change orders or is everything within the original scope of work? He should have budgeted a cushion for unexpected discoveries. He shouldn't be charging you taxes (unless there are taxes on his services-in Canada we have this but it is part of their quote).
The fact that the initial budget was $98K and then went to $121K without him talking to you beforehand, then you capped it at $130K (mistake 1, you should have told him $121K is 20% above the original quote and you want to know why), then for him to go to $142K-something is dodgy with your contractor.
Stop now and sit down with him and explain your concerns. If he's only spent $40K so far, stop and assess where the money is going.
Quote from @David B.:
Hi everyone
I’m in the middle of my first flip. I locked up a single family home (roughly 2600 sq feet) with 5 beds and 3 baths for $454,000.
The ARV for the area tells us we can probably sell the house for 685-700k on the other side. We underwrote at 650k to be safe.
My contractor initially came in with an estimate of 98k for the rehab. This would encompass new floors, dry wall, electrical/ plumbing, and two new kitchens (upstairs and mother in law suite). Keep in mind, this was for zero exterior work… which I was considering having cash on hand in case we needed a new roof. We couldn’t tell when we bought it cuz it was covered in snow.
Last week, he mentioned the budget was going over a little and we should talk about it. So we finally hop on the phone and tells me that we’re at 121,000 all of a sudden.
#2 Personal Finance Contributor
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- Greenville, SC
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#2 Personal Finance Contributor
- Investor
- Greenville, SC
Have a written fixed fee contract with details by line item (specific scope). Walk the property with him every few days. Use written change orders before out of scope work is performed. Even with these, things can get sideways (ask me how I know...).
At this point, I recommend getting the written change orders and discuss what is going to be changed and the related cost, what is going to be left unchanged (no additional cost), and discuss who is paying for for the changes (based on unforeseen repairs or contractor error). Maybe you can get the job back to 20% rather than 40% over budget and everyone wins. Can stop the job if need be until this is produced...and you can discuss with him next steps (he finishes the job or go separate ways).
If there was no unexpected cost, such as rotten floors, shoddy electrical, had to reroute plumbing that couldn't be seen in the initial bid or you changed to more expensive materials. Then he simply under bid the job and is legally obligated to finish the job at the agreed price. It's very common for contractors to under bid to get the job, blow through the first couple of draws, and then near the end ask for more money. Tell him to give you a list with invoices of all the expenses. Ask why were they more than expected. If you don't agree, pay him for what work has been done and get someone else to finish.
I am a contractor in California. The first thing. You need to do is refer to your contract between yourself and you contractor. If it is layer out right it should have a section for change orders and the procedures on how they should be handled and what needs to be done before proceeding with the work.
Next, if he gave you a bid for materials and labor Then he needs to perform those bid items whether he goes over budget or not. There are no open check books otherwise every one would be a contractor and make a ton of money. If his material takeoff and labor estimate was not figured right that is not your fault and you shouldnt have to pay for that, but on the other hand material is very unpredictable so if this wasnt discussed on how to handle inflation on material then there may be changes but he should have comunicated that at the time he discovered it. I know as a contractor as soon as i get approval on my materials i put in a P.O. with my suppliers to lock in all pricing per the quote they gave me. I also put on my proposal that labor is guaranteed for 30 days but material pricing is at time of delivery per suppliers.
Hope this helps.
@David B.
Too many red flags with this guy. Do you know anyone who has used him before? If he was highly recommended, then maybe proceed with caution. If not, I’d cut bait and sub it all out yourself. Or find another GC. This guy will drain all your profits if you continue.
Really appreciate everyones feedback
I sent an in depth email explaining that the budget was too high, there were no change orders accepted for this work, and if he was going to continue on this project with me I needed him to come in at the budget he initially wrote.
I expect to have a follow up convo in the next day (I told him to marinate about how we could fix this situation). On the phone, I intend to bring up the "taxes" he's been charging me... which I now understand are illegal.
I'm going to give him an opportunity to make this right, and potentially finish this deal together. I think replacing him and finding subs will be time consuming and I'd rather not put myself in position where he could - potentially - sue me (even though I'm certain it woulan't hold up in court given what's happened here).
But the trust is broken and I don't expect to work with him again. And - if he's defensive and argumentative about what I need from him - I'll let him go and sub it out myself.
Thanks for everyone's feedback. This has been an eye opening experience. I'll continue to update.
Your next move depends on the wording of the contract and whether it was fixed price bid of an adjustable number. I agree the best thing to do at this point is talk it out with him and see if you can come to a mutual agreement. Based on the SoW you described - full gut rehab of a 2600 sf house with 2 kitchens - 98k is way too low. Guy probably got half way in and realized he's about to loose his shirt. I've been there and it sucks, but sometimes contractors just have to eat that cost and make it up on next job.
UPDATE
After expressing my concerns via email to the contractor - where I laid everything out very clearly - he said he would provide receipts and respond via email. He also said “I’m sure we can figure this out and finish this together”.
Then - a day later - he asked if i would resend the two bids we had… his initial bid that we cut down and then the formal bid we signed off on… apparently he couldn’t find them.
So I sent both of those. Didn’t hear anything for a day. Still no invoices.
Today, he sent me a text recommending I fire him. He said I would save “several thousand dollars” that way, and that he would stay with me pro bono to help me with his subs and negotiate their prices down to finish the job. He said he was frustrated and dejected by how things had turned out, and that he wanted to make sure I was taken care of.
… He has yet to provide receipts and invoices.
I asked if the 40k we were out of pocket was all gone. Haven’t heard back yet.
Very strange situation. I’m not sure if he’s just trying to save face saying he’ll help me if I fire him (and assuming I won’t take him up on it). Or if he’s genuinely bummed out by what happened here, and somehow lost control of something along the way.
Maybe it doesn’t matter.
Does anyone have any tips on how to clean up from here? I’m debating getting another contractor or subbing the work myself. O Iv never worked with subs, and not sure exactly where to start, but for $ I’ll figure it out.
Thanks everyone.
Quote from @Carlton B.:
General contractors scare me because of this very reason. I'm by nature a pessimist. I would be walking the site as much as possible asking questions and reviewing invoices. At this point the only way to know if he is being honest is to review the books number don't lie. I would also speak with another contractor who is reputable and get their opinion. With that said it would probably cost more to stop and start again with someone else. If you find out he is playing games you can go after his reputation by letting people know what he did wrong. I'm very interested in how this turns out please post a follow up.
Quote from @Colin Kelly-Rand:
Hey @David B. What day and time does this saga release on HGTV?
I'm glad your looking into this 40k in and not 120k in. I have hope for this project yet.
waiting on the next update.
#RenosAintCheap
we have healthy margins. We can probably save it.
Quote from @Shafi Noss:
You should look at your contract. If you have a fixed price contract, he is responsible for getting the job done at the agreed on price. If he is not financially strong himself he may not be able to cover his mistakes.
That said, you should ask him where the overages came from and understand what happened before doing anything else.
If he is cooperative and it's possible to find a way through, you might be able to work together to exit the project and limit losses, even though it's not ideal it may be the lesser evil.
Shafi!
definitely tried to resolve it with him as opposed to cutting and dealing with the devil I don’t know.
seems like he’s chosen to walk.
My suspicion is he realized that he may be in legal liability zone (with the taxes he was charging and the overages without change orders) and decided safer to cut ship.
Actually - one specific questions now that I’m getting into some details with him…
he’s claiming we spent (or agreed to spend) 48,500 on demo electrical plumbing drywall framing stucco and windows.
However, Iv only given him 40k in draws. And none of these overages were cleared with me. So do I have a right to cut him and not pay the additional 8,500?
I’m not trying to rip the guy off. He hasn’t provided a single invoice and it seems as though he pledged money to people that supersedes the scoped of the budget without telling me. He also said - in text - that he added things BACK into our budget without adequately informing me, hence why costs went up (insane)
So am I on the hook for what he’s pledged his subs? Obviously I could put that 8,500 back into the house and help move this along.
Thanks guys
#3 Managing Your Property Contributor
Quote from @David B.:
Actually - one specific questions now that I’m getting into some details with him…
he’s claiming we spent (or agreed to spend) 48,500 on demo electrical plumbing drywall framing stucco and windows.
However, Iv only given him 40k in draws. And none of these overages were cleared with me. So do I have a right to cut him and not pay the additional 8,500?
I’m not trying to rip the guy off. He hasn’t provided a single invoice and it seems as though he pledged money to people that supersedes the scoped of the budget without telling me. He also said - in text - that he added things BACK into our budget without adequately informing me, hence why costs went up (insane)
So am I on the hook for what he’s pledged his subs? Obviously I could put that 8,500 back into the house and help move this along.
Thanks guys
If you have a contract with everything itemized, he can't change things without you signing off. It doesn't matter how much you agreed to spend on A or B, rather that you agree to $X for a set job. It is up to him to make sure it gets done. If you change things or there are unexpected problems, that is another story.
Quote from @Theresa Harris:
Quote from @David B.:
Actually - one specific questions now that I’m getting into some details with him…
he’s claiming we spent (or agreed to spend) 48,500 on demo electrical plumbing drywall framing stucco and windows.
However, Iv only given him 40k in draws. And none of these overages were cleared with me. So do I have a right to cut him and not pay the additional 8,500?
I’m not trying to rip the guy off. He hasn’t provided a single invoice and it seems as though he pledged money to people that supersedes the scoped of the budget without telling me. He also said - in text - that he added things BACK into our budget without adequately informing me, hence why costs went up (insane)
So am I on the hook for what he’s pledged his subs? Obviously I could put that 8,500 back into the house and help move this along.
Thanks guys
If you have a contract with everything itemized, he can't change things without you signing off. It doesn't matter how much you agreed to spend on A or B, rather that you agree to $X for a set job. It is up to him to make sure it gets done. If you change things or there are unexpected problems, that is another story.
we had a set contract with everything itemized. Upon looking at the contract, his wording on change orders is a little sneaky. It says - basically - that if I issue a change order it’s a 100 dollar charge to me. And then it doesn’t necessarily say the same in reverse.
However the contract does say that any and all changes to the scope of work / budget will be addressed before hand. Which they were not.
It seems to me that this wording still allows me to deny their claim I owe more money than I agreed to in the draws. But in hindsight, it’s a little loose that they don’t state they ALSO need change orders to shift the job.
However, from my side, the only thing I ever asked changed is we added an additional 1000 bucks in tile. which we discussed and I’m happy to pay.
His drywall, electrical, stucco and DOUBLED. Without discussion.
I think I’m gonna have to tell them to pound sand.
#3 Managing Your Property Contributor
Quote from @David B.:
Quote from @Theresa Harris:
Quote from @David B.:
Actually - one specific questions now that I’m getting into some details with him…
he’s claiming we spent (or agreed to spend) 48,500 on demo electrical plumbing drywall framing stucco and windows.
However, Iv only given him 40k in draws. And none of these overages were cleared with me. So do I have a right to cut him and not pay the additional 8,500?
I’m not trying to rip the guy off. He hasn’t provided a single invoice and it seems as though he pledged money to people that supersedes the scoped of the budget without telling me. He also said - in text - that he added things BACK into our budget without adequately informing me, hence why costs went up (insane)
So am I on the hook for what he’s pledged his subs? Obviously I could put that 8,500 back into the house and help move this along.
Thanks guys
If you have a contract with everything itemized, he can't change things without you signing off. It doesn't matter how much you agreed to spend on A or B, rather that you agree to $X for a set job. It is up to him to make sure it gets done. If you change things or there are unexpected problems, that is another story.
we had a set contract with everything itemized. Upon looking at the contract, his wording on change orders is a little sneaky. It says - basically - that if I issue a change order it’s a 100 dollar charge to me. And then it doesn’t necessarily say the same in reverse.
However the contract does say that any and all changes to the scope of work / budget will be addressed before hand. Which they were not.
It seems to me that this wording still allows me to deny their claim I owe more money than I agreed to in the draws. But in hindsight, it’s a little loose that they don’t state they ALSO need change orders to shift the job.
However, from my side, the only thing I ever asked changed is we added an additional 1000 bucks in tile. which we discussed and I’m happy to pay.
His drywall, electrical, stucco and DOUBLED. Without discussion.
I think I’m gonna have to tell them to pound sand.
He can't do a change order without both of you signing off. I'd get another person in to do the work.