General Contractor losing money and potentially bailing on the job.

[Dan Costantino]

I have a General Contractor that gave me a bid. We agreed on an Independent Contractor's Agreement, and a Scope of Work. I certainly didn't tell him how much material to use but I stated what needed to be done.

We are about a week away from completion and he is stressed because they are $4500 in the hole. They still have about a week to go with paint, and finishing materials like toilets, vanities, faucets, etc. to finish. I owe him $5,000, but that was supposed to include the carpet which will be roughly $2,000. All in all, he is probably going to be $10,000 in the hole.

He does mostly framing. He was way off on his material cost on the inside work. His work has been great and timely. He has offered to show me his P&L for the job.

2 options I thought of:

1) Work with him a bit. He has done everything he said he would beyond my expectations. I can't see doing anything over $5,000. I based my budget on his bid and he was a little more than another bid from another GC. I'd like to tie this 'bonus' to the sale of the house, but I don't think that will help him, based on what he has told me. I picked this contractor because of his credentials. He will still take a significant loss. He may not accept this and walk off the job...

2) I let him work until he says I can't do it anymore (days) and tell him to abide by the contract or be sued.

I've paid him $41k and he is owed $5k on the last draw (I made the mistake of paying ahead of the agreed upon draw schedule, although I kept him working for a couple more weeks).

Sorry for the long post. This guy and his crew has been great. He's in trouble and I've already helped him in several instances like paying ahead of the draw and letting him use materials from other jobs instead of the ones specified in the scope of work.

Can any experienced rehabbers offer any advice?

Thanks!

[Micah Watson]

I am also a general contractor experienced in rehab work. This field is a different animal than ANY other in construction. If a GC does not know his costs (both materials and labor/subs) he will lose his shorts on a rehab. Margins are very slim with not much room for mistakes. Most guys in construction get caught off guard when entering the rehab world. With that said, find out more about this guy. Is he new to rehabbing? Check references to see if he has gone over budget on a job before. Where is the shortfall on your job - was it his deficiency, or was the scope not detailed enough and he got nickel and dimed to death? He may be similar to me in that he will just absorb costs to make to customer happy (to the detriment to himself). Find out what subs he has used and get proof that they are paid up. Has he taken draws for himself without paying his subs? If so, it says something about his character.

Just keep in mind this point - DO NOT PAY HIM THE FINAL PAYMENT until you have lean releases from him and know that his subcontractors and suppliers are paid in full! In our state, a supplier or subcontractor can place a lien against the property if they have not been paid by the general contractor, EVEN IF THE GENERAL HAS BEEN PAID IN FULL. I am sure you do not want the property encumbered when trying to sell or refi it.

He sounds like he is taking the hit and trying to hold up his side of the agreement. If that is the case, be fair with him - he is a good contractor that you will want to have around. I have been in the same situation and have learned a lot from my mistakes - we all learn from mistakes. But I have also formed great business relationships with investors after working through similar problems such as this. I am not saying he should be paid what he is asking for - just be fair and view this as building relationships, if you see him as a part of your "team" you are building.