Rehab overrun question

Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes

7y

Originally posted by @Jean Laurin:

If I get a quote for a rehab from a contractor, they work the job, and then the job goes way over budget, what happens? Is the contractor responsible for some or all of the cost, or does it all fall on the investor?

This is probably a super-newbie question, but I haven't heard anyone talking about this yet. I'm still learning, so maybe my confusion is jut because I don't know what causes cost over-runs...

On the PB Podcast, I've heard about getting an itemized bit or statement of work, breaking-down labor vs materials, and paying after stages of work are completed, but I haven't heard who's responsible for cost over-runs. Are over-runs something that are typically defined and addressed in a contract before the work starts? And... is it different if the over-run was on a part of the rehab that was defined in the statement of work, versus if the contractor found a major unrelated problem like dry-rot or something?

Thanks in advance for clearing this up for me!

Jean Laurin

There is always an unexpected problem. Generally, I agree with getting an itemized list but getting a contractor to be that specific is a challenge. There are several of things to keep in mind

1. Unexpected problems (in you can determine it was the contractors fault you Try to get them to pay for that, if they find mold, asbestos, rot, lead plumbing, aluminum wiring or anything that is structural you pay for it)

2. Change orders (you tell him new information that changes things, then that's on you - (and it gets costly fast) As in "I want that wall changed", or "what if we moved the tub to this side of the bathroom?"

3. Quality of workmanship and materials (some contractors aren't very good about finish work) You probably need to do a daily or every other day walk through to answer questions and catch items before they become a big issue later. I've where granite counter top was installed 6' too close to the wall and the refrigerator no longer fit. I've seen new windows cut into a room that were too high off for the floor to meet code for egress.

4. Contractor showing up when he says he will (notoriously contractors will start a job and then disappear for a couple of weeks. Also, contractors not finishing their part of the job so the next scheduled contractor can't start when planned. You have to frame before you can wire. You have to wire before you sheet rock. You have to sheet rock before you paint.

5. Contractor finishing close to the scheduled finish date - this is always a tough one. Seems it is never finished on time.

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

7y

You need a Detailed scope of work developed by You, preferably with input from the contractor.

That work gets done at the agreed price....additional issues get addressed as they arise.

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Mike McCarthy

Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

7y

In a perfect world, when a contractor runs into an unexpected problem, they should contact you, let you know what the problem is and how much it will cost to fix, then have you sign a change order.

This rarely happens (unfortunately) since contractors are rarely that organized, rarely know exactly what it will cost, and the homeowner is rarely experienced enough to understand and agree in a timely manner. So you end up with a he said/she said kind of thing that needs to be negotiated after the fact.

I think the best thing you can do is sit down with the contractor and make distinction between what he should have anticipated, and what was hidden or changed - that he wouldn’t have expected in the original statement of work. Then decide who pays for what based on that.

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Lore Postman

Rental Property Investor · Charlotte, NC · Member since 2019 · 57 posts · 53 votes

7y

This won't help you on your current project, but it might be helpful on a future one. I like to negotiate a contract (much like what's already been discussed on this thread), with a price and end date that the contractor and I both feel good about. My own "feel good" number written into the contract is usually 5-10% less than the amount I'm actually willing to pay. In this case, let's say I'm ok paying another $5k more for a project.

Before we sign the contract, I like to add one last clause: If you (contractor) finish the job on time and on budget, I'll give you a $5k bonus. However, if the job isn't finished on time, that bonus will fall by $500/business day. After 10 business days, you agree to pay me $500/business day until the work is complete. Any cost overruns not agreed to in writing also reduce the amount of the bonus paid.

This clause seems to help keep projects on track. For larger projects, I've broken the scope into milestones and awarded bonuses at those points. There have been times when projects ran over or long for reasons the contractor couldn't control. In many of those cases, I've surprised them with a good chunk of the bonus after everything is done. In this business, goodwill and long relationships are as important as on-time and on-budget work.

Hope that helps!

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Ryan Benson

Racine, WI · Member since 2015 · 9 posts · 7 votes

7y

All depends on situation. If demo is involved it's impossible to guess what's under floors and behind walls. All contacts a contractor gives you should explain that and all additional cost are on a change order. A good relationship with a contractor is best but trust in a contractor takes time. If your taking the lowest bid and an inexperience contractor they might miss something. An itemized contract is best. You wouldn't expect to pay for an item the contractor didn't do nor should you expect a contractor to work for free with an item that was not itemized for seen or discussed. Nobody likes to for free but don't be fooled by someone trying to pull a fast one.

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Rehab overrun question

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