Hello, I have lurked on this site for a long time and leeched a lot of great information. I finally have something worth registering and posting about.
I made a long winded post regarding a contractor that wants more money beyond our contract price in the new construction forum and it unfortunately didn't get any traction so I will simplify it. I have a fixed price contract for a new home construction that was delayed by a 3rd party by approximately 8 months. The contractor attributed to almost 3 months of the delays. He is now claiming material price and labor increases over 6 months to the tune of $40000 (total project price is $292000). My attorney has reviewed our contract language and strongly believes I am not liable for this additional cost and that the job was significantly underbid. There is no escalation clause or completion deadline. The price increases are 25-55% on most line items (drywall 55%, lumber 45%, electrical 40%, etc). I believe these are unreasonably inflated but unfortunately, legitimate.
We are currently attempting to resolve this with the contractor. His solution to start with is to cut all of the finishes that we added ($21000ish). He currently has not offered to make any concessions to his profit line except that he's doing the line items that are over "at cost" and is attempting to justify this by the fact that the home will still have significant equity even with the overages.
We are still moving forward, framing is set to begin next week. Does anyone have any advice for me as I'm feeling taken advantage of. I do not have any prior real estate investment experience. Any advice on how to proceed by anyone with experience in this field would be incredibly valuable!
@Shaun Alexander I don't have much in the way of advice, but is there a deadline for completion in the contract? Are you able to start over with a different contractor instead?
Thanks for the reply Dawn. There are no deadlines for completion on the project. I had the budget looked over by another contractor and he believes it was grossly underbid from the start. Unfortunately he believes the current numbers are now correct so if I change contractors it will not resolve the fact that there will not be enough money to complete.
The bank just informed me that they will not allow him to take from other line items to pay for his current overages. That essentially means either he's paying or I'm paying out of pocket for the differences. If anyone out there has experience resolving disputes with underbid fixed price contracts I would greatly appreciate the input!
Always have a completion date with penalties if the deadline is not reached. If the contractor underbid it that is his problem and he has to make it work. If he is a small one or two person contractor he will probably not be able to make up the costs. Can you cut costs in some other areas if needed? The percentage you have said the items went up are not realistic numbers, they don't go up that much in that short of time. 55% increase for drywall, the material has gone up maybe 10% in the last 6 months. Find your own drywall company, electrician and save money that way. I obviously don't know the contractor but those trades are probably being subcontracted out and he is adding money on top of that.
@Shaun Alexander I would pluck out those trades from his contract to an addendum, you obviously don’t know contracts, talk to your license board and see what your options are on suing if he doesn’t comply. New construction that doesn’t have a deadline and penalty clause is such a noob mistake. Even my 5k micro projects have deadlines. One note, if you pluck those trades out, it will be a fiasco unless you hire a contract/project manager to overlook your side of things, I would pay 5-10k for the cm/pm instead of the whole 40k, this way you save 30-35k AND have someone on your side to protect you from unauthorized change orders or COs that are of industry standards. I’m not a big fan of bad mouthing other contractors, and I will never say this guy underbid it, I mean, his price will always be different from mine.
Maybe not an addendum, that would be too much work, use a deductive change order.
The contractor currently is refusing to continue work and wants to be paid ~$13000 for extra foundation work based on a subsurface condition clause. I believe he is trying to settle up and walk off at this point. He only has a $12k bond and my attorney believes he may have some other pending lawsuits. I don’t think I would ever collect the damages awarded through arbitration (which is what our contract requires to resolve billing disputes).
I spoke with another bank about refinancing and getting a new construction loan with a new builder. I haven’t put through the preappoval paperwork but it sounds like I’m short. I sent the project in it’s current state to be bid by a couple other builders and am waiting to hear back with some real numbers. The only thing I have working for me with this thing is the project appraised at 525000 15 months ago and should have gone up at least 5%. I’ve drawn $80000 on the loan total and have all dirt work, foundation, backfill, well and permits done. Inspections are up to date and it’s ready for framing. The house is 2700 sq ft. 2 story and relatively basic. I have 229000 left on the current loan and I don’t believe I will be able to get more than that from a new construction loan.
I believe I need to pay an attorney to get me out from underneath this guy and find someone to get this thing built to at least get a certificate of occupancy within the budget I have. Does anyone have any suggestions as far as creative financing goes if no one can (or is willing to) finish this thing within this budget? Things are pretty desperate over here and I would really appreciate any additional advice.
What would it take to make this contractor go away? If you get someone else to finish the project from this point, how much will it cost? You say you still have $229K you can draw on your existing loan. Or do you mean you owe $229K? How short are you?
With an existing loan in first position most hard money lenders won't make you an additional loan. But, if there's enough equity here and the amount you need is fairly small then you might find someone to do it.
Home equity loan or a cash out refi on a different property?
Friends and family?
Get a second job (or third, since this project seems like a second job already)?
Do some of the work yourself?
Sell it as-is?
Thanks for the response Jon. I’m getting the project rebid currently. I’m expecting it to come in about 40-50k short to finish. My construction loan is running on extensions with all the issues I’ve had with this builder. Ideally I could slide a new builder in and I make up the cash difference, but I would be completely tapped at that point and they may not go for that. I don’t think it’s going to be difficult to get rid of the current builder.
There is equity here... Appraised for 525000 over a year ago and it should have increased 5+%. Bought the land with cash and have 70k into it to this point. I’m expecting new bids to come in around $270000 to finish. Getting the additional 40-50k into it is what I’m trying to figure out.
It hard to know with so little details but I would want this guy out of my life ASAP. I would do whatever I could to not pay him $13000. Lies and delays just continue to pile up. Fire him and have some completion fines. Seriously. A little noob, especially with so much money in the line. Maybe pay a project manager just to swing by once a week and look over your contracts. That’d be worth 3-5k to you I bet.
Or as mentioned above. Sell it as is before you get slapped with a lien.
If you pay your current contractor anything, get a release of lien from him. That's a document that says the contractor accepts full payment and releases any liens that have been or might be filed against the property. In this case, getting it notarized might be a good idea.
You might see if the new contractor would be open to deferring some payments until the property sells. Perhaps for a share of the profit. Sounds like you will be all-in at $340K vs. a selling price of $525K. After selling costs that should result in a profit of $140K, unless there are more costs than you're listing. While not ideal, given you lack of cash giving the contractor a cut of that $140K might let you get out of this deal with a profit.
@Shaun Alexander To be blunt, there are too many words to read, back referencing, and too many emotions. What about thisc state the facts per timeline. Remove those emotional statements and maybe it can yield you more appropriate responses.
Also next time if there is a next time
Liquidated damages if x amount per day if deadline is not met
Contractor must pull a bond that is at least equal to the cost of the project. I usually had to pull 1.5x job. Also a contractor can only pull so many bonds.
Any additional work or change order must have a not exceed x dollars clause written in. This way he can’t just come back with oh it cost a little more than i thought
Anything you sign I would write in that the signature ONLY verifies hours. This way you can argue if the guy was there for a hour but wants to charge 4
Once a job is completed make sure you get a release of lien from ALL the subs and the contractor. The subs can go after you and lein the property if the contractor doesn’t pay them.
If he is refusing to complete the work I would file a complaint with the state board and go after his bond to complete the contract he signed for. Truthfully if he underbid it’s his problem. He’s basically trying to get out of it. I had to do that Tina painter. By the end the contractors board dragged him through the coals. But the dude didn’t show for here days and I couldn’t reach him. To me that was job abandonment.
I would look over the contract and see if he has a time clause of no time
Clause as to “this bid is good for x days after submittal” then the bid isn’t expected at the old price. Most bid jobs have a time limit which is usually 30 days. When I gave bids they were good for 30 days. After that I would resubmit a new bid if the customer wanted another bid. It was usually higher than the last bid
I really appreciate everyone's advice here. We ended up getting a good construction attorney who looked at everything. Without going into details, there was some seriously shady stuff going on when we started getting invoices and comparing them to the draws. The lawyer sent a good letter and we got our unconditional lien release within a couple hours and settled up with the contractor for a reasonable amount for the unpaid work. We have a new builder (someone we know and got some references for) that rebid the job and will be able to complete the project within our remaining budget (had to cut some finishes but after this we're ok with it). We are taking some advice from this thread as well as having our attorney look at the new contract a lot closer this go around. We're not out of the woods yet but we feel like we are in a good position going forward.
Some lessons learned:
-REALLY look at the contract before signing
-DO NOT trust a general contractor you don't know
-It's worth paying a good attorney
Thanks again for the advice in this thread.
@Shaun Alexander Do not forget to get an unconditional waiver after payment, and always remember there is progress payment and final payment on both un/conditional releases.
I would not go with bonds, if you do, that is a 5% upcharge, AND it normally applies for commercial builds or better, bonded contractors are also retail prices or higher. I will never enter a bonded project with a discounted price, it is simply not worth it, why would I use a 300k of my bonding line on a discounted transaction when i could
make so much more on a government/commercial project? Surety bonding protects you from all non-performances and locks in your price, so bonded contractors will make sure that their behind is covered on all worst case scenarios.
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