Construction company raise price after contract?

23 Replies

Hi Investors,

I signed my first investment property contract back in March this year. While today, the construction company told me to either accept a $42000 increase on top of the contract price, or get off. I understand now it's a seller's market and the cost is rising, but still, is this a common practice? 

If it is, what can I do in future to protect myself from this?


Happy investment!

Nikki

@Nikki Bai

Read your contract. Builders often have an escalation clause built in that says something to the effect of “if material costs increase more than 10% during the time of construction, builder can raise the price to cover the difference”. 

Look at your contract and see if that is what’s happening. If so, run the numbers again and see if it still works. Chances are, it’s still a good deal if it was in the first place.

@Dustin Allen

Thanks a lot for your insight. Yes, there is one clause like that. While I'm running on the number, is it a good idea to ask the constructor for the proof of increase so to make sure I'm only paying for the difference instead of paying more to match the current market?

Thank you!

Nikki

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I don't know your total spend but my cost for new SFH construction is up about 30% this year. Lumber, concrete, electrical, appliances, HVAC, etc. Even the port-a-jon rental increased lol. I feel bad for young people trying to build a house.

@Nikki Bai most contractors today will not honor nor guarantee estimates contracts etc for more then a few days. Theirs too much fluctuations in material market today. I would talk to them see if they can work with you, but I doubt they will. Not only is the market causing so much pain in the industry but also the lack of good help and good contractors. Everything across the board is skyrocketing, if the contractor you received the contract from is a good contractor with alot of referrals and has a good solid crew I would push a whole lot of issues it could take you months in the long run trying to find another one, and yet when you do who knows what they're bid may be

@Dustin Allen

Yeah, this part in the contract confused me a little bit: "...proceeding 30-day period from the execution of this Contract...". Not sure when is considered as the "execution the contract" means, contract day/delivery day/etc?

------"In the event that there is a significant price increase in these construction materials in excess of 25% from the average of similar materials purchased by Builder in the proceeding 30-day period from the execution of this Contract, the excess charges will be passed through to Purchaser......Builder will attempt to keep the purchaser informed of any cost variances."

@Michael Gessner Thanks a lot for the advice. Yeah, I will try to reach out to them to see what's the possible solution. On one hand, I totally understand the situation and want things move towards the right direction; on the other hand, I want to still do my due diligence to make sure I'm not over paying. 

@Nikki Bai

Executed Contract means the day both parties signed the contract. The later date if parties signed on different days. It says builder should keep you informed of any cost variances. I would just ask them to explain what changed and go from there. Costs have been fluctuating lately. Build costs are down from their high earlier in the year but supply chain issues are causing more price increases lately. 

@Dustin Allen Got you. I will do that.

Yeah, I also heard about the supply chain issue. Though good news is from what I know, the 40' container price is decreasing in last 2 weeks, from China to LA port, it decreases from ~$25000/container to ~$20000/container.


I was even thinking if they can just push back my construction because I'm not in a rush lol.

@Nikki Bai

Not sure I’d take the gamble of waiting. I don’t see things getting cheaper overall in the near future. Not to mention the revenue you miss out on if this is an investment property.

I would certainly talk to your agent if you had one. I might even go pay for an hour or two of an attorneys time to look over the contract and the price increase they are asking you to sign. In the end, you are going to need a little more insight than you’ll gain from this forum to know for sure that they are doing everything properly. If they are, run the numbers again and make sure your deal still makes sense. 

Originally posted by @Nikki Bai :

@Terrell Garren The builder increase the price by ~14%, in Forney, TX.

I cannot say that is unreasonable. I'm surprised it is not higher but maybe he had some purchases or supply locked in before the prices began escalating in the Spring. 

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@Nikki Bai Given the increases in commodities/labor..from a business perspective the 4200 does not sound unreasonable if there is a relevant clause in the contract. That said, I don't think any of us has seen the entire contract so anything written here is just speculative interpretation concerning your legal options. Best bet is to have an attorney look over the contract in its entirety so you can get the best advice. That may cost some money but it may be well worth it to avoid a misstep in the long run.

Originally posted by @Nikki Bai :

@Theresa Harris I'm not sure how usually builders price in the expectations. Any ideas?

 I don't.  I'm guessing they have enough experience that they build in a buffer to the price.  Jay Hinrichs on here has lots of experience with builders, he may know.