Estimate from Contractors
Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
Hey BP,
How much do you budget when getting an estimate from a contractor? Once again, I’m in a situation where I’m spending more money on my contractor who is over his estimate. (Shocking, not.) I’m sick of being hosed by these guys and I expect every contractor to be wrong with their estimate. I want to be proactive for next time, I thinking of budgeting 20% extra on top of the estimate to cover myself from them. What do you guys think?
@Nick Rutkowski Good day, seems like there are a lot variables here that need some addressing. Let’s see if we can identify them and go from there. Do you use an architect to draw up plans? The reason I ask is that I work on a lot of large commercial projects(read projects in the hundreds of millions of dollars) and even those mega high paid architects and engineers miss things in their design. Unfortunately, they don’t pay for the things they miss, they have a line in their contracts that removes them from responsibility. Ask me about this super high end movie theater I built a while back, be more than happy to share that story with you some time down the road. Let’s get you out of the woods with your current situation first.
The contractors bid the prints, and anything that is not on them costs the customer more, not the architect or engineer.
So even on a single family residential project, I built homes from the ground up as well, if the architect misses something, the customer pays for the extra. Why? Because contractors bid what’s on the drawing.
If it’s a remodel/renovation, and you decide to not use drawings, which is very common, the contractors cannot bid what they do not see. So if you want to take out a wall, the contractor can only use an educated guess as to what is in that wall. So if something is in that wall that shouldn’t be there and was covered up with Sheetrock (like buried electrical junction boxes, this happens quite often with flips on older homes)this is considered unforeseen, and the customer pays extra to deal with whatever that issue maybe. These are risks that the investor takes on when they purchase the property, and even the most thorough inspectors will miss things like this.
Extras are a killer. Changing your mind, also a killer. Why? As an investor, you have a problem, you hire the contractor to solve that problem. The contractor gets paid for his expertise and time. If you present a problem to the contractor, i.e. - I bought this outdated house and I need it updated so I can sell it a profit, however I can’t do it myself, can you do it for me? The contractor will come up with a plan, figure out the logistics of implementing the plan and then execute the plan. If you change your mind or add something to the project that alters the timeline of that plan, it will cost you money.
How can you minimize these occurrences?
Create your own plan at the beginning of the project. Ask the prospective contractor(s) the best way to achieve that vision. Common rookie mistakes, having your painter do his job before the electrician. Why? Electricians often need holes in walls and ceilings in order to run wire from the switch on the wall to fan light combo you want installed in each bedroom of your flip. Those holes need patching by another trade. Best to have your painters and tapers come through and not call them back, more often than not, if they can fit into a day’s work, there is no price difference between patching 20 or 25 holes. One important thing you can do, educate yourself on the signs of trouble in the home you purchase. A good way to do this is to identify what caused the extra costs on past projects and examine how they could have been avoided. A case in point, during a basement remodel, the previous owner left a rather large cabinet up against a foundation wall. It was so heavy, one person could not budge it, so the home inspector can’t be expected to move it. Years later, when the new owners went to renovate the basement, they got rid of the cabinet only to find cracks throughout the foundation spanning the width of the cabinet. Lesson learned, sellers will do anything to hide things during a sale that will cost them money. Wholesalers, real estate investors are no different, and are probably better at hiding things than regular homeowners. Learn their tricks. The contractor who bid the job will charge extra to fix those cracks. Those cracks aren’t included in their scope.
There are literally thousands of these scenarios of why extra costs occur, those are just some that I came across in the past couple of years. If you can cite specific examples of incidents from your previous projects, I would be more than happy to review how and why they happened. Apologies for going all over the place on this post, tried to cover as much bases as possible. I hope this helps, best of luck in your future endeavors.
What kind of contractor? A GC, or individual subs? Costs should really only go up for unforeseen issues. If you have a solid scope of work, and the contractor bid that, then his price should be for that work. If things happen or are found during the project, you address them as they come up. I usualy have a 10% ish contingency, but it wouldnt be "for getting hosed" it would be for unforeseens, added work, or missed scope.
@Brian Pulaski
Thanks Brian, 10% sounds good. I’m still learning how to pick the right contractor. So maybe I need to get hosed off and cool down a bit before I pick my next guy.
@Mark Fries
Thank you, I needed the honesty. Next time, I’ll do my best
@Mark Fries
What’s a strategy that’s worked for you?
@Nick Rutkowski Good day, seems like there are a lot variables here that need some addressing. Let’s see if we can identify them and go from there. Do you use an architect to draw up plans? The reason I ask is that I work on a lot of large commercial projects(read projects in the hundreds of millions of dollars) and even those mega high paid architects and engineers miss things in their design. Unfortunately, they don’t pay for the things they miss, they have a line in their contracts that removes them from responsibility. Ask me about this super high end movie theater I built a while back, be more than happy to share that story with you some time down the road. Let’s get you out of the woods with your current situation first.
The contractors bid the prints, and anything that is not on them costs the customer more, not the architect or engineer.
So even on a single family residential project, I built homes from the ground up as well, if the architect misses something, the customer pays for the extra. Why? Because contractors bid what’s on the drawing.
If it’s a remodel/renovation, and you decide to not use drawings, which is very common, the contractors cannot bid what they do not see. So if you want to take out a wall, the contractor can only use an educated guess as to what is in that wall. So if something is in that wall that shouldn’t be there and was covered up with Sheetrock (like buried electrical junction boxes, this happens quite often with flips on older homes)this is considered unforeseen, and the customer pays extra to deal with whatever that issue maybe. These are risks that the investor takes on when they purchase the property, and even the most thorough inspectors will miss things like this.
Extras are a killer. Changing your mind, also a killer. Why? As an investor, you have a problem, you hire the contractor to solve that problem. The contractor gets paid for his expertise and time. If you present a problem to the contractor, i.e. - I bought this outdated house and I need it updated so I can sell it a profit, however I can’t do it myself, can you do it for me? The contractor will come up with a plan, figure out the logistics of implementing the plan and then execute the plan. If you change your mind or add something to the project that alters the timeline of that plan, it will cost you money.
How can you minimize these occurrences?
Create your own plan at the beginning of the project. Ask the prospective contractor(s) the best way to achieve that vision. Common rookie mistakes, having your painter do his job before the electrician. Why? Electricians often need holes in walls and ceilings in order to run wire from the switch on the wall to fan light combo you want installed in each bedroom of your flip. Those holes need patching by another trade. Best to have your painters and tapers come through and not call them back, more often than not, if they can fit into a day’s work, there is no price difference between patching 20 or 25 holes. One important thing you can do, educate yourself on the signs of trouble in the home you purchase. A good way to do this is to identify what caused the extra costs on past projects and examine how they could have been avoided. A case in point, during a basement remodel, the previous owner left a rather large cabinet up against a foundation wall. It was so heavy, one person could not budge it, so the home inspector can’t be expected to move it. Years later, when the new owners went to renovate the basement, they got rid of the cabinet only to find cracks throughout the foundation spanning the width of the cabinet. Lesson learned, sellers will do anything to hide things during a sale that will cost them money. Wholesalers, real estate investors are no different, and are probably better at hiding things than regular homeowners. Learn their tricks. The contractor who bid the job will charge extra to fix those cracks. Those cracks aren’t included in their scope.
There are literally thousands of these scenarios of why extra costs occur, those are just some that I came across in the past couple of years. If you can cite specific examples of incidents from your previous projects, I would be more than happy to review how and why they happened. Apologies for going all over the place on this post, tried to cover as much bases as possible. I hope this helps, best of luck in your future endeavors.
@Robert S. well stated , No , VERY well stated .
@Robert S. is right on the money. I work as a construction manager for a GC and we typically do 25-30 million in work annually. So we see some decent size projects. My current project was originally contracted for 1.9 Million. But due to severe design errors and misses, the current contract value is at 2.3 Million. 400k is a lot of money, guess how much the Architects paid? 15k, and that's a lot compared to how much they would typically pay (i.e. 0).
Create a detailed scope of work, if you're going to run a rehab you need to understand the process of the construction occurring. Learn the basics of critical path management, and create a schedule in MS project. It's easy to use and will allow you to keep your contractors on track.
If you have any questions about activity sequencing you can typically google them. If you don't find the answer ask on here.
Good luck man!
@Robert Soto
Thank you for the detailed message. I will use his in reference next time
@Brian Wilson
MS Project? Is that an app or a program for a computer?
@Nick Rutkowski
Microsoft Project is a project management software product, developed and sold by Microsoft. It is designed to assist a project manager in developing a plan, assigning resources to tasks, tracking progress, managing the budget, and analyzing workloads. Wikipedia
10% - You are damned good, 20% -You know what you are doing. Materials used-that you have 100% control. Labor or permit remedy-That has to do with architect, plans.... If they have to work OT to meet your schedule you need to foot the bill.
It's unfortunate that some investors think that their relationship with their contractor needs to be an adversarial one.
"I'm not paying for extras" "I'm not paying for unseen problems that occur"
Why should the contractor have to pay for hidden things that no one could have foreseen?
Sure building multi-million dollar projects are easy compared to remodeling because there aren't any unknowns. It's being built from scratch unlike residential remodeling when you're dealing with years of unqualified, untrained, do-it-yourselfers work that often has to be redone for safety or to satisfy newer codes.
As a 40 year Contractor, I can tell you ALL remodeling estimating is a shot in the dark. We don't have the time to do exploratory "surgery" to see what we're dealing with so we'll often "pad" our estimates just in case. It's up to the parties to discuss and determine what that "pad" looks like. If you dont, it's your fault for not being proactive.
Your goal is to find a great contractor with excellent communication skills. Hiring should be based on past work and client satisfaction. Trust will be earned by the right one and then you can stop worrying about 'what's in the walls'.
I agree that many investors have an unhealthy approach to dealing with GC's. However, they likely had a bad experience to put that taste in their mouth. Licensed and insured GC's with a good reputation are worth their cost. That being said I think there is a happy medium between "it's the owners obligation to pay" and "the GC should have covered this in their bid". The easiest way to mitigate this is to ensure the SOW is inclusive of all sub tasks. Unforeseen incidents such as differing site conditions are not the fault of the owner or GC, and thus the two parties must be able to negotiate options for a resolution.
Contractors dont make the budget , the owner made the budget . And usually the owner/ rehabber budgets too little and expects too much .When some hidden problem comes up and its an extra charge , that is not the contractors problem , or responsibility to do it for free .
I am currently working on a house on the water tear down and rebuild , We have had lots of rain and its also 4 ft above sea level . Tide has been high and rain , I told the owner we need a week of dry before we dig footers and its gonna set us back . He said no , get them done , he signed off on it . So I had them dug , they filled with ground water in 4 hours , inspector failed them . Had to get the footers engineered , now he has to pay a engineer , in the mean time it rained again and the sides caved in , they have to be hand dug back out . And then filled with 6 inches of stone , then concrete with rebar . Stone has to be done by hand now (no room to get machine by ) This alone has set the job back over 2 weeks closer to 3 , and added $9000 to the " budget " Would I eat this as the contractor ? hell no . Its not on the plans .
So are we in an agreement on having 20% set a side in case our contractor goes over their estimate?
@Mark Fries
Love this as I am new to investing period
@Mark Fries
Do you know of any great contractors in Tampa FL. I’m a retired NFL’er looking to burst into the investing scene. I see you’re close here in Jacksonville.
You are correct and that's why there are so many who have a bad taste in their mouths with contractors.
I think a lot of the problem is expectations. You have a flipper who buys a home from a wholesaler or realtor that says " Only 20k in repairs is needed". Then the investor (after they buy the house on these expectations) starts the talk with the contractor at 20k or less. The novice contractor who needs the job because he is hungry will say "Sure, I think we can do that." and they cant.
All three parties are partly responsible in this case. I don't know the situation that occurred in the OP but if you can alleviate at least one of the above and one of these parties knows what they are doing you will be ok. Try and pick professional people for your business. It will pay a lot more than it costs. If you contractor is unsure of himself don't use him or her. Ask the hard questions now that you may be uncomfortable with now because you will be a lot more uncomfortable later I assure you.