Contractor suddenly over budget by 40%

[David B.]

Hi everyone 

I’m in the middle of my first flip. I locked up a single family home (roughly 2600 sq feet) with 5 beds and 3 baths for $454,000.

The ARV for the area tells us we can probably sell the house for 685-700k on the other side. We underwrote at 650k to be safe.

My contractor initially came in with an estimate of 98k for the rehab. This would encompass new floors, dry wall, electrical/ plumbing, and two new kitchens (upstairs and mother in law suite). Keep in mind, this was for zero exterior work… which I was considering having cash on hand in case we needed a new roof. We couldn’t tell when we bought it cuz it was covered in snow. 

Last week, he mentioned the budget was going over a little and we should talk about it. So we finally hop on the phone and tells me that we’re at 121,000 all of a sudden. 

I was shocked. But rather than freak out I tried to navigate how we could make that money work for us. I also decided to do some light exterior work. So I told him “look - this ain’t great - but if we can cap this at 130k - and ALSO fix the exterior - then I can live with it.” 

He then promptly came back with a bill for 142,000… 9,000 of which was “tax” 

So he’s almost 50% over budget. And frankly, the more I think about it, the less I understand HOW this number has blown up. 

We’ve had a couple overages, but not many, and most of the stuff we’ve done was completely within the scope of work in the initial bid. He also has only taken two draws at this point - for a total of 40k. That 40k has covered the demo of the house, dry wall, and handled most of electrical/ plumbing. We’re *basically ready for cabinets and flooring at this point, and then paint and fixtures. 

So I don’t really understand where this extra 100k would need to go. Or how he ever let it blow up to begin with. I went through the budget with him, but frankly it still doesn’t make sense. The budgeting seems VERY loose. And that 10k tax? As soon as I brought it up he went “oh good catch” and then eliminated about 6k of it. To me, it doesn’t make sense to pay ANY tax… I pay materials and labor and whatever tax there is should be included in that no? 

This is my first flip and while Iv tried to implement all the strategies Iv learned about on BP, this one is throwing me for a doosie. 

What are my options for a contractor who’s  this much over budget? I really like this guy - and had thought we would work together on more projects - but this is pretty inexcusable. He’s taken a deal I worked hard to get, where I thought my floor profit was 50k, and made it so now i could LOSE money if we get stuck holding the property too long. 

Do I fire him? Refuse to pay the overages? 

Any insight would be really helpful. Thanks in advance. 

[Shafi Noss]

You should look at your contract. If you have a fixed price contract, he is responsible for getting the job done at the agreed on price. If he is not financially strong himself he may not be able to cover his mistakes. 

That said, you should ask him where the overages came from and understand what happened before doing anything else. 

If he is cooperative and it's possible to find a way through, you might be able to work together to exit the project and limit losses, even though it's not ideal it may be the lesser evil.