What to do when a contractor underbids?

29 Replies

We are doing our first 2 flips simultaneously.  The 1st was pretty much as expected.  The 2nd was the typical nightmare that you hear about so often from other investors.

Our original costs were $26k, which was a signed contract (with line items of work to be performed without dollar figures attached) that he prepared.  Then we agreed to not do $6k worth of upgrades to offset an additional $11k in unexpected costs, like upgrading electrical and replacing the sewage lines.

I have been getting messages from my contractor about how much he has spent and how much he expects to spend in the next week, but these numbers don't jive with what we expected.

Finally, I asked him to break down for me 1) original estimate/contract 2) minus work removed from contract, 3) plus additional unexpected work, 4) to arrive at a total amount.

We started at $26k minus $6k plus $11k to equal $31k.  So far, I have paid him a little of $26k, leaving an expected balance of $5k.

Now, he's talking about the job's expected cost to be $40k.  I had a LONG heart-to-heart with him today after sending him an email questioning his figures yesterday.

Ultimately, he admitted that he underbid the project... and rather than the $26k that he estimated, he now realizes that he should have submitted a bid for approx $35k.  $35k - $6k + $11k = $40k.

My question is... what the heck should I do with this guy?  I told him that it seems like he is asking me to be 100% responsible for his underbidding... and that I'm not sure I should be held responsible for his underbidding the project, especially when another contractor bid approx the same amount.  Playing Devil's Advocate, if the project only cost $20k, rather than the agreed upon $26k, he wouldn't have refunded me the extra $6k profit.

Please help!!!  What would you do in this situation, especially when there's another week's worth of work to be completed.  Thanks for your input!

I would appreciate input from BP readers, especially... 

@David L. @Brandon Turner @Joshua Dorkin @Dawn Brenengen @Mike Ritter @Jacob A. @Jon Arthur @Andrew Lanoie 

PS:  If we received bids in the $35k range, we wouldn't have pursued the property and moved on to the next opportunity.

what does your contract say and how much (dollar amount) of actual work is there yet to be done. That will provide your with an answer to your possible next moves. Also do you have a general idea what projects will cost or do you go almost completely off a contractors big.

Wow, it's almost like holding you hostage! You already have $26K in so he feels you can't say no now. Do you have him under contract? Depending on the terms, hold his feet to the fire. Hope everything works out for you.

If you hold his feet to the fire and make him 100% responsible, can you trust his work going forward? Or will he start cutting corners. I would come up with an agreement that's fair to both of you (50/50?) and then not use him again. I think your goal should be to finish this project as successfully as possible and get out with your shirt still on. 

@Lee Huffman  

Having been a builder I have a bit of empathy for the guy. But, as a business owner I have to hold true to my numbers unless the extras were for items that are unable to be discovered in the normal bid process. You should absolutely hold him to the contract, but if you did the other flip with him, trust him and like his work, maybe it's not worth walking away from the relationship for the money you are going to lose. I don't know the answer to those things, but I do know that it is hard to find good contractors. If you want to keep working with him and the project can bear the added expense maybe meeting him in the middle is best in the long run. 

Either way, I'd have my attorney look over the contract immediately so you can get your ducks in a row for the next discussion and so you have a legal opinion about your rights in the event things get ugly.

Lastly, take lots of photos of the current condition ASAP so you cover yourself in case the job gets "altered" by a miffed contractor. 

@Lee Huffman  From my standpoint as a contractor, it is my responsibility to make sure I give a correct number to get a project completed. There are times when I may forget to add some sort of material, or extra labor that my be involved that I forgot to account for, but that is my problem. In my bids I state it will cost $XXXXX to complete x, y, and z. On the other hand, I do have a note in my formal bid that says project time and cost may change with unforeseen site conditions. For example if we open up a wall and there is rot or insects that may change the price of the job. It kind of depends on what the contractor is charging you for.

I have seen contractors try to price gouge customers for many reasons and a lot of the time its the contractors fault. Either they wanted the job bad so the low balled it, hoping for the best. Or they are a contractor that never makes any money unless they change order the heck out of the customer. 

I would mix @Ibrahim Hughes  and @Marshall Downs  suggestions and first see if you and the contractor can come to what you feel is a " fair " agreement. If nothing can happen in a reasonable time, call an attorney. One note tho, no one wins in a pissing match.

As a previous home builder and remodeler, sometimes the numbers are truly hard to figure. Rehabs can be especially trying because of what is unknown.
On my first rehab my realtor was telling me it would take $15k and I thought $20k. I did tons of the work myself and it ended with a total of $38k and I didn't do anything fancy. What I learned from that experience is to be sure and buy low and add a certain percentage over what you expect the repairs to be, say 15%.
Much like the advice of others I would simply sit down and have a conversation about how to move forward. If he is a quality guy he will feel horrible about what has happened. If that's the case simply see if he is willing to work for a lesser rate. I know that I would personally work for free and have you pay the material costs to get it finished. Relationships are that important to me and hopefully he has learned something from this project as well.

Curious if you used him on the other project you mentioned?

Good luck.

Thank you all for the very valuable feedback and suggestions!!!  I'm certainly trying to avoid a pissing match or turning it into a bad situation, especially since there's still work to be done to get the house finished.

I live in California, and the project is in North Carolina, where I have some family.  So, I rely on getting multiple bids to ensure that nobody is underbidding by a wide margin.  His bid was $26k and the other guy's bid was $28k --- so not a big swing.  We didn't choose the other guy because he was already selected on our first project, so we thought we'd diversify and try out 2 contractors.  Both guys have done several jobs with our realtor, so everyone's surprised that it has come to this because it is out-of-character.

I've asked him to go back through his numbers and to talk to his subs to see if everyone takes a bit of a haircut, we can all get out of this without any one person taking the brunt of the goof-up.

I'm hoping he is successful in cramming down his subs without cutting corners.  I'll be sure to update this post to share the follow-up!

Thanks again everyone!!!

Lee

You only got 2 bids?

Why would you want the contractor to take a hair cut?

Joe Gore

In the past when I was putting contracts for bid I made it clear that one of the terms was that the scope of work defined had to be done for no more than 10% over the bid price, and that went into the contract. Bid high if you want to risk not getting it, but don't try to put one over on me by bidding low and billing high.

Sure, there are unexpected things on a rehab, but those get priced separately. He needs to know the cost of doing a job, or he is in the wrong business. That said, I personally would consider whether there is room to split the difference with him. If not, he screwed up, not you. But it also comes down to what the contract says about overages. You may be obligated to pay, or he may be obligated to eat the loss.

Originally posted by @Joe Gore:

Why would you want the contractor to take a hair cut?

Joe Gore

 Maybe because he set his price, and the deal (and it's profitability) were based on those numbers. If there is room in the profits to go higher I agree that is how it should be, but if not then it was his mistake and a contractor needs to know how to price a job.

I agree if a contractor is in business, they should be able to give a correct price on work to be done, but you will have investors who want the contractor to pass on the discount they get at Home Depot, and most investors want contractors to work for nothing.


Joe Gore

Thanks @Joe Gore .  While he and I were talking, I told him that I relied upon him that his bid for the work listed was the correct number.  I said that I don't go to HD, Lowe's, or contractor's warehouses to verify his numbers... and if he had overbid and there was more profit, he wouldn't have refunded money because I agreed to pay $26k for the work to be done.  This was not his first job... and my realtor says that he has done many rehabs with him in the past and this the first time there has been this kind of issue.

The 2nd estimate (from the other contractor we didn't pick) was only $3k higher for a very similar list of items.

@Walt Payne  thanks for the suggested language for the next deal.

Overall, I'm not disputing the additional work performed that we didn't anticipate (upgraded electrical panel, replace sewer line, replace copper pipe under house, replace rotted kitchen sub-floor) and that amount is in addition to the contract amount.

We went from contract at $26k, minus $6k adjustments for downgrades/work not performed to stay closer to budget, plus $11k additional work = $31k.  He is now saying that the job should be $40k... and the difference is that he said he underbid by $9k, which I don't buy because the other guy bid $28k (the other contractor did our other rehab house without any hitches).

I am a contractor , I have bid jobs and screwed up , and it cost me money , its part of the education . But I finished the jobs and didnt complain to customer that I needed more . And I have bid jobs that went better than great and made very good money on , and I certainly didnt give any back . 

The items you deleted were probably higher profit items than the other work performed , things happen , it sounds like the contractor was still making money , but not what he expected , well that happens sometimes . I have lost , broke even and made money on jobs , but I have always finished the job .

@Lee Huffman  Did you do a house inspection on this property before you purchased it?

The reason why I ask is with things like an electric panel, replacing coper, and even the sewer line, those should all be known in the inspection. If they were noted in the inspection I'm assuming you gave a report to your contractor... in turn should have no reason to not include those in the bid. The rotten kitchen floor on the other hand is harder to detect.

Did the contractor try to upsell you on those items?

Just my two cents

In the past I've paid for the extra materials but the contractor had to eat the labor.

@Matthew Paul  thanks for the perspective from "the other side".  I didn't choose which items to delete from the original estimate.  Essentially, when additional items started popping up (ie: sewer, kitchen subfloor), I asked the contractor if there were some adjustments we could do to the original estimate so we could stay closer to the original estimate.  He suggested laminate vs. tile, stone vs. glass backsplash, etc.

@Cole Walker  we didn't get a formal inspection of the property.  Some items, of course, you'll never realize, and for those I have taken responsibility and am paying for.  But others are fairly basic and should have been caught.  For example, looking at the electrical panel and noting that it needed to be upgraded to 200amp.  Even with that, I begrudgingly signed off on as an add-on that I am paying for.

The big issue is that, for the itemized list of repairs we agreed to, the contractor underbid on those items.  The additional work is not part of the issue.

I'm still waiting for his reply to my email on Sunday night... I'm giving him time to think it over and reach out to his subs.  Hoping to talk with him later today.

Try to work things out because you don't want the contractor to put a labor lien on your property. 

Joe Gore

Good point @Joe Gore .  I'm just going to pay him, then work with an attorney to see if it is worthwhile to pursue after the fact.  I just want the house done and listed to get my equity out.  Dealing with this can wait... I have enough written evidence between our conversations that should put things in my favor.  However, depending on how the deal works out in the end, I'll probably just drop it and take it as a lesson learned.  The time, effort, and drama involved wouldn't be worth it... and only the attorney's would win.

Did you at least try and negotiate a compromise with him? That would be more than fair on your end, and I suspect most contractors would be very grateful for that rather than eating the entire cost themselves.

Here's an update to our situation... the home sold in January 2015 and we made a small profit, even after the contractor overbid.

We have tried several times to settle with the contractor, but he has barely responded, if at all.  His last response was that "he prayed on it and decided not to accept our offer to setttle."

So, I filed a small claims action against him on Monday, and our court date is in 5 weeks.  In NC, the maximum small claims amount is $10,000, which will just about cover everything.

I'm pouring over old emails, pulling supporting documents, and creating a timeline to show the judge (magistrate) to prove our case.  Wish me luck!

@Lee Huffman I just noticed that you tried to tag me in your original post. The tag feature didn't work, so I never saw this. Glad to hear you have settled on a course of action, and I hope they find things in your favor. What's as the address of the rehab? I'd love to be nosey and look it up in MLS :)

Hi @Dawn Brenengen , I'll message you the rehab address.  Thanks for reaching out!  I'll have an update in a month after the court date.

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