Major Contract Cost Bust

[kenmoremmm]

We're building a new home in British Columbia. Started in January of 2022 and nearing the finish line.

The contract was set up as cost plus (mistake, I know). The "conservative" construction cost estimate was ~$720k. Originally it was $625k, but the $720k was an update on the latest set of drawings + material cost increases. As we're nearing the finish line, the cost is $1.02M. We did not add much in the way of custom items - maybe $25k (though we saved on kitchen cabinets by $30k because we did Ikea instead of the local places).

Obviously, not what we planned. Trying to figure a way out of this mess.

Contract states:
Accounting Records: Contractor shall check all materials, equipment and labor entering the Work and shall keep such full detailed accounts as may be necessary for proper financial management under this Agreement. The Client shall be afforded access to all the Contractor's records relating to this Agreement

I had requested that the Contractor provide a detailed breakdown of costs back on April 11, 2022. This would match what he had set up in his cost estimate where it shows line items (drywall, screws, paint, wood, etc) with a "quote" price and an "actual" price. I never got this information until November 22, nearly 7 months later and after the project is largely complete (well, complete enough to live in). I had requested this information a least 10 times throughout the work. We ended up needing a construction loan (weren't planning on it originally) and to close out the construction loan, you need 95% completion determined by the appraiser. We're close to that point based on the bank's % complete chart.

The contract also states:
Pricing: In the event of significant delay or price increase of material occurring during the performance of the contract through no fault of the Contractor, the contract sum, time of performance, and contract requirements shall be equitably adjusted by change order in accordance with the procedures of the contract documents. A change in price of an item of material shall be considered significant when the price of an item valued over $1000 increases 25% between the date of this contract and the date of installation.

To date, we have received no change order. We never authorized anything related to a change order. We have paid invoices as they've come in (which might be a form of acknowledging, but I don't think so). We've held on paying the last 1.3 invoices as this is turning into a contract/cost dispute.

As noted earlier, we finally received the data needed to compare quote price vs actual. I took this info, put it into a spreadsheet, and did some cost comparisons. For items that were originally listed in the spreadsheet along with items that have been added to the 'actual' ledger, it looks like there's somewhere between $130-170k in materials that would qualify as a change order (i.e. >$1000 and over 25%). It's worth noting that "quote" prices originally provided from subs (MEP) turned out to not be actual quotes, but just guestimates by the general contractor; he doesn't get quotes from his guys that he normally uses. Their budgets are truly fucked up compared to the 'quote' price.

Overall, for the project, material costs are ~60% over the budget and labour costs are ~35% over budget.

I have supplemented labour efforts for the past 2+ months straight, working nights from 8pm - 1am. I have 8 years of carpentry experience, several remodels under my belt, and am a structural engineer, so while I'm not a journeyman, I'm more qualified than most of my contractor's employees. I have observed sloppiness, laziness, long breaks, and tremendous amounts of unpreparedness and mistakes. I have notified the contractor of the mistakes and asked about how costs would be handled. He has repeatedly said that he just doesn't bill his time, so that he offsets the costs. I think this is bullshit since there's no way it offsets for material + crew.

At this point in time, he has loosely stated that he will be unable to carry costs any further without payment on the outstanding invoices (basically saying that he's going to pull his subs off the project when they're slated to come in next week to give that final push to get us to 95% complete).

I am not trying to stiff the guy (he lives 2 blocks away and I generally like him as a person), but he has failed on multiple fronts on this project and being $300k over a "conservative" (his words) budget does not work for me. Per his contract, I'm pretty certain we have a decent argument for what is considered a change order and that we are technically not required to pay those without written authorization.

If we don't pay current invoices I'm pretty certain he will pull subs out and leave us hanging. We have given a move-out date for the rental we're in (date provided by Contractor) and have guests visiting for the upcoming holidays. So, we're in a compromised position. Further, if we don't pay, then you deal with the possibility of liens (of which I'm not terribly familiar with) and that'll make securing our loan quite difficult/impossible.

Do we pay now, and then go to court?

There do not seem to be mediators available in town to handle this situation. The next level of escalation in the Dispute section of the contract is to submit to final and binding arbitration in accordance with the laws of British Columbia. We're not Canadian citizens, so I'm not sure if this would impact judgement (we'll hopefully be Permanent Residents soon, but not before the dust settles on this fiasco).

One final note: there were some cash deals involved on this project. I understand this to be not so great for both parties, but probably much more devastating for the contractor. Not sure how this plays into the power dynamic.

I'm feeling really trapped and don't feel like I did anything wrong and that we took many measures to keep costs reasonable (relative term) with our design and with labour and significant oversight I have provided. Seeking help!

[GilesMM]

Doesn't sound like you chose a good contractor since he doesn't have access to good people, can't estimate and doesn't properly manage his projects. You are left with a house you may not like at a cost you hate.  However, the time to manage this is during construction, every single step of the way.  At an absolute minimum, there should have been thorough weekly reviews of cost and quality with the project manager.  Any issues not resolved could then be quickly escalated to resolution.  This way, the contractor is redirected to your expected path for quality and cost along the way, not at the end. What can he do now?  Eat the cost?  Rebuild stuff?

If you are not happy with the product and/or cost (is the house value in line with the neighborhood or do you now own a $1 million house that would sell for $720k?) then you need to -
1) document all your quality complaints on the way and how they were resolved or not.  I hope these were in writing.
2) You saved all the cost complaints until Nov when you get the breakdown, so now you have a documentation of over-runs not allowed per the contract.
3) Sit down with the contractor and present him a concise document of the quality and cost issues you see. Propose a resolution.  Tell him that per the contract he is not entitled to anything not pre-approved by you with a change order ($150k) so that will be your resolution in court if he leaves you hanging.  Demand he address quality now and adjust cost to your satisfaction.  Tell him if he walks that will be further breach of contract and you will have someone else finish it and he will pay.
4) Extend your rental so you can breathe.
5) Who cares if he lives two blocks away? He was happy to screw you, two blocks away.

Good luck!

[sonofsven]

Is it the increased costs from the estimate, or the fact that you didn't receive the change orders detailing the increased costs in a timely manner? I learned early on that change orders were fundamental to the success or failure of a project. Are these CO's legit, just expensive (and late)? Or do you think they are inflated?

I ask because it is really expensive to build right now, some subs and suppliers are guaranteeing their prices for mere days which makes it difficult to get accurate pricing up front. Manufactured items especially are taking a long time to arrive, which leads to slowdowns in other areas as well.

So the fact that the cost of the build increased wildly from the estimate isn't surprising and not evidence of malfeasance of the builder. It is, after all, an estimate. The change orders not being done properly according to the contract is a separate issue, really, and I wouldn't even guess what a fair resolution would look like. From the contractors' point of view, I would imagine his position would be that these are legit cost increases and that you're trying to use a loophole in the contract to get out of paying. Not saying I agree, he appears to be pretty sloppy. And hopeful. Think about what a perfect resolution would look like to you.

My state has a contractors board that regulates contractors and offers mediation, I would think BC would have something similar that you could turn to. Obviously you could hire a lawyer as well. More $$ of course.

I wouldn't pay any more until there is some kind of resolution, you will lose leverage.

Also on liens, again I'm no expert (I've never had any conflicts like this) but if the contractor is not paying the subs then, in theory, they can place a lien against your property. I do know that in my state a host of required documentation has to be done prior to this happening.

Also, if you don't mind sharing, what is the square footage of the home? I'm curious as to the cost per sq ft. A friend backed out of a vacation home build last year when their builder told them the cost had risen to $400/sq ft

[kenmoremmm]

There are some increases in the cost estimate resulting from products we selected. However, there are decreases too that offset that number. The primary driver of the change in costs is quantity of materials estimated, prices of a few items (truss and floor joists), and estimated labour to complete. We preordered as much as we could to offset inflation and supply chain swings. There are certainly some inflationary items in there, but those are 10% or so and you can see the unit price change. However, when the contractor misses that quantity of something by a factor of 3, that's an issue.

He's basically holding us hostage at present. Don't pay and he cancels the subs that need to come in for final finishing. A staring contest. If we stall, and don't lock in a loan, then come early December the Canada fed will increase prime rate again, and then we'll be stuck with a higher loan which will further add costs and one that would never be compensable in a lawsuit.

[waltworks]

I don't know anything about Canadian law, but in the US, this would be a situation where the two of you either need to sit down and resolve it in person, or you will end up spending even MORE money and time to resolve it via the courts.

It doesn't sound particularly open and shut to me, honestly. In your situation I'd take a hard look at paying up (or at least paying up the majority of the disputed money) and calling it a life lesson.

-W