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Question DetailsAsked on 5/14/2016

Our Gen Contractor went 48% over the budgeted amount without notifying us when we hit the budgeted amount. Normal?

We contracted for a few renovations in a building we are renting. We have a detailed estimate which came to around 43k. The contract states "The Costs and Management Fees is budgeted at $45000. This is based on Estimate 893." During the renovations, in order to get the job completed by when we needed, we told the contractor to forget about a few items -- totaled to about $1700 of the estimate amount. Now the contractor is saying the cost for the job came to over $64000. He never notified us he had reached the budgeted amount, and we do not see how he could have gone that far over budget doing less than what was on the estimate. So, what % of overage is normal? The amount he has quoted is 47% over the amount stated in the contract.

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1) you probably don't need me to tell you that for any substantial work, and certainly that large an amount, you should have had a signed contract with either fixed bid price (best), or if forced into going with an estimate because scope was not definitive or could not be exactly determined at contract time (say there was unknown amount of bedrock excavation or unknown amoutn of rot or termite damage to be replaced, or unknown costs on to-be-determined specialty items or special orders) it at least should have had terms in the contract stating that any increases in cost or changes in scope required an approved change order before they are started, how change order or overrun requsts were to be processed, and also that it was the contractor's responsibility to inform you promptly at any time if he foresaw or expected the project to be exceeding budget. Not saying this is necessarily the case here, but far too many contractors are taking jobs started based on an estimate as opposed to a firm bid as a blank check to run wild with the costs - be they legitimate or not.

2) when changes were made, there should have been a signed Change Order stating the change in scope and the cost adjustment (plus or minus as applicable)

3) 47% over is very excessive in general (5-15% is considered a "normal" overrun/underrun range for ordinary type work, so your 5% budget allowance was probably a bit on the lean side for the normal case unless a very straight-forward job), especially without prior warning. The nice thing is you do NOT have to automatically accept his numbers. Tell him (opreferably in writing so it is documented and so he knows you are serious) that he is way over estimate, so he has to provide proof of good cause for the overrun. That would be proof of manpower costs and materials and subs and overhead and all other costs he incurred (including negotiated profit/management percentagae or fixed amount fees), PLUS documentation/proof that the overrun was beyond his and his subcontractors control, not just due to poor estimating or slow progress. (Below on justification issues). Then you compare the individual costs for the total job against the estimated costs - and items that cost LESS than the estimate constitute a credit to you, so you are looking at total estimated cost versus what he is claiming and whether that is justified or not. He should be justifying his TOTAL project cost for all items, NOT just the overruns, because you should be getting the credit for any underruns not just pahying for overrun items. IF he argues that if he underruns that is his benefit and part of his profit or makes up for jobs where he overruns, then that makes it a firm bid situation and tell him if he is getting the benefit of individual work item underruns, then he also has to absorb any overruns that are not covered by an approved change order so the total payment should be the $43K minus the $1700 change order (approximate numbers - use real exact numbers of course).

BTW - taking the $1700 reduction in scope into account, he is 55% over budget, not 47% - $64,000/($43,000-$1700) = 1.55. Or if you are giving him the benefit of the doubt for the $43K estimate versus $45K budget (which was abnout a 5% overrun contingency I presume), then $64,000/($45,000-1,700) = 1.48 - the 47-48% overrun you are talking about, but the "overrun" is really that above the $43K as adjusted for change orders, not from the $45K contingency budget.

Justification of overruns - normally a contract spells these out, but generally if it is under his or his subs' control then overruns would not automaticlaly be considered acceptable. If due to change of conditions once the work started (hidden and not reasonably anticipated conditions like unexpected bedrock, unmarked tanks or utilities, hidden rot or termite damage, etc especially), highly unusual weather conditions, supplier strikes or plant fire or such disrupting schedule or making planned materials unavailalbe at estimated cost, request for changes or delays caused by you, and similar type unanticipatable situations would generally be at your expense and a legitimate charge unless the contract assigns that risk elsewhere. Then a lot of gray areas in the middle that could go either way - generally in a court it comes down to whether the job COULD have gone as he planned or if there were conditions beyond his control (and sub's work is generally considered under his control, but say death or longterm illness of a key worker or planned sub would not, for instance). This is why contracts are so important - though in practice they generally do not do so for remodel and repair (as opposed to new home construction) jobs, they should spell out how responsibility for various types of unplanned events or conditions are allocated between the contracting parties.

If you are not able to come to a reasonable agreement, then arbitration is a possibility, or if you are going to stand pat because you think he should have been able to do it for the estimated amount (as adjusted by any agreed upon change orders) then you have the choices of letting him sue you or file a lien and then challenging that, or calling his bond to force completion and issuance of his and subs and supplier's lien releases and warranties (if any) at the contract price originally agreed upon, with the bonding company dealing with him on the overrun issues (generally meaning the contractor gets stuck with no overrun payment).

Here is a related issue previous question with response which might be of interest too -

One last thought - you said "renting" the building - hopefully you are straight with regard to landlord approval (usually renter improvements require landlord preapproval) and whether you are getting any rent credit for the work, because generally unless agreed to in writing by the owner in advance, any renter or leaseholder improvements automatically become the property of the landlord without any payment or credit to the renter - and lacking a specific agreement, he can also require that you return the property to original move-in condition when you depart, or charge you for that.

Answered 4 years ago by LCD

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