Dealing in real estate involves vision, hard work, and patience. If you have the ability to look at a project, figure out how much it will cost to make improvements, and wait for your vision to become a reality, you stand a chance to make five-figure gains–if not more–in real estate. The problem lies when all of those projected gains get erased by contractors who go over budget.
When contractors go over budget, it is best to have a direct and clear line of communication with the project manager. While it may feel difficult to remain civil when you feel like you are out thousands of dollars, clearly stating your area of concern increases the likelihood of getting some satisfaction.
Going over budget for contracted projects is a messy scenario. Both parties are likely to be justified in their positions, and equitable solutions may not be attained easily, if at all. Therefore, throughout the course of a project, open and honest communication is paramount in ensuring that everything is going as scheduled and no unexpected charges arise.
Contracting Budget Basics: Quotes vs. Estimates
When hiring a contractor to do a renovation, you are going to want a solid idea of how much the bottom line will cost for everything. Before work begins, the process for arriving at a final cost will look something like this:
- Set a budget – before reaching out to contractors, decide how much you are willing to pay for a specific renovation. Get your actual number in mind, but be sure that you are willing to go about 20 percent higher than your budget to account for any surprise overages
- Research contractors – through references, project postings, and searches, you will want to get a pool of candidates capable of performing the work you require
- Describe your project – when talking to prospective contractors, you will need to provide as much information as possible: area of the room, its current condition, and your vision for what it will look like when finished. Have prospective contractors come and look at the area before beginning work, if at all possible
- Wait for the contractor – using the information provided, the contractor will consider all factors, such as materials needed, time to completion, how much help he or she needs to add on, and any special licenses or permits necessary to start work before giving you an idea of what will be the final cost of the project
When presenting you with the final cost, contractors will present you with one of two documents: a quote or an estimate. While the difference between the two is subtle, it is important that the client understand which one he or she is dealing with prior to breaking ground on a project, as it will influence how a budget overage will be dealt with.
Quotes are a formal offer as to the final cost of a project to be performed. This will break down each line item in terms of its individual cost and provide a bottom line for the cost of everything.
Quotes are signed by both the contractor and client and typically must be paid before work begins. As such, the contractor will receive the quoted price for the service provided, regardless of whether the final cost ends up being more or less than the quoted amount.
Estimates are detailed guesses as to what the final cost of a project will be. Like quotes, estimates will provide line-item costs and a bottom line for the client.
While contractors try to be as specific and accurate as possible with their estimates, there is nothing binding when a contractor presents a client with an estimate. The final cost that the client pays may end up being significantly more or less than the initial estimate.
Most experienced contractors use estimates when presenting budgets to clients to allow themselves more wiggle room in the event of unexpected overages.
In the event that an estimate evolves into a quote, a good contractor will likely include language that allows him or her to collect for any unexpected overages in the event that they arrive.
When considering quotes, estimates, and/or contracts, there are a few best practices to remember:
- Be specific – as the old adage goes: “Aim small, miss small.” Even if you need a lot of work done, try to get your quotes and estimates broken down as specific as possible
- Give it some time – while you are anxious to get to work, make sure you take plenty of time to review your offers and understand what comes with each
- Be wary of low offers – if you get an offer that is substantially lower than other estimates, this may be a sign that a contractor is just trying to win your bid and may have difficulty staying within the budget
Factors That Cause Contractors to Go Over Budget
While it is never a desirable situation when a contractor goes over budget, clients must keep an open mind that overages are a real possibility when undertaking a renovation. By understanding why a project may go over budget, customers will be in a better position to deal with the situation when an overage actually arrives.
Additional Labor Required
This is by far the most common reason that contractors go over budget. Whether it be more time required than expected to finish the project or additional workers needed to be hired to get the work completed on time, extended labor costs are very common issues that can cause a contractor to go over budget.
Previous Condition Worse Than Expected
This is related to additional labor costs because when a property is in an unforeseen state of disrepair, it will almost always take longer and/or require more workers than additionally expected.
You will most commonly see this when remodeling a bathroom. While a contractor may be able to place an estimate for what he or she sees, the cost can skyrocket when removing toilets, sinks, or bathtubs and discovering that the underlying plumbing needs to be overhauled, as well.
Unforeseen foundation issues can also present elevated costs when contractors are hired to work on items such as siding or drywall.
High Cost of Materials
Material costs will probably not fluctuate much for small projects, and even if they do, they are not likely to influence the final cost of the project in a way that will make a substantial difference.
However, when contracting out for major projects, such as the construction of a subdivision, that will take months or years to complete, the price of materials can come into play.
Items such as oil and lumber prices can fluctuate enough that when required in large quantities, they can greatly impact the bottom line if a predetermined rate is not set prior to breaking ground on the project.
Special Permits/Additional Contractor Required
In this situation, the contractor hired runs into a case where he or she cannot legally do the work required.
This presents itself frequently when dealing with electricity and wiring of a house. If a contractor is working and realizes that wires will need to be manipulated in a way that would violate fire code, then a trained electrician would need to be brought on in order for the project to move forward.
What to do When Contractors Go Over Budget: The Steps
Despite your best preparations and extensive communication, the undesirable has transpired, and your contractor has gone over budget. There are a number of steps you can take that can potentially help you stop the bleeding and make you more comfortable with the work performed.
Define the Issue
When starting a renovation or major project, it is best to be as specific as possible. That way, when a problem such as an overage arises, you will be able to get to the heart of the matter more easily.
As such, when dealing with a contractor who goes over budget, it is not a good idea to simply ask, “Why did this end up being so expensive?”
A better approach would be to review the initial expectations, discuss with the contractor where the project went off course, and review how that resulted in the higher cost. In doing so, you may be able to identify unnecessary costs and get the contractor to reevaluate the bottom line.
Talk with Prominent People
When a project goes over budget, it is best to only involve the key decision-makers in the conversation. Whether he or she is at fault or not, the contractor is likely to take pride in his or her work, so creating a scene in front of the employees or hired help is likely to cause the contractor to mount guard and be less willing to admit to any mistakes.
If you discuss the issue in a controlled manner with only the contractor and other project decision-makers, you are much more likely to arrive at an equitable solution.
Discuss the Facts
People are protective of their hard-earned money, so it is easy to get your ire raised if you feel like your money is being unnecessarily spent.
Therefore, it is important to talk about the facts when looking at a project that goes over budget. Even if you do not understand why a certain task was performed or why it cost so much, make sure that everything is on the table in the following manner:
- Make a list – get on the same page with your contractor as to the work actually performed and what the exact cost was for each item
- Ask why – get a specific answer from the contractor as to why a specific action was performed, especially if the action was not in the original plan
- Ask if – ask if the work performed could have been performed in a more economical manner
- Ask how – find out the specific ways in which the work performed adds value to the project
Now that you know exactly what happened to cause the project to go over budget, both parties will be able to rationally discuss any options or alternatives.
Although you are proud of your money and property and have a specific vision for your project, it is important to remember that there is a reason you contacted a contractor to do the work for you: You are probably not an expert.
While there are undoubtedly a few contractors out there who try to cut corners and take advantage of situations, the vast majority are honest professionals who are highly skilled in their areas of expertise.
If you carefully listen and try to understand their logic, you may be more comfortable that the higher cost will ultimately be in your best interest.
Ask About Options
Many times, with high cost, comes high opportunity. If you find your project running over budget, there are a few items you may want to consider asking your contractor in an attempt to maximize value:
- Labor rates – some line items in a renovation, such as the cost of materials, are pretty non-negotiable. While the time of a professional contractor is certainly valuable, you may be able to save a little money by negotiating to the effect of, “Hey, I know your rate is usually $XX per hour, but since it is taking longer, do you think I could get a little break?”
- Bundling – if you are happy with the work the contractor has performed, but it is just more expensive than you thought, you may ask, “Hey, since this project ended up being a little more costly than we originally thought, do you think you could give me a discount if I bring you back to do some future work for me?”
- Going even bigger – if you are unhappy that a contractor went over budget, you may not feel like spending even more. However, as renovations are meant to add value, a more costly renovation is likely to open the door to make a project even nicer than expected, so if you are in a position financially, ask about luxury additions
Don’t Place the Blame
Even if the contractor has completely missed the mark or made an error, avoid getting hostile and threatening him or her professionally. Again, contractors certainly take pride in their work, and even if the project is not going along the path you expected, it is best to work together to get it back as close as possible to the original plan.
At all costs, you want to avoid a situation where you back a contractor into a corner, and he or she feels compelled to leave the project halfway and/or perform inferior work that will require you to start from scratch with someone else.
Review the Quote or Estimate
Before presenting your contractor with the issue, make sure you have thoroughly reviewed and completely understand the contract in place. Did the contractor provide a quote or an estimate? If it is a signed quote, is there language that allows for additional charges to be applied as they arise?
Sometimes, what you thought was an issue or an additional charge may not be in reality. By thoroughly reviewing the initial documents, the answer to your issues may be right in front of you.
As was mentioned, open and honest communication is essential when dealing with a contractor. It is important to stay in the loop with the progress of the project.
Even if you are not sure what is going on and want to trust what the contractor is doing, it is best to ask right away when you suspect an issue may be arising. Do not sit back and passively allow additional costs to accrue and then try to iron it out after the fact.
While there is a chance that a contractor may be irked that you are “meddling” or don’t trust that he or she is doing the job right, it is better to stay on top of the project than to let it spiral into a monstrosity.
Bring in an Expert
If you truly believe that the project is costing way more than it should, you may want to consider bringing in another contractor to take a look and see what he or she thinks.
This is why it is important to choose your contractor from a pool of several options, as it can help keep those performing the work honest throughout the process.
If an outside set of eyes feels like breaking the budget is or was justified, then you can feel better that the renovation was simply bigger than what you initially expected.
If not, you may want to buckle down a little harder and work to find an equitable solution to recoup some of your money while still getting the project finished.
Seek Legal Remedy
The courts are the absolute last place you want to go and should only be considered as a last resort. For small renovations, the cost and time of going through mediation or the judicial process will likely far exceed the overages you incurred from your contractor going over budget.
However, if you are working with a six or seven-figure project and feel like you have proof, beyond a reasonable doubt, that your contractor has been negligent or has broken a binding contract to perform the work required, then legal remedies are something you may want to consider.