Our Contractor Has Spent All the Money and We’re Only 65% Done, What do we do Now?

This is a phone call I get often in my work as an owner’s representative. While it seems like a very dire situation it actually is solvable, and it is possible to reach a positive end result.

The initial fear for most owners is that they have been ripped off by either an unscrupulous or unqualified contractor. But the reasons for this situation are actually more varied. Here are some of the common issues I encounter when I am called in to projects that are well underway but in trouble such as this.

  1. The cost of the work was underbudgeted by the contractor.
  2. The contractor let the scope of the work creep to include higher costs but did not properly document change orders or alert the owner.
  3. The owner had an unrealistically low budget in mind and convinced the contractor to attempt to do all this work for the low budget.
  4. And then of course there are times when there is the unscrupulous contractor who has sought to deceive the owner by entering into the work with a low initial budget while expecting to make it up on change orders.
  5. Finally there is the unqualified contractor who took on a project that he could not manage properly. Often this type of contractor has demanded deposits or payments higher than the work done to date.
  6. So what do we do in these situations?

Cost of work underbudgeted

For those projects that were under budgeted to begin with, a knowledgeable owner’s representative will be able to ascertain what a realistic budget should have been at the beginning. As the Owner’s Representative, I work backwards, and then advise the owner that this is the case and mediate a solution where the contractor can finish up the job at a discounted fee while the owner pays a fair cost to get the work done.

Scope creep and change order misunderstandings

This situation is especially difficult to solve, when the scope of work increased without acknowledgement from the owner. Retroactive charges for change orders are difficult to add to the budget for fair payments. Emotions are high, and blaming seems to be the answer. When there is tension between the owner and contractor, and a mediator is important to keep things clear.
It is typical (and understandable) for owners to only remember a small portion of additions to the scope of work. Of these the owner may remember only the core item but not all the ramifications of that change. Clearly communicating changes and their financial ramifications is one of the key ways an owner’s representative works to bring success to both the owner and contractor.

For example: “We just added air conditioning”
What was not documented was this also meant upgrading the following:
Electrical to supply enough power to the furnace coil and the condenser.
Walls had to be opened to run the copper fluid lines and wires from the fan coil to the condenser.
Walls had to be opened to enlarge the ductwork and move it up high on the walls.Construction project manager owners representative marin - 36

Unrealistically low budget

If the project got started with the owner pressuring the builder to accept a low budget, then we have to start questioning the intentions of the owner. Since the owners can typically control the flow payments to the contractor, the owner really has the upper hand. But forcing a low budget sets unfair and sometimes impossible demands.

An owner’s representative that is knowledgeable and fair can discuss the work with both parties and determine what is a fair payment for the work done.

The contractor who intentionally bids low

If it becomes apparent that the contractor intended to extract more money from the owner after signing the initial contract, then we need to be harder on this contractor. An owner’s representative can authoritatively state what cost should be for the work performed, then show proof that the contractor intended to raise the cost.

Since the relationship will by now be soured, the best option probably is to end the contract and hire a new contractor to finish the work. An experienced Owner’s Representative can take over construction as the Project Manager and either see it through completion, or set it up for a new contractor to take over.

The unqualified contractor

In the case of the unqualified contractor who took a job way over his ability, termination is often the best option, and the sooner the better.

The owner’s representative can advise the owners through this difficult process that requires:
Determining if any sub-contractors or and suppliers still need to be paid.
Getting lien releases from all major subs-contractors and material suppliers.
Studying the contract between the owner and contractor and advising the owner how to follow the procedures outlined in the contract, such as a 10 day notice letter
Give notice to the contractor to stop all work and not enter the site.
Secure all materials stored on site, so that any expensive equipment such as windows or appliances cannot be “repossessed” by the contractor.
The owner’s representative can attempt to mediate a final settlement. If this is not possible then an attorney can be brought in, with the owner’s representative providing all the relevant information to the attorney. Since these cases seldom go all the way to court, the advice of a knowledgeable owner’s representative is crucial in determining an outcome that allows the owner to be able to continue with a new contractor and complete the work.

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Key Benefits of Having an Owner’s Representative on Your Project

In addition to serving as a mediator between all parties, I use my decades of custom home building experience to make sure the critical steps of the process are managed correctly.

Sometimes I speak to clients who think, “I can do this myself, or I can count on my construction team to do it collectively.” Unfortunately, we often have these conversations much later, when they call for help after the project has entered hot water. So what can you expect from an owner’s representative?

Put simply, the crucial tasks of the Management Contract for an owner’s representative are to:

Keep budget in line

The owner’s representative is given the responsibility of monitoring and advising on design choices as design evolves. The owner’s representative will provide preliminary cost estimates for options being considered, looking at the repercussions of design and building choices.

Why this matters: Seeing into the future impact of changes requires cross-functional knowledge, because seemingly small changes in design or materials have long-term impact. This work supports designers and builders to work together and avoid surprises.

Ensure value engineered drawings

The owner’s representative works with outside consultants such as structural engineers, lighting designers, mechanical/heating designers, and interior designers to ensure that there is coordination and value engineering between these consultants and the architects.

Why this matters: In a word, communication! Things can get lost in emails between teams, or in the owner’s inbox. When there isn’t one clear point of communication, decisions can get lost, muddled, duplicated and override without anyone noticing until much later.

Ensure timely approvals

The owner’s representative manages the process of submittals and meeting dates for government agencies such as Planning and Building Departments. The schedule is set with the input and agreement of architects, and modified as needed to meet the client and architect’s design process.

Why this matters: Nobody wants to go through multiple review rounds to pass approval of Design Review Boards and government departments, yet it happens! This is a tremendous waste of time for everyone, and it can be heartbreaking for a client to fall in love with a design only to hear that it fails to meet local regulations. This is an important step not only to stay on budget and on time, but also for team morale. (I’ve spoken before about the importance of local knowledge when building in the Bay Area—here’s my recent article.)

Before starting a custom home project, gather your team together and ask who will be responsible for these three elements. If you see a lack of clarity or confusion, you know exactly what an owner’s representative can do for you.

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CAN A CUSTOM HOME BE BUILT WITHIN A BUDGET?

Yes, definitely, but it must follow a process that gives the owner control, accountability, and a roadmap with scheduled reality checks.

How?

The owner needs one person in charge of the entire process, to monitor the budget and ensure the groups communicate and work in harmony.

Who would that be?

The owner’s representative. This type of role is common sense in other types of projects, and it’s no different with a custom home project.

Why would this be an improvement to an already complex group?

Some owners have the time and skills to oversee their own construction project, including watching the budgeting and change orders, making in the moment decisions around materials and staff, and thinking through the long-term implications for every course adjustment. If the owner doesn’t have the time and skills, they’ll want a construction expert on their side to oversee the process, from the start of design to completion.Construction project manager owners representative marin - 27

The problem with custom home building today

The typical process for building custom homes is stressful for everyone, especially when the budget starts to spiral out of control and the choices pile up. That’s because there are many different parties working on the project, but communication between them can fall apart.

A convoluted, expensive project that goes over budget and over deadline hurts all involved, including owners, realtors, designers, and good builders. No one group feels at fault or fully understands the situation, but everyone loses.

This can be fixed. Any major project needs team-wide accountability and a start to finish process that is clear to all, with controls and reality checks at scheduled times and as the design evolves. This is what an owner’s representative does. And all the team members benefit! An owner’s representative works on behalf of the owner, but helps support the work of architects, builders, and other parties to complete the shared vision.

Design and budget conflicts hurt everyone

The all too common result of custom building is an unpleasant and stressful situation for clients who find themselves with building plans that significantly exceed their intended budget. This tends to happen mid-way through the project, when the owner is forced to decide whether to make compromises to the design (which they have now grown emotionally attached to), or to cancel the project. Design changes usually lead to a reduced quality of materials, or looking for cheaper labor options, both of which lead to bigger unpleasant experiences and long-term home problems.

Bay Area custom homes are unique

Home owners in the Bay Area benefit from many environmental regulations to keep our environment safe. Marin and the East Bay also have a number of local regulations around open space, view obstruction, and other local guidelines. Finally, Marin Design Review Boards may have additional preferences or requests in order to approve a project. This is local knowledge that not all builders and architects are familiar with, and review can become a complicated process with several rounds of revisions.

If the building team is not familiar with California zoning and environmental regulations for custom homes, there can be additional late-stage changes and delays. At best, there will be missed opportunities to build an environmentally friendly home and save on long-term expenses by using appropriate materials.

One of the great benefits of building a custom home in the Bay Area is the diverse and beautiful building sites, but owners need someone who is familiar with the area, including the environment and review boards.

A solution for custom home building in the Bay AreaConstruction project manager owners representative marin - 65

West Coast Project Management offers a complete construction project management service, guiding the process from the beginning of design to final construction completion.

After decades as a custom home builder in San Diego, California and the mountains of Telluride and Aspen, Colorado, Richard Wodehouse has the expertise and complete project knowledge to guide even the most unique and complex custom homes to completion.

Richard’s methodology is successful because of his continuous monitoring of the budget, expertise and support for builders and architects, and deep knowledge of custom home projects of all types.

When to call West Coast Project Management

We can facilitate at any stage of the construction project, but it’s best to start from the beginning. The design is when most of the budget will be set, and when structural decisions will be made. That being said, West Coast Project Management is often called in mid-stage to help. Contact us to see how we can help make your California dream home happen on schedule and end with a positive outcome for all.

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If You Want Confidence You Have a Good System in Place When Building a Home

By hiring me a your owner’s rep early on in the process you can be assured of having a great process that will give you peace of mind and save you lots of money during the entire construction process. (And design, if you bring me in early enough.)

Here are four duties I can perform that will give you confidence that you have a good system in place:

1. Verifying that the Budget is appropriate and sufficient for the planned work.

  • Become familiar with the plans and specifications
  • Analyze the contractor’s budget line by line item and compare to others
  • Comparing the budget values for costs compared to the proposed construction schedule

2. Vetting the contractor

  • By checking on his financial and professional standings
  • Inquire and verify as to his/or her’s commitment and availability for this project
  • inquire and vet the key management and support personnel. (If any)
    • In the case of the one man contractors:
      • Establish his/her experience, knowledge and skills
      • Establish what systems if any will be used for budget and schedule management.
    • If needed, supplement contractor’s capabilities with Owner’s rep’s systems for tracking budget
    • Create and update our own schedule.
    • Verify with contractor that key steps such as site utilities are planned for.

3. Vetting the major sub-contractors and verifying they can fit our construction schedule.

4. Verifying plans are complete and all permits are processed

Here are other tasks I can perform during the construction process:

  • Create preliminary schedule for the entire process from design to move in
  • Ensuring, building and design remain within budget
  • Substantiate Status of permit processing, facilitate as prudent.
  • Verifying that the Budget is appropriate and sufficient for the planned work
  • Analyze the contractor’s budget line by line item and compare to historic data
  • Comparing the budget values to the proposed construction schedule duration. (e.g: is supervision enough)
  • Review all plans and specifications
  • Review all contracts with all subs and owner paid consultants
  • Compile budget encompassing all hard and soft cost envisioned for the entire project
  • Keep all encompassing budget up to date
  • Work with contractors, and designers to provide detailed construction schedule
  • Keep construction schedule up to date
  • Weekly site meeting with Owner’s Rep and Builder.
  • Twice monthly meeting with Owner’s rep, Architect, Contractor (owner invited to all key meetings)
  • Substantiate all temporary and permanent utilities are planned for
  • Additional subcontractors recommend as needed
  • Green building features and materials suggestions
  • Review and negotiate proper change order issues
  • Giving options to the design team when needed to potentially save money, including alternative construction techniques, and reviewing other areas of cost saving.
  • Scrutinize all invoices, explore questions in invoices and approve proper invoices.
  • Managing final close out at completion:
    ▪ Collect all lien releases
    ▪ Collect all warranties
    ▪ Manage final payments to subs and contractors
  • Prepare Operating Manual for owner’s future use and maintenance with emergency preparedness.
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Sonoma County Fires Will Cause Scarcity of Contractors and Subs

We feel deeply for all those that suffered tragic loss in Sonoma and Napa this October 2017. One of the many unfortunate outcomes is that the construction industry in Northern California including the San Francisco/ Bay Area will become stressed even beyond the overheated conditions we have currently.

Even more than in the present contractors and subs will become difficult to acquire and more costly. There will also be material shortages and price hikes.

As your plans for your rebuild in Marin, Sanoma or Napa County get developed consider hiring and securing as many subcontractors and large materials as you can purchase.

Napa & Sonoma County Fires 2017

Napa & Sonoma County Fires 2017

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