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.
- The cost of the work was underbudgeted by the contractor.
- The contractor let the scope of the work creep to include higher costs but did not properly document change orders or alert the owner.
- The owner had an unrealistically low budget in mind and convinced the contractor to attempt to do all this work for the low budget.
- 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.
- 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.
- 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.
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.