My contractor went over budget, what are my options?

You have a project that you hired a contractor to perform, and he is now over the estimate or cost that was discussed or agreed too. What do you do?

To tackle this question, we should outline the typical courses and how if you approach projects, it can help take the surprise or gouging opportunity away from the contractor.

There are several ways to have a contractor to proceed:

1. Verbal – The contractor gave you a range or even a number that he “estimates” it should be, or even a number with conviction. Then you replied verbally, go ahead.
2. Purchase order – If you accept a written proposal via mail or email and you reply, “go ahead,” and you provide a purchase order number of form for him to sign or acknowledge.
3. Written approval, you replied or signed the proposal provided
4. Contract – Either the contractor or you write up a formal agreement that both parties sign.

So, depending on which way you proceeded with the above four options, here are some options for each scenario.

If you find yourself in what you thought would be a little Time and Material project that for whatever reason has ballooned into a much higher cost than anticipated.

The first step is to ask for a breakdown of the costs:

• Get all material costs
• Get an accounting of time of the personnel
• Get a summary from the contractor why this project had gone far from what you initially discussed
• Ask and get the answer in writing on how this was not known or anticipated prior too

There are several reasons why you want to do this post-audit of the project.

1. You are going to have to explain this to ownership, and the more information you can provide helps your position
2. Getting the contractor to write the narrative of why this was not foreseen or anticipated helps cover your but from being on the hot seat and helps position the negotiation that will ensue.
3. The more information you get may help uncover information useful about how they did things
4. Sometimes there can be an accounting error performed by the contract. They may have overbilled the project.
5. Once you have the breakdown, it can give you points of leverage to negotiate.

Since the project was agreed to verbally, there is no structure for either side. It is a problem for you, but it is a problem for the contractor as well.

Some ways through the process once the information is gathered:

1. Negotiate – With all the information, you know what the contractor has spent (roughly) in hard costs. Depending on the trade, there will be a profit margin of 10-30 percent that is not a hard cost. Start talking about the expenses of the job and the hard costs that were incurred. 

E.I. An electrician did a project, and at the end of the day, what you figured would be a few days, maybe you just thought 2-3 thousand dollar cost. Now you get a bill of $10,000 

You got all the hard costs of the bill, now the profit and overhead are built into most of those time, and material bills, if not they may show it separately.

But for a bill that is 10,000 here is a likely cost:

Material	40%
Labor	30%
Overhead and Profit	30%

Listen, Jack, this project had gone way over what we had estimated for when we spoke at the beginning, It was thought that that the cost of the project would be only 2,000 to 3,000 in total.

Now they will respond that they obviously did much more than the small repair/ project, and the contractor will tell everything they did, justifying their cost, and probably rightfully so.

The contractor will not be happy with this offer since it does not cover the costs of the project, and they would be losing money.

Now your response would be what in some circles of negotiations as an anchor. An anchor is a starting point typically far off from the desired amount of your party. Once it is thrown out, it sets the tone of the negotiations. In this case, we would figure anchor 50% of the $10,000.

This will prompt an argument and explanation of all the costs, generally with intense zeal.

At this point, you can remind them that you are in a tight spot since the money was not budgeted and challenging to get from the owner. Ask the contractor to be reasonable and try and work with you on this problem.

So, the $5,000 offer was rejected, our next offer will move up to $5,950, an increase up to 85% of the desired amount.

Now the goal in this scenario is to get to $7,000 roughly again. The contractor most likely not tell you exactly what the profit margin is, but as we discussed earlier, 30% is a reasonable estimate. While it is not necessarily fair to “hurt” the contractor, but there was a breakdown in communication. In hindsight, you could argue that the contractor should have informed you along the way, but that may not be a fair assessment, and it could be your fault for not setting the parameters. Regardless of failure, you find yourself in the situation, and unless your brother is an attorney that will work for free, the legal system may not be the path you want to go.

There will be more discussion and explanation of costs from the contractor. Simply reply that you understand, and you sympathize with their issues. After hearing them out, you will then explain your problem and the budget issue you both have with this situation.

Now your next offer is 95% of your target figure. Jack I am doing the best I can to get this resolved and make it right for both parties, I checked, and I can see about coming up too $ 6,650.00

If they have either countered higher or still have not been satisfied, this is your last offer. Come in at a number just under your target number, for this scenario it would be,

At this point, we should be close or in the range of covering their costs. In most cases, the contractor will understand even if they are right in what they originally asked for, that the circumstances may not permit them from getting full retail and that getting out of this covering their costs may be the best they can do and move on.

This may not work in all cases, but give it a try and see how it works.

Listen, Jack, I am doing the best I possibly can for you, the best I can probably do is 6,973.00 and throw in some other now monetary caveat. Like I can get you paid quickly or the promise of a future project or referral. Let that sit and see how they respond.

It is essential to have a goal in trying to resolve the issue, it shows fairness in your dealings and that you can prove ownership of your skills and that you handled a tough situation the best way possible.

The techniques I referenced come from several sources I highly recommend.

Never Split the Difference by Chris Voss (former FBI hostage negotiator)is a must-read for anyone dealing with vendors and contractors regularly (at least in my opinion). Check out the following website https://www.blackswanltd.com/

The graduated increase formula is based on the Ackerman System. It is in the book as well but comes from a person named Mike Ackerman, a former CIA operative. Check out https://www.ackermangroup.com/#homehttps://www.ackermangroup.com/#home

https://jonathanvieker.com/ackerman-bargaining/

Purchase order

If you used a purchase order, there might be repetition that may help in the process. If not, then you are very similar to the verbal notice since there was not an option to “not to exceed” in the paperwork.

If this the case, then go back to the first steps, get the breakdown and start the negotiation process.

Written notice to proceed

Check the paperwork and see what is stipulated for agreements and any clauses or information that may help your cause.

Contract

Depending on who wrote the agreement and if it is on a standard template agreement like an AIA (American Institute of Architecture), there may be clauses that help your position in the resolution of the problem. Most times, if there was no written approval or authorization, they may not be entitled to any “change orders” or extra cost without proper notification and permission of those charges. This is where you would call that relative that is in the legal profession or have your attorney take a look.

When confronted with this situation, you need to break this down into parts.

1. Is this legitimate? Did the cost rise because the contractor performed the work, and it was just a communication problem. You never knew or made aware of the rising costs
2. Is this partially the case, but the contractor may be taking advantage of the situation? While there is extra work needed to finish the job, but the contractor is being greedy and or covering his costs, so he does not lose money?
3. Did the contractor just mess up the estimate? In some cases, a contractor figured the job to go a certain way, and when that does not work, they kept going and figured you would understand at the end.
4. The contractor is straight-up just trying to gouge you or take advantage of the situation. This is rare, but it does happen.

Once you have decided which of the 4 your contractor is in will help you with how hard you plan to be in the negotiation. If they are outright trying to take advantage of you, then you may put up more of a tight line on the extra charges.

Pro Tip- In some cases, Property Managers can be defensive about these situations because they feel it is there fault, it may or not be. One thing to help bolster your position or help with ciphering the info is to get a second opinion from another contractor. I know this may be hard, but it can help. Ask another contractor if you know of one and get their overall advice on the situation. They may take the opportunity to trash their competitor, but usually, there is a nugget or two in their perspective that can help when you are negotiating, and you will need all the info you can get your hands on to get an edge. In most cases, a contractor can share rates of what time and material would cost, and that can help immensely in trying to get to a good end number to shoot for as well as the anchor.

If it is justified and legit, you can take more of a collaborative approach and try to find out of the box options.

Out of the box options to help in negotiations:

1. The promise of more work. Ultimately you are the customer, and they probably felt like they did an excellent job and want to keep you as a client. Even if this may not be a winner of a job for them. If they feel that in the long run, it is valuable to make money from you in the future, it can be a useful leverage tool to help them be amenable to taking less than what they originally asked for.
2. Payment terms. Since the contractor has already put out the money, it is money spent. By offering quick payment for the job does have value to the contractor so he can take care of his obligations.
3. Referrals – Most contractors are always looking for work or know they will, at some point, need work. By offering yourself as a referral, they can count on again does carry some weight. If you want to take it up a notch, you can provide a letter of recommendation or even make a call or two to folks that they may be trying to get their foot in the door with. 
4. Do you have a website, Newsletter, or association that you are involved with? Along with number 3, you can further spread the word by advertising this company on your company website or highlighting them in your Newsletter or even possibly paying for an ad with the association you are involved with. These are options to throw in with your monetary offer to try and sweeten the pot for the contractor that may not cost you much of anything.
5. This is another step out of the box and would take some investigation. It is an old way of doing business, bartering if this is a contractor that you like and would like to work with in the future, they may have a need that you could help with either right away or in time. It could be storage, contractors from time to time may need storage of equipment and material. If you have unused space at your property, it could be another value add that could help offset direct money. If you have an unused office or apartment space, that could be something of value. This, of course, would require good dialogue and relationship to uncover these unknown needs and require conversation and a little work. 

These out of the box options due take some work and maybe a bit of a pain, but the easy solution would be to pay them for their work, but if it was that easy, you would not be reading this article!!

So to recap.

1. Get all the information from the contractor you can
2. Evaluate which of the four categories they fit in 
3. Try and create a potential list of out the box options you may have
4. Create a strategy on how much of a hard-line you want and need to take in your negotiations
5. Define your target end cost that you can live with and work up to that number
6. Read Never Split the Difference by Chris Voss https://www.amazon.com/Never-Split-Difference-Negotiating-Depended/dp/0062407805

Once that is done, you may want to look at your approval/agreement process for your contractors and vendors.

Couple of ideas to help prevent this in the future.

Purchase order agreements or service contracts.

Any contractor that you plan on working with in the future. Create and have them sign an agreement or form that does not cover job-specific information; it is a form that states in general when working for you and your company-specific guidelines.

Such as:

Insurance requirements
Rules and regulations of when working onsite what is permissible and not
Change orders and extra job cost must be approved in writing before commencement
Standards of material and workmanship

Just to name a few. It serves as a non-monetary contract for the contractor to abide by the guidelines that you want. Most contractors will not have an issue because it seems to lock them into you, and if presented as a service contract and standard paperwork that is needed by your company won’t get too focused on it. The Benefit is that it can be a huge help for the next time this comes unexpectedly.

When bidding our getting a price, check out our article “Ten Tips for getting the best price on your next RFP”
https://www.facilityvip.com/ten-tips-for-getting-the-best-price-on-your-next-rfp/