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Perils of a Time and Material Contract #MarkupAndProfit #ConstructionContracts

It’s always painful when we hear from a contractor who has a homeowner trying to put the screws to them. In this situation, the homeowner is a professional and that makes it harder to deal with. Let me outline what happened.

Last fall the homeowner, who is an attorney in a large, well-known law firm, contracted for a whole house remodel. The estimate for the job was a little over $300,000. The contractor wrote up a Time and Material contract and gave it to the homeowner, who agreed to the conditions and the work got started.

The contractor quoted a rate per hour for everyone on the job, along with a 35% markup on materials, subs, and specialty contractors.

The job moved along and the homeowner made payments when invoices were submitted. Along the way, they also upgraded several materials and changed or added work to the mix, and before long the overall job was well over the original estimate.

Suddenly, the homeowner realized that the total job was more expensive than projected and called the contractor. He informed the contractor that he wasn’t going to make any more payments because the contractor was making too much money on the job. He gave the contractor two choices, and insisted the contractor choose one of them right now, over the phone.

The first choice was to deduct $35,000 from his total bill. The second choice was to stop the job and the contractor and homeowner would sit down and work through all the paperwork. Every time card, invoice, and bill needed to be produced. The homeowner also maintained that there were several things done on the job he wasn’t happy with, and, surprise, the contractor was overcharging him.

Don’t forget, the homeowner is an attorney. Our contractor, feeling overwhelmed, told the homeowner that he’d discount the job $35,000 as the homeowner demanded. A few days later, after stewing over it, the contractor gave me a call to see if anything could be done.

They told me they’d done a good job to date and taken a number of pictures over the course of the job. However, he didn’t write change work orders when material upgrades or changes were made to the job. He’d also stopped charging the attorney for his own time as he was feeling bad about the overall cost of the job.

I reminded the contractor that once a contract is signed, the homeowner can’t later demand to change the price or the terms. If they weren’t happy with the pricing structure, that needed to be negotiated before the contract was signed, not after.

I suggested he find an attorney who specialized in construction law. Between now and when he could meet with his attorney, he needed to create a complete history of the job, complete with photos, time cards, invoices and all the other paperwork to complete a paper trail of the job.

Hopefully the contractor’s attorney will tell the homeowner there will be no credit or discount, instead the contractor wants to sit down and discuss the paperwork and billings to date for the job. I understand why the contractor chose the $35,000 deduction from his bill; the homeowner was bullying on the phone, and the meetings could be very contentious and painful. However, the homeowner might have more to lose.

How many hours will they want to spend to try and prove that the contractor has overcharged him? He bills his time at $400 dollars an hour, and that could be a lot of unbillable hours spent arguing over little details based on a contract he signed.

An attorney is in the position of representing the law, and that makes them more able to bully someone who isn’t as versed in the law. To demand a decision, on the spot, without the benefit of time or counsel, is wrong. I hope the contractor’s attorney will know if there is any recourse that can be taken against them professionally for that behavior.

We discussed time and material jobs briefly during the Q&A portion of our live class last week. Many contractors use the terms interchangeably, but both contracts put the contractor at a higher risk of complaints, lawsuits, and sleepless nights.

As I’ve written many times:

  • Time and materials is fine for small jobs that are done quickly. Only use time and materials if the job is under $3,000.
  • Don’t make any changes on a job without a signed Change Work Order and payment upfront. If you’re doing a Time and Materials or Cost Plus contract with a rough estimate, the homeowner needs to sign something that confirms they understand the estimated price just increased based on the change.
  • Learn to estimate so you can quote a firm fixed price for the project. The pain of estimating is FAR less than the worry and stress when you’re fighting for payment on the work you’ve done.
  • Never feel bad about the overall price of a job. You’re not the one making the decisions that are driving up the price. The price is based on the design of the project and the selections the customer makes. If you’re using a markup that recovers your overhead expenses and makes a fair profit, you’re not overcharging. It’s the right price and a fair price. If you want a friend, go buy a dog. This is business.

May the profits be with you.

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