2023-05-13
Many homeowners have experienced it: you’re midway through a construction project when your contractor announces additional charges.
The phrase “it’s going to cost extra” is met with frustration, suspicion, and the nagging question, “Why is my contractor charging me more?” As a contractor myself, I understand your concerns, and I’m here to demystify why construction projects often incur extra costs.
Most of the content on this site is for the benefit of young project managers, but I strongly believe that everyone benefits from a true shared understanding.
Sometimes, if you’ve been doing something long enough, you forgot how many of the things you take for granted are not common knowledge.
So if you’re not a contractor, but you’re working with a contractor in your home or at your office, I hope this post provides some chances to get ahead of extra costs and understand where they come from.
This post deals mostly with construction, but this can apply in any project management situation and I wouldn’t be surprised if you’ve experienced these same issues working with project managers across all industries.
The Misconception of the Greedy Contractor
First, let’s tackle the stereotype of the “greedy” or “dishonest” contractor. When I first started my career, I planned on becoming a design engineer. I had looked at construction before but I had the perception that contracting was all about slimy business practices and taking advantage of customers.
I know a lot of people feel this way. And I get where it comes from.
Lack of trust
Contractors are often counted amongst lawyers, politicians, and car salespeople as some of the least trusted professions.
And while I concede that bad actors do exist in the construction industry, I think a lot of the perception comes from miscommunication and a misalignment of understanding.
In most of our day-to-day experiences (at least in North America), you agree on a price up front and that’s the price you pay. So when a contractor comes to you half way through your bathroom renovation telling you it’ll cost $500 extra to re-route the shower plumbing, you’ll naturally feel like you’re being taken advantage of.
In my experience, the majority of people in the construction industry enter this profession out of a passion for building and creating. The desire to provide a high-quality service for a fair price is at the heart of what most contractors do. However, the nature of construction involves inherent risks and uncertainties that can lead to additional costs, which aren’t always easy to predict at the outset.
When extra costs arise, we feel we’ve been deceived about the true cost of the project. And that apparent deception breaks down trust.
The Trap of the Cheapest Bid
While not always the case, part of the problem in contracting is the North American practice of selecting the least expensive contractor. Assuming you took the time to collect multiple bids at all, you know how appealing it is to hire the team with the lowest number.
But while it’s tempting to go with the lowest bid (especially when you’re trying to stick to a budget), the cheapest contractor might be underestimating the project’s risks, leading to a lower initial bid.
But, ultimately any unexpected condition will result in additional charges. So, while the initial price might seem attractive, it may cost you more in the long run due to unforeseen complications or underestimated risks. Whether the contractor intentionally hid these risks or they just didn’t know, its often on the client to bear the costs.
When faced with different prices from different contractors, take some time to understand why the prices vary so much. We’ll discuss how to do this a bit later. But sometimes the price difference is due to:
- Efficiencies: companies that manufacture their own product can install cheaper, for instance)
- Skill: a more experienced contractor may fetch higher rates for a higher quality of work or rate of completion
- Risk: different companies will make different assumptions about the needs of the project. If the scope isn’t well defined, the cheaper contract may be assuming less risk.
The first option doesn’t often lead to extra costs. The second might result in extra costs if the work is poor enough that it must be redone. But the third almost always results in extra costs.
When Extra Costs Arise
Common scenarios that lead to extra costs include uncovering hidden issues during a project, such as structural damage, outdated wiring, or delays from specialized providers. Anything that slows or prevents the completion of the planned work will represent an extra cost.
As a client, you’ll either be paying for the contractor to do the extra work (removing and replacing water damaged wall studs, for instance), or you’re compensating the contractor for the downtime while they pay their crew to wait on other contractors or inspectors.
These situations often cannot be foreseen and require additional work, which justifiably incurs extra costs.
Contractors are businesses and unforeseen conditions that require extra time or resources to complete will affect the final cost.
And, while unforeseen conditions are no one’s fault, the burden usually falls on the client.
You may wonder “why didn’t the contractor assume these possible conditions when they priced the project?”
But, the unfortunate irony is that, as mentioned above, the contractor that includes risk in their bid often doesn’t win the project. Contractors are incentivized to exclude risk from their bid in order to win projects.
Vetting Contractors and Pricing Practices
So what can you do as a client? If you’re a homeowner hiring a contractor with your own money, or you’re hiring a contractor on behalf of your company, you want to get the value for your money.
Check Online First
In the digital age, online reviews and direct questioning are essential tools for vetting potential contractors. You can check Google reviews and social media for public perception. You can also check Glass Door to see how they are perceived by current and past employees.
Companies that treat their employees well tend to treat their clients well. If employees feel that management’s money-mindedness has led to poor working conditions, you may find the same company cutting corners on your project.
Shop Around And Compare Bids
Beware of lowballing, an industry practice where a contractor intentionally underbids to secure a project with the plan of requesting extras after the contract is signed.
As a project manager for a contractor, I often hire subcontractors to complete specialty work. Its common practice to solicit a minimum of three bids, and I’d recommend this for you as well.
If a contractor’s price comes in much lower than the others, you should be a little suspicious. If a contractor pressures you to sign up at the time of bid, you should be very suspicious.
Making Informed Choices
As a client, it’s important to make informed choices when selecting a contractor. Opting for the lowest bid without considering other factors such as experience, reputation, and communication skills could set the stage for disappointment down the road.
Instead, consider the overall value that different contractors bring to the table, including their ability to manage risks, their commitment to quality, and their track record of transparency and communication.
Get a bid breakdown
Most people stop after collecting bids. They compare all the numbers and pick the cheapest crew to proceed with the project. While there may be nothing wrong with this, there’s one more thing you can do: get a bid breakdown.
Since risk is the main source of extra costs, you can get an idea of potential issues by asking your contractor to provide a breakdown of their bid. Ask specifically about possible risks that will lead to extra costs. Ask about exclusions (things the contractor did not include in their bid).
For example: if you hire a painter to paint your living room, they may quote you $400. But that $400 fee does not include the time to move all your furniture. If they show up on painting day to find all your furniture in place and your walls covered in photos, they will likely ask for extra money.
Had they shared this exclusion with you up front, you might have known you could save a little money by moving your furniture before they arrive.
Contractors may charge a small fee to come visit your site and discuss your needs, but many won’t. While you’re the only one who can decide if the price is worth it, I think that a couple hundred up front to discuss risks and exclusions can save you thousands in the long-run.
Its worth noting that risks can always be avoided. Many contractors take customer service seriously and may feel uncomfortable asking for extra money, but they should be compensated for any additional work that arises due to unforeseen circumstances.
From Experience
In the summer of 2018, I was slated to begin a modestly-sized landscaping project for a local municipality. The project was won in the Spring with an expected start in July. We predicted we’d be complete by August.
The project required a large excavation, some tree plantings, and some minor concrete work. All of these activities are easiest to complete in the summer, so two months was a very reasonable esimate.
Due to some permitting issues, the project was delayed three months and we weren’t able to break ground until October.
While we knew there was a likelihood that this change would negatively impact the duration and cost of the project, we were trying to be accommodating.
Six weeks into the project, we were lagging behind due to delays caused by rain, frost, and cold weather. As we approached the beginning of Winter, it was becoming increasingly clear that no only would we not meet our two-month deadline, we’d need to shut down the project until Spring.
While a delayed project is cheaper than a late project (due to not having to pay for labour or deliveries while the project is shut down), we still had to pay rental on fencing, lights, and equipment.
When we brought this to our client, they are understandably upset.
From the client’s perspective
The project management team for the client was relatively new to construction. They were a general project management team and they handled special projects for the client.
So when we provided the two-month estimate, they did not know it was contingent on a July start.
We didn’t share our concerns over possible delays and increased costs until the two months had nearly passed and it was clear the project would be delivered late.
By this point, what seem to us to be reasonable explanations of the cost of change came across as excuses.
Its tough to say how receptive the client might have been had we shared our concerns up front, but it certainly couldn’t have hurt. They even questioned why we didn’t air our concerns earlier.
Live and learn.
Preparing for Potential Additional Costs
As a client, it’s wise to anticipate potential additional costs. If you suspect dishonest behavior, shop around, pay only for completed work, and consider other options.
Involving a construction lawyer for contract review before signing is also an excellent precautionary measure.
But even when a contractor is being 100% honest and forthright about their anticipated costs, extras may still arise. If your budget is $5000 and the contractor’s bid comes in at $4800, you don’t have much budget left over to cover contingencies.
Ideally, you should be prepared to be up to 50% more for your project than your initial bid. This amount varies by industry and scope of work. But the less the contractor knows going into the project, the more opportunity there is for
Protecting Your Interests
If you’re unsure about a contractor’s bid or practices, don’t hesitate to seek a second opinion or legal advice. A little due diligence can save you from potential headaches later on. It’s also a good idea to pay in stages based on completed work, ensuring that you’re satisfied with the progress before releasing funds.
Trust: The Foundation of a Successful Project
Ultimately, trust between the contractor and client is pivotal to a successful project. The myth that all contractors are out to exploit their clients is simply that – a myth.
Construction is expensive, and extra costs can arise due to a variety of factors. It’s nobody’s fault, but the contractor can’t be expected to bear the risk of uncertain project conditions.
A good contractor will be honest with you up front about the potential risks of the project (and if you’re a project manager reading this, take this advice: tell your client ahead of time what the risks are).
As a client, the best thing you can do is provide as much information as possible to your contractor. Ask them questions about the work. Ask them what they need to know to feel more confident in their bid.
Some contractors get into the industry because they’re very technically skilled, but they may not be the best communicators.
Nurturing Trust, Avoiding Misunderstandings
Trust between a contractor and a client isn’t built overnight, but it’s an investment that pays dividends. Open dialogue, clear contracts, and transparency in pricing help cultivate this trust. Don’t shy away from discussions about potential extra costs; understanding these possibilities ahead of time can help avoid unpleasant surprises later on.
Also, keep in mind that the stereotype of the greedy contractor is often far from reality. Many contractors operate under thin margins, balancing the need to turn a profit with the desire to deliver quality work and ensure client satisfaction. They are professionals who take pride in their craft, and their reputation is their livelihood.
I find myself doing a lot of free work because the effort to reclaim those costs is often not worth it. Contracts can require a lot of give and take from both sides. I understand when I’m working for a client that nothing will go exactly as planned and I try to be as reasonable as possible with small changes. But if a change or unforeseen condition could potentially wipe out all of my project profits, I will need to request additional funds.
To put it another way, profit margins can be 5%-10% of the project cost. If I have to do an hour of unpaid work, I have to do 10-20 hours of paid work to make up for it.
Ultimately, predictability is the core of trust. So both parties should be trying their best to limit surprises.
Steps to Take
I’ve discussed a lot of tips throughout this post about how to protect yourself and get the best value on your project but I’ll summarize them here.
For Clients
If you’re hiring a contractor, the best thing you can do is seek transparency in the bids you receive.
Ask for a detailed breakdown of the bids you received. If a bid seems suspiciously low, ask about potential risks and exclusions.
Understand that design changes cost more the later you request them. It may be easy to make a change with a month’s notice (assuming nothing is being custom manufactured), but it could be difficult or impossible to make design changes once the work has begun.
As you find out new information that may affect the contractor, offer it up freely. While new information may affect the final price of the project, giving your contractor more time will almost always help alleviate issues.
Regularly check in with your contractor about potential risks.
For Contractors
Take the time to detail your bid and provide a breakdown of your expected scope, assumptions, and exclusions. In the best case, you’ll be providing your client with more information to make an informed decision. In the worst case, you’ll have a document detailing your assumptions from the start of the project that can help protect you in the case of dispute.
Be willing to walk through the bid with the client and be honest about potential risks. If this is a client’s first time managing a project, there may be things you take for granted that they don’t know about. So take extra care.
As soon as you’re aware of a change that might affect the project duration, cost, or viability, make it known to your client. The sooner everyone is on the same page, the sooner you can begin collaboratively working on a solution. I’m not aware of any client who’s complained because their contractor communicated too much.
Final Thoughts
Choosing the right contractor isn’t merely about price; it’s about professionalism, communication, and trust. Be informed, ask questions, and understand the bid. Remember, the cheapest bid may not always be the best choice, especially if it underestimates the project’s complexity and potential risks.
On the contractor’s side, transparency is vital. Explain your bid in detail, provide insight into potential risks, and communicate any extra costs as soon as they arise. This approach fosters trust and paves the way for a successful project outcome.
In the construction industry, extras aren’t always a sign of greed or dishonesty. They’re often just part of the process, and understanding this can go a long way in fostering a healthy contractor-client relationship.
Remember to prepare for potential additional costs, seek legal counsel when necessary, and keep open lines of communication. A strong partnership with your contractor is a cornerstone of a successful construction project.
BG
