How To Deal With Contractors Overcharging You – Bad Contractor Series Part 4

How To Handle Contractors Overcharging You

If you haven’t already, start with part 1 of our Bad Contractors series: How To Spot a Bad Contractor.

Most people will end up renovating a home at least a few times in their lives and sometimes that experience can turn into a renovation nightmare.  If you are unfortunate enough to find yourself working with a bad contractor, you could easily end up in a stressful contractor dispute.

Sadly, this is not an uncommon occurrence.  Over 50% of homeowners report having a negative experience with their remodel or complaining of a bad contractor. Many homeowners say that the main reason for their dissatisfaction is that the contractor was overcharging them and asking for more money above the budget.  

Here at GreatBuildz, a free service that connects homeowners with reliable general contractors, we speak to homeowners every day who want to get connected with honest, reliable pros to ensure they don’t get stuck with a bad contractor who will go way over budget. There are many ways that you can end up dealing with a contractor’s extra charges – here are some tips and guidance to help you avoid that or find ways to solve these issues that have arisen with a bad contractor.

How To Avoid Being Ripped Off By a Contractor

If you haven’t hired a contractor yet, there are several things you should do in order to prevent contractors overcharging you. The most important thing you should do is find a quality, reputable, and trustworthy contractor. Generally, good contractors bid the job fairly at the outset and make an effort to have as few extra charges as possible because they want to keep their clients happy. They put too much value on their reputation and make it a priority to make sure the client is happy. They want you to be satisfied so that you will recommend them to their friends in the future.

On the other hand, bad contractors use extra charges (‘change orders’) as a standard business practice.  They will bid the project low at the outset just to get the job and make up their profit by demanding more money from the homeowner in the form of change orders. Contractors know a ton about construction while the client often knows very little.  This disparity can easily allow a dishonest contractor to “pull the wool over the eyes” of a client with regard to extra charges or costs and the client has no way of knowing it.  

Before hiring any contractor, I suggest you call several of their references and ask them whether the contractor was asking for more money beyond the budget or was overcharging them in any way.  If you find that past clients were happy with the contractor’s cost, you can be confident the contractor will probably also be fair with you.  Also, you should express your expectations to the contractor clearly upfront.

At GreatBuildz, we require that contractors agree to and sign a 20-point “Code of Conduct”  describing how they will deal with change orders, including the following language about extra charges: “I commit to charge a reasonable price for Extras or Change Orders based on my true costs of labor, materials, and profit. I will allow homeowner two days to research prices to confirm my price estimates are reasonable.” Before you hire a contractor, you should as them for this type of commitment as well.     

What Leads To Contractors Overcharging On a Project?

As I mentioned, some bad contractors will submit a low bid for a project expressly with the intent of winning the job and ‘making up the profit’ with change orders (extra costs), which is infuriating to clients.  If a homeowner is in the middle of a project and the contractor is asking for money for an unforeseen item, the homeowner has very little leverage to negotiate a reasonable price.

If the contractor provides a price that the client thinks is outrageous, the client’s only option is to halt the project and bring in someone cheaper to perform that task, an unrealistic course of action in the middle of the job.

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Once you start your project, it’s important to maintain realistic expectations:  Homeowners need to set their own expectations at the beginning that most jobs will cost more and take longer than originally anticipated.  It is worth noting, however, that there is a fine line when it comes to extra costs and budget disputes.

Although a 10-20% project cost overrun is normal with even ‘good’ contractors, a 50-100% cost overrun is not normal and could be indicative of a dishonest or bad contractor.  Some cost overruns are normal because contractors must make some assumptions upfront about things they cannot see.  For example, there is no way to know for certain what is located inside a wall that needs to be relocated or what kind of structural framing is inside that wall, or even whether there’s termite damage or dry rot inside the wall.

The best, most honest contractors usually integrate some of these ‘surprises’ into their original estimate to the client, while others choose to give a client the lowest bid upfront, but ask for ‘change orders’ (extra charges) during the project to resolve these issues. 

Once you’re in the middle of a renovation, dealing with the extra costs associated with additional work can be a stressful experience and can sometimes lead to a contractor dispute. This issue is usually not straightforward.

Is That Change Order Fair or Not?

The first question that can become contentious is whether this ‘extra work’ was really included in the original budget of the project. Sometimes it’s hard to tell exactly what is and isn’t included in the scope of the job because there isn’t enough detail in the estimate/contract. A contract may include an item that says, “paint walls and ceiling”.   The homeowner may assume this includes making small drywall repairs before painting, but the contractor may feel this should be charged as an additional item, leading to a budget dispute.

Another contractor dispute may arise when the homeowner agrees that an extra item is needed but feels like the contractor’s price is way too high. As discussed, the contractor has all the leverage in this situation because the homeowner absolutely needs this item completed and would be challenged to bring in ‘another’ contractor just for that task.    

Most homeowners renovate infrequently and don’t have a background in construction.  Therefore, it’s hard for them to tell whether a contractor is overcharging or not.  Usually, they just get a gut feeling that these extra charges seem high.

If you’re struggling with this, I suggest doing some research online to understand what other people are paying for both the materials and labor of the extra item.  Also, if you know anyone in your network (or even social networks) who has experience with construction (maybe a retired contractor or home inspector, etc), ask them what extra cost they think is reasonable.     

Recourse When Contractors Overcharging Becomes an Issue

After you do your research and determine the contactor may be ripping you off, the very first thing to do is sit down with them and have a conversation about it. It’s ideal to sit down with the owner/contractor in person and show them in writing what you found/heard about the appropriate price for each extra task. Make sure to be reasonable and tactful.

Explain nicely and firmly that you are spending a lot of money under the original budget and need to be frugal with change orders and extra costs.  Let the contractor know you are willing to compromise on cost, but the price needs to be reasonable to you based on your research. Remind them that you both want the same thing…to have the project done right and get them fully paid. 

You need to remind yourself that your primary goal is to get the project and the extra work completed at a reasonable cost and not to get into a stressful contractor dispute.  Your best bet is to negotiate something you can live with, even if it’s more than you wanted to spend because the other alternatives are not great.  You can try to bring in another contractor to do the work, but it will be challenging to find someone to work in the middle of another contractor’s project.

Also, you can decide to fire your contractor and bring in a new one to finish the remodel, but keep in mind that could lead to a budget dispute. Your current contractor will still want to get paid and it’s not likely you will agree to what amount is owed for the work done to date. However, if it’s obvious that you’re dealing with a bad contractor who is demanding more money or overcharging, you are well within your rights to report the contractor or make a claim with their Surety Bond or the contractor’s state license board and even decide to file a lawsuit.      

After you have an in-person conversation, but before taking any of these major steps, you can consider emailing or sending a bad contractor a warning letter for extra costs. A first warning letter should be ‘calmly’ worded so that the contractor doesn’t get offended but takes it seriously enough to work with you.  An example of a first warning letter is below:

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Sample Letters for Contractors Overcharging on a Project

First Warning Letter to Send for a Contractor Overcharging

Contractor Business Name

Contractor Address

Re: ________________ (job address)

Dear Mr./Mrs. ______________:

 

I’m writing this letter about the renovation your company has been performing at my home.  I appreciate all the work you have completed to date.  You have discussed with me some extra charges (change orders) that have come up.  I am concerned with these for the following reasons:

  • Some of these charges are part of the original scope of work agreed to at the start of the job.
  • Some of these charges/estimates seem significantly higher than is reasonable. 

I understand that you cannot work for free and I’m willing to pay a fair price for the change orders that are appropriate.  I’d like to work with you to determine a price that’s fair for both of us.  I’d like you to provide me your true cost for labor, materials, and profit for each extra item.  I will research these prices with local material suppliers and construction experts and confirm they are within the appropriate range.  Your prices should be in line with local industry standards and I will expect you to adjust them if they are not.    

I’m certain that we can come to an agreement on a price that works for both of us and move past this issue so that you can complete this project and get paid.  If we can do this, I will be a happy customer and will commit to provide you a good reference/recommendation and post positive reviews of your company online.  

Thank you for your attention. 

Hopefully, this letter is sufficient to get the contractor’s attention and start a positive dialogue to get the issues resolved.  If, after a week or two, you’re finding that there continue to be issues with the contractor’s extra charges, you may need to send a second, more strongly worded warning letter….sample below:

Firm Warning Letter if a Contractor is Overcharging You

Contractor Business Name

Contractor Address

Re: ________________ (job address)

Dear Mr./Mrs. ______________:

 

I’m writing this letter about the renovation your company has been performing at my home.  I appreciate all the work you have completed to date.  You have discussed with me some extra charges (change orders) that have come up.  I am concerned with these for the following reasons:

  • Some of these charges are part of the original scope of work agreed to at the start of the job.
  • Some of these charges/estimates seem significantly higher than normal prices 

I understand that you cannot work for free and I’m willing to pay a fair price for the change orders that are appropriate.  I’d like to work with you to determine a price that’s fair for both of us.  I’d like you to provide me your true cost for labor, materials, and profit for each extra item.  I will research these prices with local material suppliers and construction experts and confirm they are within the appropriate range.  Your prices should be in line with local industry standards and I will expect you to adjust them if they are not.    

I’m certain that we can come to an agreement on price that works for both of us and move past this issue, so that you can complete this project and get paid.  If we can do this, I will be a happy customer and will commit to provide you a good reference/recommendation and post positive reviews of your company online.  

If you’re unwilling to work with me to reach a compromise, I will have no choice but to take one or more of the below actions:

  1. Require you to pause work so I can bring in another contractor to perform the extra work at a reasonable price   
  2. Write negative reviews about your firm at online sites such as Yelp, HomeAdvisor, etc.   
  3. File a complaint with the state licensing board or Attorney General  

I would prefer not to take any of the above actions. I’m certain both of us want the same thing: to get this project completed and paid.

Thank you for your attention.  

Make sure you’re not missing anything, and check out all parts of our Bad Contractor Series:

Part 1 –  How to Spot a Bad Contractor Before It’s Too late

Part 2 – Dealing with Contractor Delays

Part 3 – Contractor’s Poor Workmanship: How You Can Deal With It

Part 4 – How To Deal With Contractors Overcharging You

Part 5 – 8 Secrets About Working With Contractors


When it comes to finding a reputable contractor for your project – GreatBuildz is simplifying the contractor search. GreatBuildz is a free service that connects homeowners with reliable, thoroughly screened general contractors and provides project support from start to finish. Call now (818.317.3567) to chat with a real person about your next renovation project or visit our website for more information: www.greatbuildz.com