Cost Plus project victim

[LosingSleep]

My wife and I feel we are the victims of a Cost Plus custom home scam. The builder we chose owned the lot my wife wanted in the neighborhood she wanted and was planning to build a spec house on it when we came along. He agreed to build our plan instead and convinced us that a Cost Plus project where he was guaranteed a generous profit, we paid for the lot, and everything else would be at "builder's cost" was the best way to go. He said we would be saving ourselves thousands of dollars of "padding" built in for his protection in a normal project. The vague contract he presented us had some things that seemed strange at the time such as he got to use the subs of his choice for the project and we weren't to communicate directly with any of his subs. We proceeded anyway because the contract called for him to produce all invoices at least every 30 days. As you might have guessed, we have only seen invoices twice in 6 months, the second time only with pressure from our attorney. The invoices have only totals with no breakdown of what was charged. All invoices appear to be padded, particularly the big items like HVAC, Electrical, Framing, etc. as I have gotten bids elsewhere. We have called this all to his attention and the project has ground to a halt as our lawyers have been exchanging letters. We are not even sure that the invoices we have been presented are even for our project since he has about 6 projects going on at the same time The builder refuses to give us any explanation of the charges other than the pat statement "That's just what it costs."

Surely there is some kind of protection against a builder just presenting you with invoices for anything at any price and you having to swallow it. Unfortunately, the contract states that if we delay construction longer than 7 days or back out totally, he still gets his guaranteed profit, plus other charges. We are really feeling squeezed but are ready to come out fighting. Please help us with the biggest mess of our lives.

LosingSleep in NC

 

[HomeGuru]

I am not privy to the construction contract but hopefully the terms and conditions are defined. On a cost plus contract, the builder is supposed to provide documentation each month for progress payment. This documentation would consist of a breakdown of actual labor and material (builders cost) and the builders overhead and profit (plus) which is normally a percentage of the cost. When I am involved in cost plus projects, the builder must submit copies of all invoices for the materials and billable hours for the labor.
Each line item for materials are listed on a budget with a timelime construction schedule. The mistake you may have made was to not identify the total cost up front as it is easy for the builder to estimate his cost and add a percentage for the overhead and profit. Builders have invoices for materials. It is fine for the builder to say that's just what it costs but the statement should be backed up with evidence. Where are the invoices from the suppliers for concrete, lumber, rough-in plumbing, rough electrical, doors, windows, all plumbing and electrical fixtures, siding, roofing etc. and the labor for each or a statement from each subcontractor billing in progress percentage increments of the total ie. Plumbing $20,000 total, invoice this month $5000 at 25% completion. Where is the architect in all of this mess?

It would appear that the contract was written loose so the builder is taking advantage of all the loopholes. Also there may be double cost plus, where the sub submits his cost plus and the builder tacks another profit or 2 (his) to the invoice. Then there may be commingling of funds, and building materials and labor where the builder bills you for your project, but the materials and labor are actualy for his other jobs. Keep me posted.
I hope your attorney is a construction litigation attorney since it takes specialized knowledge and experience in dealing with these specific issues.

 

[LosingSleep]

Thank you HomeGuru for your response. I've paid thousands to an attorney that has given us less help than your two paragraphs. This whole mess has taken a huge toll on me and my wife physically and mentally and we greatly appreciate your advice.

Here are some extra details that might give you a clearer picture: 1) The builder not only owned the lot but had already taken out the construction loan for his comparably priced spec house, so he is paying his subs and himself with our money. 2) The contract was originally for a fixed-price project he had quoted, but then convinced us to try CostPlus. All that was really changed on the original contract was that we would get copies of all invoices in groups every 30 days. 3) The invoices have no breakdown in most cases for materials or labor, just a total cost. 4) This Cost Plus contract did include a cap. As part of this "scam", at the beginning of the project, the builder insisted on sending the project out to a "professional" estimator (a buddy of his). The estimate came back at $350,000. for a 2200 sq. ft. house that is basically a two story box with a drive-in garage. We were blown away at which point the builder assured us that he could do the project for about 10% less than the estimate, which led to a final cap of $310,000. which was still high for our area. In most cases, the price runs close to the square footage. (2800 sq = $280,000.) Because he assured us that there was at least 15K fluff in his price and my wife's desire for house and lot, I proceeded. 5) We have no architect. We used a stock plan from architect Stephen Fuller. My wife made some changes to the plan by flip-flopping the kitchen and the great room and adding some extra doors. the builder has used this as an excuse for everything from mistakes to price overruns that he didn't have a true blueprint to work from. The thing about that is that before construction started, we requested that the changes be taken to a draftsman or in some way put to paper and were told he didn't have time for that, that interest was mounting on his loan and he was sticking to his original contruction timeline for his spec house and that his framers would be able to frame from the 8 1/2 x 11 sketches my wife and I had drawn. This has been a major theme throughout the project, that the show must go on and he doesn't have time to discuss anything that has happened in the past. As it turns out the framers did has problems building from our sketches and I ended up having to go on-site for a couple of days and guide them as to where doors and walls would go. We were later presented with a framing bill that included 3k in extra charges for lost time due to confusion with these changes. The whole project has felt like being on a runaway train, which I think has been his intent from the beginning to be a smokescreen for the builder. 6) The allowances we were given have proven to be woefully inadequate. First of all, allowances should not be any part of a Cost Plus since we are paying for whatever we select, but the builder says they are necessary because of the cap. As an example, the HVAC allowance he gave us was $7500. Remember when he was setting the allowances, he had our blueprint and could have gotten bids. I'm sure he put no effort into it, probably just guessed, because the estimate that came back from his sub was just under 13k. This has been the trend at every step of the project: way low allowance, bid comes back around double, we are given a change order to sign for the difference for the project to proceed. At this point I am sure the builder has eaten up the supposed 15-20k in fluff with his padding (and probably more) and the builder claims we have overages of around 59k.
7) Our banker called us and told us that the builder had called her probing as to how much money we had and was relentless in his quest for personal info. We read that as him fishing for how high he could take the project. That can't be legal! 8) We had tried to force the builder to order our windows from Home Depot instead of his lumberyard since it was one of the larger costs of the project. It would have meant a savings of around 5k. He agreed to place the order with Home Depot, his only concession of the process. I feel this was only to make it look like later that he had tried to make "every effort" to save us money should we end up in court, because after getting HD out to the site for measurements and pricing and telling us the order was placed and us thinking our windows were on their way from HD, right before they showed up he tells us "Oh, by the way, I had to order the windows from my supplier because HD screwed up the order, but don't worry, I got my supplier to come within $1200 of their price. Right. I'm sure that somewhere within the endless list of non-itemized invoices is probably a little something for the buddy supplier. After talking back to the guy at HD after the order had been cancelled, he told us there was no problem at all with the order, that the builder had just out of the blue cancelled it. When we confronted the builder he said the guy at HD was a liar. We talked back to the guy at HD and he told us the builder had called HIM again wanting to know why he had talked to us, threatening him for giving us confidential information (everyday HD pricing?),what pricing he had given us, dates, times, etc. Not the kind of thing an honest builder does on a straight-forward Cost Plus.

We are currently looking for a construction attorney but need to know based on all this from your experience what things this builder has done illegally and unethically to allow us to put pressure on him to make it right. Thanks for taking the time to help us.

LosingSleep in NC

 

[HomeGuru]

I will respond later due to your long post.

 

[engineer]

5) We have no architect. We used a stock plan from architect Stephen Fuller. My wife made some changes to the plan by flip-flopping the kitchen and the great room and adding some extra doors. the builder has used this as an excuse for everything from mistakes to price overruns that he didn't have a true blueprint to work from.

You can't do that... not unless your wife was a licensed architect. The builder needed to have new framing plans, electrical, plumbing, etc. before he could make a change like that. Not your fault, but the builder should have told you that the architect must approve those plans before he can make the changes you wanted.
The town inspector should have easily picked that up. Where was he? Call him, and inform them what the builder did.
Unfortunately, that doesn't help the situation. You would either still have to pay the architect for the redesign, or wait longer for the builder to change your house back to the original plan. The later should not cost you additional, however.

A cost plus contract is not always a bad way to go. But if that is your choice, you are best to hire a third party (i.e. architect, engineer, inspector) to monitor hours and expenditures by the contractor if you and your wife are unfamiliar with a builder. It will cost a few thousand more, but well worth the piece of mind and could ultimately save thousands in the end.

 

[LosingSleep]

Thanks for trying to help, HomeGuru and Engineer. At this point, any help I can get from people like yourselves who have been down this road before is greatly appreciated. The lawyers I have used in the past generally don't give any "real" advice until they have reached certain monetary goals. I will be checking back for further responses.

LosingSleep

 

[Wgoodrich]

Not an attorney but have been considered a Code Expert.

In my jurisdiction no plans, engineer, etc. are required to be filed at the Code enforcement office. The Inspectors look only that the minimum safety standards are being met, CABO building, plumbing, and the NEC electrical.

A cost plus contract many times invites the builder to try and please the home owner. The home owner just wanst to make a few minor changes. The few minor changes tend to blow the original print into the waste basket, and invites the builder to have an unlimited ceiling on his bills. When a lock and key contract is present on the home project then when the home owner makes a change in the original design then an addendum must be issued in writing by the builder and provided to the home owner as a new contract with the changes included and the total cost impact of the changes if approved. Then the home owner approves this addendum to the original contract and the building proceeds with the changes as the addendum and extra charges are agreed and signed as approved by both parties. If this is not done then the builder assumes the risk of not getting paid for the changes but only the original contract. This addendum is commonly overlooked due to bad business practices on the builder's part.

Now if you have a cost plus contract the you have an open end cost factor. When you make that minor change in the print you just invited an unlimited set of bills from the builder. When you go to litigation and you said that you indeed made minor changes the litigator will be immediately thinking where the is a change there is a reaction and you probably just blew you case. In most cost plus projects you have little limit to the rise in estimated costs. If you make a change from the original plans you just threw away any estimates and gave an open end billing for the builders.

Many builders like to see that minor change because you home owner just set the builder free to bill what he wants. Many builders low ball an estimate or bid counting on that home owner to make that minor change that set him free. This minor change from the original print is where they plan to make their profits.

Many a court battle has been presented for litigation because of a minor change that the home owner asked for. Thus finding the final bill to be 3 or more times the original estimate or bid. Just a game many builders play in the construction industry. Not pretty but reality. Sometimes you can fight and win, sometimes not.

Approximately 90 percent of new house owners make changes and step into this trap that you discribed thoughout the world. You are just one of many.

Sorry it is a shame but very true?

Wg