Contractors

I'm sure this just adds to the pantheon of "Stories of Less than Honest Contractors", but I feel the need to contribute.

We began our house building project in 2005 hiring an architect after purchasing our land in Woodstock, NY in 2004. We were in no rush (and immediately at least not in financial position to do the house) but wanted to use the time to get what we wanted in a weekend house. As those in the construction business tell you there are three things pulling at any construction project: time, quality, and money, and at best you only can have two of them. We'd chose quality and money.

Our architect was ready to go by December '05. We asked for his recommended contractors and we sourced one ourselves: our neighbor Glenn who builds mostly spec houses for a living including the one right next to us. Glenn was enthusiastic and seemed like it was going to work. As we were advancing past the initial bid he told us he couldn't take on the project. There were several reasons but mostly it came down to his resources and his commitments to other projects. While disappointed we understood the extenuating circumstances and Glenn also provided another contractor, Rod, who could take over.

As 2006 rolled around a few things were changing for us. First, we found out that our first baby was on the way. Second, I finally hit the wall working at Palm, Inc. and it was time for me to move on. It took time to leave as I agreed to transition my position to another person but I didn't have anything concrete I was going to. Those major life changes had us hold off on the broader project and just focus on doing the bridge which Rod was up for.

That was completed in Dec '06 (several months after it was supposed to be done but we were in no rush) and we told everyone we were on hold for a bit regarding the rest of the project. As 2007 rolled around things had stabilized as I had advisory work and the pressures of a family made us really want some space (even if it was just on the weekends). We knew we had to move out of our East Village apartment into a larger one sometime in the next few years but decided the NYC real estate market was overheated and thus we could gain some space upstate. My accountant also advised taking on more mortgage interest as I was getting killed by the AMT and interest is one of the few write-offs you keep under the AMT.

We told our architect we were back on the project in spring '07. Since Rod had done a decent, albeit delayed, job on the bridge we went back to him for the road and house. He was confident he could do it (even though he tended to focus more on heavy work like foundations). We gave him plans in May '07 we told him our budget and he promised a bid in a few weeks. Those weeks passed and there was communication with Rod but no bid. He had many problems he claimed in putting it together. As the summer advanced we started to worry that Rod wasn't up to it.

Our architect brought in a couple of his contractors (including a couple who had bid the first time around). By August we were on our way to Europe for vacation, Rod's bid was nowhere to be found (even though I told him I had to have it before we left), and three others were to have bids to us by mid-Sept. When we returned Rod still hadn't produced anything and we pretty much wrote him off. The other three produced their bids roughly 3-4 weeks after receiving the docs.

One of them, Brian, said he would honor his bid he had produced in the first round. When we initially received it we saw it as on the high-end. However, as I parsed through it more deeply I realized that he had overbid on the bridge and road and the house wasn't far above our budget. Of the other two bidders, one submitted a rough bid that was a bit high but basically said he couldn't do it. The other, a favored builder of our architect, blew the numbers out of the water on the high side. His bid for the house part wasn't bad. He just tacked on a 30% management fee on top of it. 30% margin in any business is amazing and most try to achieve 15-17%. Some, like supermarkets, eke out 3-5%. This was robbery and a bit insulting. He obviously didn't want the job by why crap on an architect that gives you a lot of business.

Oh, and Rod finally had his bid together. It only took 4 months but again his house number was fine but he then also tacked on a management fee. It was more reasonable but he was acting as GC and marking things up and also putting on a management fee. Unethical. So we told Brian he was the guy and to put together a detailed bid. He took about a month and came back. We understood if the bid went up by 10-15% given fleshing out detail. He submitted a bid 50% higher after he said he would honor the number! And no, it wasn't that materials or labor prices had skyrocketed. It was that he also was tacking on a 20%+ management fee on top of GC margins.

My architect has told us that the construction industry is moving more toward doing construction management in charging a % on top of the overall cost as a management fee just like architects do. That's fine and makes it all more transparent since underlying materials and labor costs are passed right through. And 15% is reasonable in this scenario. However, some are delusional in thinking they can act as a GC (fixed bid but no transparency of underlying costs which they mark up) and putting on a management fee. In our case I think this stemmed from a) them still thinking the housing/building market was red hot and they could pick their projects and b) that we were clueless city-folk with lots of money to spend and thus their bids were more about what they though we'd pay then what it actually costs.

Given this insanity I went back to Glenn given that we had stayed friends and I knew he could tell me how much houses cost to build in the area. He confirmed that these people were trying to rip me off and that my estimates (given that I now had 5+ sets of bids) for the project were reasonable. He also happened to be back in the game for our project and that's who we are now working with and hopefully he'll be our construction manager.