Case 24: Budget or bid?

In this case the client hires a GC to build a $3 million executive home but he also hires separately an architect for the design. Once the permit was obtained the architect’s contract was closed out. The agreed contract does not tie the GC to a fixed price and the $3 million estimate is referred only as a “budget” in the contract. The owner assumes that because of verbal communication with the GC that the $3 million agreement was a lump sum. Discussions and estimates were not tied to or referenced in the contract. The owners’ mistake was not having any representative like a project manager or someone with prior experience as the owner had never been involved in a construction project.

During construction changes were made by the city and owner but none were formalized in the contract. Many changes were due to building code changes. The GC understood this to be a time and materials (T&M) project they did not find it necessary to submit change orders against the “budgeted” amount. When the project was 90% completed the GC invoices owner for 100% payment at that point the GC indicates that the project will run over $500K from the $3 million “budgeted” amount. The owner refuses to pay the GC, the GC pulls off the job and states he will not complete the job until the owner pays off the remaining $1 million and the additional $500K. At this point GC is dismissed and both parties sue each other.

In this case I believe the owner is at fault for not having a third party involved. He should have had someone with prior construction experience like a project manager. He would have been better informed and any changes made would have been changed in the contract. Every change should have been referenced back to the contract. The contract was vague as it did not tie the GC to a fixed price.

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