We know it sucks to admit … but the truth is, budget overruns are just one of those things that happen in the construction industry. Sure, you can try to prepare the best possible estimate, and then add 10-20% for possible overruns, but there’s always a chance you’ll eventually run into a situation where what you quoted simply isn’t enough. Here’s what to do when a construction project goes over budget.
Figure Out Why
Budget overruns generally fall into one of a few categories.
Scope Creep: This is common when dealing with homeowners who haven’t had much work done on their homes. They may follow you around -or catch you at the end of the day – to ask, “While you’re here anyway, could you…” It’s tempting to just say “yes” to minor requests, but before you know it, a $5 goodwill gesture could easily become $1,000 in extra work that must be paid for.
Hidden Damage: When estimating a project, you should do your best to investigate what might be involved. But, sometimes, you will pull up a floor that looked fine, only to discover termites eating away the joists, or drill into a wall to install an electric box only to find black mold.
Out of Your Control: Snowstorms, hurricanes, and even run-of-the-mill summer thunderstorms can wreak havoc on a construction project. And they’ve all got one thing in common … they’re out of your control!
Miscommunications: The more people involved in planning a project, the more chances there are for miscommunications to occur. Whether you accidentally estimated based on the architect’s third draft rather than the fourth – and final – draft, or your salesperson promised granite countertops to seal the deal when you budgeted for butcher block, miscommunications can easily sink the budget.
As soon as you notice a problem with the budget, let the homeowner know right away! Always open with a genuine apology and take ownership of the mix-up. Explain clearly and succinctly what happened, and then assure the homeowner that you plan to make it right.
Many cost overruns are relatively easy to solve, and most homeowners are reasonably flexible. The homeowner might just be as happy with vinyl flooring instead of tile in the bathroom, or a solid paint color rather than an elaborate wall treatment in the bedroom. You won’t know until you ask. Offer a variety of solutions that put the budget back on track by pulling money from other places, as well as give the homeowner the option to simply pay the difference. If the problem was genuinely your company’s fault, be prepared to take the financial hit.
Create a Change Order
When you and the homeowner reach an agreement, be sure to get it in writing. Draft a change order that clearly specifies the agreed-upon solution, which both parties should sign. Keep a copy for your records and give the homeowner a copy.
Sooner or later, cost overruns will happen to every builder. Fortunately, what truly matters to the vast majority of customers is not the fact that a problem occurred, but how it was handled. Honest communication and problem solving can bring you to a resolution that works for both parties.