Residential Owner Avoid Contractor Over-Billing

It is typical for Owners of all types of construction projects to incur contractor over-billings. This is particularly true for owners ("Owners") of small to midsize developments and Owners of high value residential projects. The reason is simple, these Owners are usually billed based on cost-of-work even though the Owner typically does not have the in-house expertise to manage the financial controls delegated to it by the contract they naively sign.

Often times Owners initially rely on a relationship of trust with the general contractor (GC) based on their self-perceived ability to judge character. When questions about the GC's bills come up, the "honeymoon" evolves into mistrust. When the honeymoon is over, it is very difficult to rebuild the relationship of trust between the Owner and the GC.

Based on our many decades of auditing large and small construction projects, we have identified the six most important actions an Owner can take to protect from being overbilled by the GC. These six actions are most beneficial on projects that are billed based on the cost-of-work, such as projects that use Cost-Plus-Fee ("CPF"), Time-and-Material ("T&M"), and Guaranteed-Maximum-Price ("GMP") billing agreements (i.e., contracts). Additionally, the value of the six actions listed below will be significant, but less impactful, for Owners of projects with fixed-price ("FP") or lump-sum ("LS") billing agreements.

Our six most impactful Owner actions that will protect it from GC overbilling are:

1. Have a design that is complete to the fullest extent possible, or at a minimum define the scope of work to be performed:
   1. The design should be 100% complete for ground-up/new construction projects (i.e., building a structure completely from scratch) unless time to complete is the overriding concern
   2. The design should be as complete as possible for renovation construction projects (i.e., adding to or remodeling an existing in-tact structure)
   3. The design will be difficult to fully complete for restoration construction project (i.e., post-disaster repair consisting of stabilization or debris removal and follow up repair), however the final performance specifications should be defined for the GC
2. Obtain competitive bids from reputable GC's:
   1. Assemble a bid package and provide it to selected bidders
   2. Check each bidder for:
      1. Licenses
      2. References
      3. Insurance
3. Have a contract that is signed by both parties which addresses:
   1. Get professional advice (e.g., attorney, architect, and construction manager)
   2. Define the scope of work
   3. Set a fixed price or a guaranteed maximum price
   4. Establish key requirements for:
      1. Authorization to contract with related parties
      2. Authorization of self-performed work
      3. Subcontractor bidding procedures
      4. Billing procedures
      5. Change order procedures
      6. Definition of the cost of work
      7. What is included in fee
      8. How to handle contingency, allowances, and shared savings
      9. Field monitoring requirements
      10. Termination protocols
      11. Dispute resolution procedures
4. Monitor the subcontractor bidding and selection process:
   1. Independent subcontractors
   2. Work performed by parties related to the GC
   3. Work that is self-performed by the GC
5. Watch what is happening in the field:
   1. Hire someone to help you supervise the contractor if feasible
   2. Define what field reports you expect to be prepared daily, weekly, and monthly
   3. Set up field monitoring equipment
      1. Ingress and egress controls
      2. Video and photo protocols
   4. Verify contractor representations
6. Require periodic billings from the contractor:
   1. Avoid prepaying for work to be performed
   2. Develop a pay application check list and use it to check each pay application
   3. Require periodic sworn statements from the contractor
   4. Require contractor and subcontractor lien waivers
   5. Require that all changes be documented and approved in writing

Look for future articles from ResX will explore each of the preceding topics in more detail.