Plywood prices go up, and that's a change order????

[xaqman]

Hello!
I am new to this site, which I found after doing some searches on the effects of framing with wet lumber(unrelated issue to this post).

Since this site seems to be populated with some pros, here is the scenario my wife and I are facing, please let us know what your perspective is:

Last year we got a 'fixed-price' bid from our general contractor to build our new house. From the time the builder made his bid to the time we actually closed our loan was several months, but we still signed the contract with him for the original bid price (except for some minor changes due to us shuffling our budget around). The first couple of months of work on the house were spent excavating and pouring our full basement, doing water and power, etc. The builder didn't start using an appreciable amount of lumber until about 7 months after he had received his lumber package bid from the local lumberyard.

The builder has shown us all of his subs and suppliers' bids, and allowed us to copy them, and we are paying him 20% over his costs. In some situations, I would have been leery of believing his costs were 'real,' but this is a very small town, he is well thought of, and is a 3rd generation homebuilder/carpenter in this area.

The problem arose when the lumberyard sent him a bill recently for an overage of $1400 worth of plywood price increase. Suddenly, my wife and I received a fax from the builder detailing a change order for "increase of cost of plywood!"

Now, I respect the builder's need to make a reasonable profit, (which is why we were ok at 20%), but, obviously, this is not our 'problem'. This is not a 'cost-plus' situation, (which our bank wouldn't even allow), but a 'fixed-price' job. Of course, the lumberyard's bid to the builder clearly stated an expiration date of 60 days (at which time the builder presumably should have requested a new bid and either bought the wood and floated the cost on account with the lumberyard, or accepted a new bid and given himself more time- until prices started going up). Our take on it is, 'Well, that is a business/management mistake that you made, but it shouldn't cost US money.'

In case you are wondering, we haven't had any conflicts with the builder to this point. We have had two 'allowance' items that both came in slightly higher than the builder and we estimated at the outset, and we paid them in cash the same day he asked. The only ripple to this point was that the excavator grossly underbid his cost on our basement, and the builder felt bad for him and was clearly inclined to try to find more money for him, (although he acknowledged that he couldn't really come to us for it).

So far, our strategy has been to ignore this 'change order' and see if the builder has the gumption to bring it up in person. Maybe not the most forthright approach (obviously), but we are a little upset that he even asked, since now we feel that we are forced to say 'no' to something that he seems to think he deserves, thereby putting his goodwill at risk when there is still so much house left to build.

Anybody still reading?? Sorry that was so long. Thanks for any perspectives anybody can offer (builders- your angle)?

By the way, the house can be seen at:

http://users.easystreet.com/zacher/House%20Jan%2004.jpg

and

http://users.easystreet.com/zacher/DSCN7920.jpg

Thanks a ton for your help!!

[Rich]

I just had a conversation with a truss manufacturer the other day that is providing the truss package for my current project. He stated that he had lost about 10k on a job because he signed a fixed price contract, more specifically a GMP, and plywood costs went through the roof.
Anyway similar situation - but the supplier ate the increase in costs. That's one side of it - but there are always 2 sides or more. I can see where the builder would consider that to be an unforeseen circumstance, much like below grade problems before excavation. On the other hand the builder should have honored the 60 day price guarantee for his clients.
Personally I would eat the cost or attempt to work out a portion of the costs with the owner.

[xaqman]

Well, the 60 day thing was between the builder and the lumberyard. Nothing that we the buyers even needed to know about, really.
I am surprised that you would consider asking your customers for a share of the overage. To my mind, the whole point of the fixed price contract is that the builder agrees to assume the risk of price fluctuations, in exchange for which he gets paid a price that he considers fair (in light of that risk). You can't have it every which way- full asking price, PLUS guarantee of excess money if it should happen to be necessary. The part that I find most irksome is that he could have minimized or even eliminated the increased cost by simply keeping an eye on the price of lumber as his lumber package price guarantee expired. Price is going up, you had better buy the lumber a little early (he has this capability, we checked before we signed with him). I guess you can't blame the guy for trying, but we kind of do...!

Of course the million dollar question is, "Had prices gone down after the lumber package price had expired, WOULD HE HAVE CUT US A CHECK??" No points for guessing the right answer...

[Rich]

That's really where the contention lies.. if the builder had done the right thing and purchased or locked into the lumberyard price the lumberyard would be eating the cost. And that's one side of it.
Why would you be surprised I would ask for a portion of the costs? The builder is in business just like anyone else to make money and I would attempt at all times to better my business. If the relationship is good b/w owner and builder then something may be able to be worked out. If not then I would eat the cost... but why wouldn't I ask? I've got to ask the question if nothing else.
Honestly, in the long run it really is the builders or the suppliers cost. If the legwork would have been done up front by the builder then it would be a non-issue. As I stated - I would probably eat it and attempt to make it up on the next 4 houses or something.

[Rich]

Oh.. in response to your "would they cut you a check?" - If you have a Time and Materlals contract then it would be a non-issue because you only pay for cost of materials. Of course, the downside to a T&M contract is that there is no real incentive for the builder to cut costs (or even track budgets) on in other places.
In a typical fixed price contract that cost should be negotiated to the smaller amount. We actually see this quite a bit now a days where owners are actually keeping track of costs right along with the builder (relationships matter) and requesting deductions in cost just like the builders ask for increases.
Now you ask if they do? Not too often do you see it come to completion - typically the builder will try and do something else for the money instead of giving back.

[xaqman]

Well, when my wife, who is a senior manager at a large accounting firm, runs a fixed-price bid for a job, and then ends up eating some time for some unforeseen reason, she wouldn't even THINK of bothering the client with it, even if they lost money on the job overall. It puts the client in an awkward position of having to say 'no.' Granted, we are grown-ups, who can say 'no' when we have to, but it does add stress to the process (and muddys the water- 'I thought we had an understanding that this was a fixed-price...??').

A specific part of our negotiation was that he could pocket any costs he could save (of course), as long as the specs were strictly adhered to. Additionally, any change order that we, well, ordered, resulting in a reduction in cost would save us the difference. Also, when our early allowances went over, we VERY specifically discussed the future of the budget, and were ASSURED that the rest of the bid line items (except allowances), were rock-solid. Our household is a 'business,' too, which is why we can't afford to pay for the mistakes of others.

If you had an agreement with your lumberyard (60 day bid on a large package), and prices went up, would you expect them to come begging to you to bail them out of their very own agreement?? Profits are tight on the job (and it's early and you don't know what gremlins will pop up later), would you really give them a higher price for the lumber? If you would ask your clients for more money because it is 'a business,' then your answer should absolutely be 'no, of course not.' Otherwise, 'it's a business' to get as much out of the client no matter what. Seem logical?

If I had the money and time, I would have done a T & M contract with this builder, since I do trust him, and I know he would be happier. Unfortunately, that was not an option.

I just can't help but be surprised at the way people try to warp the contract they have agreed to, but then again, I actually don't mind paying my taxes! How's that for un-American??

I don't mean to give the impression that we are 'battling' the builder. Things are still very amicable, and he hasn't brought up the plywood again (yet).

Thanks a ton for your perspective! Really cool to have this kind of forum, and obviously you (Rich) put in a load of work! Nice job.

Zach

Ps They are roofing today, and the windows got delivered!!

[Rich]

I'm not saying I disagree with anything you've said.. I'm just trying to give you other thoughts to run through. I think you have a pretty good grasp on the right thing to do.
Now I wanted to mention what is considered an unforseen circumstance in any contract and by law. Excavation is going to start in a few weeks so we pothole to see what's down there before we provide a bid. Everything looks good so we enter in a bid, fixed price, for X dollars. Upon excavating half the project we run into some old footings that the geotechnical report didn't catch. We need another 2 weeks longer and another Y dollars to do this work. Who pays for it? The owner - because it's an unforeseen circumstance.
Now as far as the price of lumber skyrocketing because of a war or natural disaster - how is that not an unforeseen circumstance.
haha.. now after all that as seen from 2 different perspectives - should a lumber supplier attempt to get the correct amount for lumber if a 60 day quote was given over 60 days before purchase? Is it his fault that the builder failed to purchase or in some other method lock that price in?
Anyway.. I rant on and apologize. There are so many different perspectives to a situation that it's counterproductive to discuss all of them..LOL.
It's a good day when the home is dried in isn't it? Keep us all updated on how it's going. You can also post pictures if you like.

[mfinley919]

It sounds like you are paying a mark up on materials also.

I would pay the difference but only the true cost of the difference, not the difference plus the mark up.

Why?

1) Everything you are paying for is going into your home, you are actually getting the wood, it is going into your home, these are actual materials.

2) Yes, you could force the contractor to eat it, but do you really want to? You win and get the satisfaction, he looses and is pissed off whether he acts like it to you or not. Do you really want to piss off someone who has so much control over the out come of your house? Piss him off and he will be less likely to look out for you for the rest of your project. Keep him happy and that $1400 will probably come back to you 3 fold.

3) What are your true alternatives if he just walks off the job? Sue him for specific performance? What if you lose, you still have to buy the lumber at the new prices. What if you win? Do you want a contractor building your house that has to under a court order? I sure wouldn't.

If you decide to pay for the overage, make sure your builder is aware of how much time you took to decide to pay it or not, it doesn't make any sense to have him think you just rolled over and paid it no questions asked, that could open the door to more and more overages. Make sure he knows that you are reluctant to pay the overage but are doing so this time in good faith and for reasons of keeping everyone happy but you expect him to understand that you are doing it this time only and expect him to really know that there won't be a next time. He should really appreciate you and understand that he dodged a bullet and he will want to do an even better job now for you then before because he really respects you.

[linear]

From my (homeowner, not builder) perspective, mfinley gets it right. I had to make similar concessions and worse ($1400 for plywood? try $14000 for septic on for size) and we tried to remain focused on one specific goal, and that was getting the very best house we could for the dollars, even if it meant letting our sense of fairness/propriety/reasonableness get bent a little out of shape (or even a lot, honestly).

I have also entertained notions of legal action against my builder. I'm within days now of taking possession on my house which is behind schedule by something like 5 months. My builder is an utter bozo but he managed to build me a great house at a fair price and that's the thing that matters irrespective of delays, cost overruns, or my injured dignity.

Focus on the house, and like mfinley and Rich have said, keeping the relationship sweet works out best in service of that goal.

[Dano]

Just to put my "two cents" worth in...we deal with GMP's all the time and we will even negotiate with the GC in certain circumstances even though they are obligated by contract to absorb these overages. BUT...we deal with GC's over and over again therefore it's advantageous to us to work things out....because if we didn't...it would most certainly bite us the next go around

[Rich]

Definately - repeat business is a great motivator. It just makes sense to negotiate stuff under those circumstances.