Everyone in the construction industry knows two things about modern construction financing: first, construction costs, in general, are skyrocketing, and second, construction cost overruns are increasingly common, affecting most construction projects. Builders know only too well that cost overruns erode their bottom line.
However, many builders do not know that cost overruns are usually avoidable and often occur due to the mistakes of the contractors, administrators, and other personnel involved in the project. As such, the builder who ignores cost overruns or assumes that overruns are unavoidable may become the only person on the project who does not get paid in full for his hard work.
At Arenson Law Group, PC, our team of experienced Cedar Rapids architect and design law attorneys advise builders in the Cedar Rapids, Iowa area regarding cost overruns. We understand the ways in which construction personnel negligently (and sometimes intentionally) inflate construction costs at the expense of the builder.
If you are facing a construction cost overrun and suspect that you are being asked to pay for the mistakes of your construction team, call us at (319) 363-8199. We are ready to help you investigate cost overruns and assist you in getting paid for your hard work.
The Causes of Cost Overruns
A cost overrun simply means that construction costs are more expensive than previously thought, and may even exceed the project’s budget. Unfortunately, in modern construction, cost overruns happen all the time.
Sometimes, cost overruns are innocent and unavoidable. For example, the price of materials, such as lumber, may suddenly spike, leading to unexpected costs that affect the builder’s ultimate profit. Sometimes contingencies, and the costs associated with changing plans, are unavoidable. A good construction budget and properly written contracts with construction personnel should allow for leeway when these unexpected and unavoidable difficulties arise.
More often, cost overruns are due to human error. Some of the most common causes of cost overruns include the following:
- Poor project planning: If, for example, the architect produces faulty plans at the beginning of the project, expenses may be higher due to the need to correct the architect’s mistakes. Likewise, anyone charged with conducting planning at a construction project can make planning errors that drive up costs.
- Poor budget forecasting: Contractors and other personnel may provide artificially low estimates, leading to surprise costs later on. This sometimes happens because contractors and other personnel lack the skills to budget appropriately. Too often, contractors have a subconscious motive to quote prices that are too low, in order to impress the builder and win the job.
- Poor project management: A project manager who fails to properly plan the logistics of construction and the order of operations will drive up construction costs due to delays and similar problems.
- Poor quality work: Contractors who provide defective work drive up construction costs, as their work will need to be corrected at further expense. In more extreme circumstances, the faulty work of contractors may destroy work properly done by other workers, such as when an electrician improperly wires a house and starts a fire. Administrators can also drive up construction costs when their work is poorly done.
- Intentional misrepresentations/fraud: Because of the emphasis on cost control in modern construction projects, some planners, contractors, and other personnel intentionally quote prices that are unrealistically low to secure funding or hiring, leading to a cost overrun when prices must inevitably be raised to complete the project.
- Theft: Unfortunately, not all personnel at a construction project are honest. Theft costs builders thousands of dollars per year, and in more severe cases can even drive a project over budget.
Protect Yourself from Cost Overruns
Fortunately, builders facing massive losses from cost overruns have several potential legal remedies. Some of the most common remedies include the following:
- Breach of contract: Often, payment demands for inflated construction bills are contrary to the contractual terms agreed upon by the builder. Even if no written contract exists, damages may be obtained through alternative remedies such as promissory estoppel if it can be shown that the builder relied on a misrepresentation to their detriment.
- Negligence: If the cost overrun occurred because someone on the project made a mistake that damaged the project and cost money, the builder may be able to sue for negligence, depending on the facts.
- Malpractice: Certain professionals involved in construction projects, such as engineers and accountants, may be liable for malpractice if it can be shown that their conduct was below the standard of a reasonable professional, as may often be the case when large cost overruns occur.
- Breach of fiduciary duty: Certain professionals, such as attorneys and accountants, may owe what is known as a “fiduciary duty” to the builder. A “fiduciary duty” means that the professional is obligated to act strictly in the interest of the builder when working on the project. A breach of fiduciary duty may occur when professionals intentionally cause a cost overrun for their own gain, such as when the cost estimate is purposefully deflated to secure a bid.
- Fraud: Finally, in cases where personnel intentionally lie or steal, personnel may be liable for fraud. Fraud is more difficult to prove than the other causes of action but allows the builder to recover high damages, including attorney’s fees and punitive damages. Further, fraud cannot be discharged through a declaration of bankruptcy.
Contact an Attorney
If you are in the Cedar Rapids, Iowa area and you are facing a cost overrun, you may have options other than to pay the cost difference. At Arenson Law Group, PC, our team of highly experienced attorneys can review the circumstances surrounding your case and advise whether you have a viable claim. If so, we can help you approach whoever caused the unnecessary cost overrun, and help you negotiate a favorable settlement. If that’s not possible, we can help present your claim in the best possible light in a court of law.
Written by James H. ArensonLast Updated : January 20, 2023