Performance Bond for a New Build in Lafayette

Hello Folks,I have been working for almost 15 months to get approval from Lafayette City and Contra Costa County to get construction started on our home. The lot was undeveloped when we bought it(we have developed it - PGE, EBMUD, CCCSD) and is now ready with utilities. When i secured a construction loan last year to make this happen, we had a general contractor come on board to help close the construction loan. The loan required a contractor to be on the record to show that this person was going to build the home with the allotted budget. Of course when the contractor signed the contract endorsed by the bank he said “we will make it work” in the budget and “we will get creative” and “move monies around” and make this happen. I have gotten in a situation now where the real costs are estimated to be 150k more than what was agreed. Every time i ask on specifics about how we will make it work, he skirts the topic.

What sort of a legal action can i take to make sure the home is built within the budget? The contractor can basically throw the towel anytime, correct? I have heard about performance bonds but not sure how they work. Upon doing a simple G Search i leant that they ensure the completion of a project in a stipulated budget. When we closed on the loan, we did not secure any sort of a performance bond. However, we have not started to build the home yet(just developed it so far). Any idea if i can purchase a performance bond now and how they work.

Any sort of advice, recommendation will be really appreciated. Thank you.

I had similar questions when contemplating whether to add a 3rd floor to my SF home and my architect thought the contractor I contacted was way off on the projected cost. In speaking to an architect buddy, he said well I could have some sort of “not to exceed x amount” agreement which I guess is something like what you are alluding to (a performance bond). The thing is, how do we know that your contractor simply won’t cut corners on somewhere else to meet budget? Hopefully, he is a credible builder but I have heard stories of local contractors who lowball bids on smaller projects like inlaw units or additions and the owner is left holding the bag and essentially has to pony up to finish the job. I guess again we all have to do our due diligence and get as many quotes from demonstrated builders/contractors. No one said this house stuff was for the faint of heart or wallet. Good luck.

First, I can’t imagine that you’re stuck with this guy building your home just because his name is on the loan. What should be important to the bank is that it gets built and finished. (but then again, I don’t know–maybe they’re sticklers and come after the contractor themselves if it doesn’t get finished)

Second, I think it would help to get other bids on the contract. If everyone else also quote you $150K more, then what do you do? I still would opt for a contractor who doesn’t say “trust me” with some hand-waving vs. one who breaks everything down for you and shows you “here’s a minimum if we use crappy wood, here’s the max if we use nice wood” There’s got to be a way to get the ranges of price based on quality of materials and let you “move the sliders” so to speak to meet your budget.

I’ve also heard of some people that have the builders do the “bones” of the building and they install the rest themselves. I’m not sure if you’re a DIY, but can you do the indoor painting to save $5K? Are there other things that might be cheaper if you bring in people themselves like carpeting or someone to do the bathroom?

The more i think about this, the more i feel that, he used a “wait and bait” strategy. He lowballed not really taking all the cost considerations and figured the owner will pay up once in the midst of building. I mean he signed a contract - does this contract have no sort of professional and legal obligation?

I am thinking if a performance bond can be set in place(usually 1-2% of contract price) for his additional costs of 150K, there would be some sort of surety from an insurance company that the job will be complete if the contractor bails out. That was what i was getting to.

Well, why isn’t this the norm usually when hiring a general contractor to do a big job? The bond would be voided if the contractor finishes on time and budget, however, if he doesn’t, then the insurance would kick in.

Thank you Terri.

I have to check with the bank to ask if they can chase down the contractor to get the job done within budget.

The bank disburses the construction loan only when they have approved a contractor for the build. It’s the bank which ratifies the contractor, checks his credit and is in good standing. They did all that and approved this guy already a year ago. For me to go ahead and pick another contractor would mean to have to redo all of this stuff again. Not saying it is not possible but it might come down to it if things go south.

What do you think is a reasonable price for getting a home built from scratch these days? Is $250 a decent low for a custom build in the East Bay?

3harkwo

I believe we have a member here who is a builder and of course other competent folks who can maybe chime in on the subject.

Again, just a few comments/questions as I understand the concern as you head into this big project:

  1. I really don’t think it bodes well if you are having concerns already with the GC before one nail is put down. Can I assume this was a recommended contractor? How did you find him?

  2. Did you not get several quotes from other GCs to compare cost estimates? I mean, if you did, and this guy came in significantly lower, well, shouldn’t you have questioned it/him then?

  3. Can you ask his references whether or not their projects went way over or not? Maybe the concern is unfounded and just the normal fear as you head into this project? I am just trying to be fair to your contractor whom we don’t also know.

  4. I had thought $250/sq ft was about right for my 3rd floor addition but my architect thought that was low now. Again, without having several bids from comparable contractors to review, how would I or you know? Again, I was somewhat surprised when my wife’s friend’s inlaw unit costedmore than I expected since I have built them before or helped friends do them. I have been told that labor and material costs have gone way up now.

  5. Again, with any big project, one must expect some budget overrun. Granted, you are doing it from scratch so it is not like there could be something discovered during a demo on a remodel job. Again, maybe someone here can give us what is a current sq ft cost now and/or can chime on the whole subject with hands on experience.

  6. Again, just because he signed a contract doesn’t mean he won’t cut corners at some point when he knows that he ain’t gonna finish within budget. I think you would agree, that is not ultimately what you want too. You want your home to be done right too.

@elt1/@ptiemann ?

$250 bare bones. .sticks and bricks only. …plus soft costs, land plus other issues. …I dont recommend building for amateurs…Even pros are leary about building in the BA…too many obstacles, unknowns and risks …plus subs are very expensive except in Stockton…got to find ones that will commute from there. .

Elt1,

From your experience as an actual builder, have you encountered a similiar situation as what 3harkwo has described? How did you approach it and fix/appease your client to his/her satisfaction? What are your suggestions to 3harkwo?

I am not a contractor. …I am a developer, designer and builder…I don’t trust contractors. …I would rather deal with the subs directly as an owner builder. …That said, prices have gone up and as more info appears and plans change, costs go up…If the op doesn’t have the extra $150k, then sell the lot…

@Elt1, thank you!

I can source the monies($150,000) but I want the assurance that the project will be completed within the budget and time frame. That is reason I was leaning towards a performance and payment bond. Is that bullet proof enough that it would not put me in hot water in case contractor defaults?

Control the contractor. …he is your employee…Only pay 90% of invoices. …make sure liens are released as paid…Get 3 more bids. .hold his feet to the fire. Get a bond too…but control the money flow…inspect the work often and keep him to his schedule. …and dont make changes…It will allow him to weasel out on time commitments

2 Likes

@Elt1 - thank you for the tips. Regarding the performance and payment bond - is this something the contractor should be paying for or should i be paying for it? Especially when it is 1-3% of the project cost. If i end up buying this, do you have any recommendations of surety companies from your personal experience?

You will pay for it…Have him apply…if he can get it…It is much mire common on public works projects. …may not be available for residential construction…

Hi Elt1, thank you once again!

If the general contractor refuses to get one(performance bond) even after i agree to pay, then should I be getting worried?

Performance bonds are not used in residential construction. …talk to some other contractors…