CASE STUDY:

A residential client hired a general contractor (GC) to construct a major $3 million executive home. The client contracted separately with a reputable architect for the design. After the permit was obtained, the architects contract was closed out. The contract authored by the contractor discussed in detail what was reimbursable but did not tie the GC to a fixed price. The $3 million estimates are referred to as a budget in the contract. The owner had assumed because of verbal discussions with the contractor prior to the contract execution, and because of early estimates provided by the GC on paper where the word bid was used, that this was a lump sum $3 million agreement. These discussions and estimates were not tied to or referenced in the contract. There was not a third-party owners representative or agency construction manager (CM) involved, and the owner had never been involved in a construction project. During the course of construction, the owner and the city had requested several changes, but none of them were formalized into the contract. Many of these were additive but some were also deductive changes. Many of the changes were due to building code changes. Because the general contractor understood this to be a time and materials (T&M) project, they had not felt it was necessary to submit change orders against a budgeted amount. The GC had previously invoiced and received 67% of the original budget, or $2 million, from the owner. These invoices were all reviewed and approved by the lender. At approximately 90% completion, the GC invoiced the owner for the full 100% amount of the original $3 million estimates. When pressed, the GC indicated that the project will overrun the budget by approximately $500,000.

Questions:

The owner and the GC disagree. The owner refuses to approve the current pay request. Can he do that? The GC pulls off the job and refuses to do any more work until the owner agrees to the revised budget of $3.5 million and pays the $1 million now due. Can the contractor legally do that? The owner dismisses the GC at this point. Both parties sue each other. How did this happen? Who is at fault? What should have been done to prevent this situation? What do they do now?