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Cancelled Project

10/8/18       
Chad Member

Website: http://www.adamsarch.com

I recently had a project that was cancelled by a contractor. It was worth approximately $35,000.00. I had requested and was paid a 30% deposit. I did not have anything documented in my terms and conditions about what happens if the project is cancelled. Which I will be adding.

The customer cancelled the project early in the process. I had to travel to the job site and my drafter had a couple hours planning and laying out the project.

Do you suggest just adding up the hours and charging them that amount and writing a check back to the customer? Do you recommend keeping a percentage of the down payment or of the entire project?
Any other suggestions?

We are new to this contractor so there has not been a long-term relationship established.

10/8/18       #2: Cancelled Project ...
BH Davis  Member

There is no easy answer that anyone can give you. All you can do is weigh the pros and cons of any given return percentage.

In my opinion you should certainly keep a reasonable amount to cover your costs. Beyond that I would return the deposit in hopes it would bring the contractor back on a future project. To help him in that direction you could offer to apply the hold back towards a future project.

If you are considering keeping a larger percentage of the deposit you might want to discuss this with your lawyer first. The last thing you want is to hear from the clients lawyer down the road.

BH Davis

10/8/18       #3: Cancelled Project ...
Chad Member

Website: http://www.adamsarch.com

Thanks for the note.

I don't want to charge too much for the time and service we put forth toward the project but at the same time it sucks when a nice job like this is pulled away.

10/8/18       #4: Cancelled Project ...
MarkB Member

I would think it'd be fairly easy to quantify your investment and apply a reasonable amount to that. Whether or not the contractor, and the customer, are going to agree with your amount will be another story.

It'd seem an easy enough subject to breach in a quick conversation with the contractor.

You're of course going to get the response to amend your contract to accommodate for such cancellations and it makes me want to re-visit ours.

Ive never had the occasion to have to refund a deposit thankfully and we usually act very quickly when deposit lands so we would have material delivered, hardware on the way, and so on. We are a small shop so rolling anything special or even not so special into inventory would be something Im not even sure we would do for our best customers without some compensation on our end and regardless of how much I would guess we would lose money on the deal.

Would be great if you'd keep posted on the outcome for the rest of us.

10/8/18       #5: Cancelled Project ...
mike

If it was me i'd call the contractor and just have an honest conversation and ask if its going to be an issue to bill for your time involved in the project and mention a number. Maybe talk about why it was cancelled. I mean he's in the same boat and may or may not be able to recover time he has in it. I just would be gracious about it; never know what the reason is. Could be health or other issues. I recently had a client hold off on a project; It was partly due to a family situation and I told them I understood. Hoping she remembers me in the future. mike

10/8/18       #6: Cancelled Project ...
Alan F.

You should charge legitimate times and materials.
This would include drafting time ,site visit time ( make believe you are an employee and have to be paid), office setup for a project time and the cost of samples, if any. This should bill at your billable rate.

His contract probably limits markup to 15%.
7 hours at $75 or whatever your shop rate is x 1.15

You need to review all your steps, sometimes you will be surprised.

Maybe you paid for a certificate of insurance.

What you can't generally do is bill for profits you would of made or lost opportunities.

10/9/18       #7: Cancelled Project ...
D Brown

If you had a contract and were told to begin and then the client cancels, basically the contract may be void because they broke the agreement. I'm not saying to keep all the money but you do have the upper leg legally, for $100 talk to an attorney.

10/9/18       #8: Cancelled Project ...
Jerry

A contract is not void because one party defaults on it.

10/9/18       #9: Cancelled Project ...
Alan F.

Most construction contracts have cancellation clauses, most contractors bind subs to their contract with owner.

For a deposit to be non refundable the language for the deposit would need to be specific and legal in the state it was issued.

Some companies use language that the deposit will become liquidated damages if the contract is cancelled.

I think it would be hard in court to keep a $30,000 deposit where no work was done.

If you succeeded it would probably get hard to get work from GC's.

Typically, a termination for convenience clause states:

“Owner may at any time and for any reason terminate Contractor’s services and work at Owner's convenience. Upon receipt of such notice, Contractor shall, unless the notice directs otherwise, immediately discontinue the work and placing of orders for materials, facilities and supplies in connection with the performance of this Agreement.

Upon such termination, Contractor shall be entitled to payment only as follows: (1) the actual cost of the work completed in conformity with this Agreement; plus, (2) such other costs actually incurred by Contractor as are permitted by the prime contract and approved by Owner; (3) plus ten percent (10%) of the cost of the work referred to in subparagraph (1) above for overhead and profit. There shall be deducted from such sums as provided in this subparagraph the amount of any payments made to Contractor prior to the date of the termination of this Agreement. Contractor shall not be entitled to any claim or claim of lien against Owner for any additional compensation or damages in the event of such termination and payment.”

Termination For Convenience Clause

10/9/18       #10: Cancelled Project ...
rich c.

When you ask legal questions on here, you are getting one sided advice. And from very few with legal credentials. Looks worse for you since your contract had no cancellation language. Talk to a lawyer unless you want to go to court latter. It sure would make a bad situation worse if you violate the law and they can sue you latter. Have the lawyer help you with contract language permitted in your state while you are in the office.

10/10/18       #11: Cancelled Project ...
Paul Miller

Website: http://MCCWOODWORKING.COM

There are a lot of good replies here, so this is obviously something that happens. I would suggest you have an honest conversation with the contractor. I would want to know if the project is cancelled or did they find a cheaper source. I had a situation where we did drawings and jobsite visits only to have the contractor tell us that the project was not moving forward. Later, we learned that they had gotten their cabinets from an Amish shop. We had done all the drawings and site visits and we did not get paid anything. If you have a situation similar to this, you don't want to do business with this contractor.

You have gotten $10,000. For that money, I would not be too concerned about being sued. If you itemize your costs, you should be able to reach an amicable conclusion. Most lawyers will charge about $250 per hour if not more and it is not logical to sue for $7,000 or so.

Good luck, at least you go a deposit.

10/11/18       #12: Cancelled Project ...
Louie Member

Website: http://staystraight.com

I found myself in this situation back in 2008, not long after the crash. We had been working on a highly custom kitchen job for almost a year. About 6 months prior, the customer put the job on hold because he ran into problems with the GC doing sub-standard work that didn't meet code (our contract was with the owner, not the GC). We had approved drawings and were days away from ordering materials and cutting parts when the owner pulled the plug. Our terms were 20% on acceptance, 20% on start of fabrication, progress payments thereafter, so at that point, we had been paid for the work we had done, so I told him "Fine, let me know when you are ready to start again". After the crash, he got nervous that we would go out of business, so he asked us to refund the deposit, and promised that he would resume the job once things were settled with the GC, who at this point he was suing. I told him that we could maybe refund some of it, but that we had expended a lot of time on shop drawings, meetings, field measurements, cnc engineering, etc., and that any refund would have to be made in payments over time. His lawyer sent a demand letter the next day.

I get a lawyer, there is a back-and-forth, and we eventually wind up before a panel of lawyers in a pre-trial non-binding arbitration. At the time, I was using a paper calendar/organizer, and I had listed in there every meeting, every site visit, every day where I had set aside time to work on his drawings. The panel concluded that I didn't owe him anything, and that in addition, he was instructed to cover my legal fees.

They contacted my lawyer after to ask if I would still consider completing the job, since they already invested 20% in it. In the end, we completed the job and got paid in full.

The moral of the story is, don't take too much money in advance, and document the work that you do.

10/12/18       #13: Cancelled Project ...
Alan F.

Louie,
When we take deposits ,we do progress billings against it for materials purchased and work completed. That keeps our financial statements accurate.

IRS requires about 33% for overhead when we carry inventory and work in progress over year end. Once that 33% is recognized and tax paid on it that's money the customer owes on top of actual work.

We attached standard rates to every proposal so we have a system for changes and costs. Some company's don't like paying "manufacturing" overhead in shop rates so we bill them for machine time and part movement. We also have a set of steps we bill for if they don't accept manufacturing overhead.

a) Cost to receive and store materials
b) Cost to move materials to equipment
c) Cost to use each piece of equipment based on the published rates.
d) Cost to move parts between each piece of equipment.
e) Cost to store completed goods because the site was not ready
f) Cost to deliver each delivery
G) Charge for each field visit related to a change order.

there is a separate steps for office including receiving samples, labeling samples, sending samples, verifying materials are Carb II compliant.

It costs a lot of indirect labor to complete a job.

We were in one of the Arbitration rooms for over 13 hours once. We ended up paying about $.1 on the dollar they were looking or because we didn't have a signed document from a corporate executive advising of them of the risk.
If we had we gone to trial we would have won but not been without any fault because of the lack of a single signed letters so we would have had to pay the GC's legal fees which is what the 10% of what they were looking for was.

The go see a lawyer when there is not money spent or very little is a waste of time and energy in my opinion which is completely different than your situation where you had costs.

Click the link below to download the file included with this post.

Sample_Labor_Rates.pdf

10/12/18       #14: Cancelled Project ...
Karl E Brogger  Member

Website: http://www.sogncabinets.com

If it were me, if give the builder back his money. First I would give him the option to let me keep some of it.

1. If he's fair, he'll understand you have some cost and the two of you can come up with something.
2. It tells you something about his character if he tells you to pack sand.
3. If you eat it and wish to do business with that builder again, it's a in olive branch to extend. If he's worth anything, it'll be worth something to him that might curry favor in the future when you inevitably have something go sideways on you on one of his jobs.

10/14/18       #15: Cancelled Project ...
Larry

I would prefer to go the route that Karl E.B, suggests.

10/17/18       #16: Cancelled Project ...
LongEyeWood Member

Have an honest discussion with teh contractor and come to a compromise for your expenses and refund him the difference. I know its easy to say and hard to do , but i think the value of a client far outweighs the $10,000 deposit you have .

10/17/18       #17: Cancelled Project ...
Chad Member

Website: http://www.adamsarch.com

Thanks for all the feedback regarding the post.

Here is how I handled it: I added up all the time I had in the project as well as my drafters time. It added up to just over $1,500.00.

I then thought about the discussions we had with the shop re-arranging of our production schedule because they wanted to install the work before the snow starts flying.

So in the end, I decided to charge 20% of the down payment and wrote the contractor a check for the remaining down payment he paid me.

I was concerned about the relationship with the contractor, however they never used our services before this and they were located 3 hours away. They also don't tend to perform work that utilizes a lot of our products. I felt this was a one-time instance.

In the future, I will be putting something into our terms and conditions that the down payment will be forfeited if the project is cancelled. This has not happened to me a lot, but enough that the customer needs to know they have skin in the game when they committ to the project.

Oddly enough - we had a commercial project recently that was 2 weeks from being completed and a fire completely destroyed the building. It was a 6 story building being renovated into apartments and commercial space on street level. Luckily we had received progress payments throughout the project, but we were left without payment of $18,000. We are still trying work with the general contractor to get paid for the remaining amount. It could take a long time to get this sorted out with the insurance company. Point of this story is that you never know what can happen on a project - make sure you get paid and on a timely manner!!

Thanks again for all your opinions. It helped me make a decision on how to handle the situation.

10/17/18       #18: Cancelled Project ...
Alan F.

Chad,
You should have an installation floater that would pay you for your goods in this case.

Its pretty typical in commercial that you are responsible for insurance and care until the owner accepts it.

Then your insurance company chases his insurance company depending on the contract.

A-

10/18/18       #19: Cancelled Project ...
Chad Member

Website: http://www.adamsarch.com

I am going to be honest - I don't know what an installation floater is but I will check into it.

We were the manufacturer/supplier of our product and did not provide installation on our bid.

The owner had everything in his possession with the exception of the last couple units that we were working on in our shop.


View higher quality, full size image (1011 X 550)

10/18/18       #20: Cancelled Project ...
Alan F.

An installation floater insures goods in transit until ownership accepts the goods. You do not need to be installing the work.

If you do a common carrier delivery to another state and the load is damaged the floater will pay the difference between the pennies on the dollar from the truckling company and the cost of the goods.

It will also pay you for these circumstances. If they issued you a purchase order without any reference to their contract (the owner or contractor) without a sub contract or any requests for certificates of insurance then the owner may owe you if the contractors insurance doesn't cover you.

Construction contracts are all about eliminating risk, one way owners and GC's do this is require sub contractors to insure the projects and for the sub contractors insurance to step in and pay (waiver of subrogation) in circumstances that are not 100% the owner or 100% the GC's fault.

An installation floater would also increase your limits so if the most you had in your shop was 500k at one time but you had 3 500k jobs in the same building for different tenant you would be covered for 1.5M if the policy was the right amount rather than a max of 500k.

Part of the price of doing commercial work is assessing how much risk you are taking on (longer warranties, odd terms and conditions) and what you charge to take that risk.

10/26/18       #21: Cancelled Project ...
Kevin Dunphy

I think everyone who responded will stay small .A construction company like Ellis Don would give a list of expenses lost profit time lost maybe give back 100 dollars.
There a big difference between what a construction company makes per employee than a cabinet shop cabinet guys are to honest I'm a cabinet guy

11/2/18       #22: Cancelled Project ...
Alan F.

Generally you aren't going to get lost profits in a construction contract unless the work is underway. so if the GC built most the building but none of the finish contractors had started the contractors that hadn't started might get $3000 or $4500 as lost profit, but they would not get the money for the work they didn't do ($35,000) in this case..

12/17/18       #23: Cancelled Project ...
Matt

I'm going to agree fully Karl E. Brogger above. I couldn't have said it better myself.

Often times, taking a stand firm on your due dollars will cost you far more in the future.

If the builder himself is simply one that you do not want to set foot in your showroom again, then keep what you can and cut your losses.

But if you have any suspicion that this whole broken deal is an anomaly with an otherwise GOOD builder, take care of him.

Good builders are not easy to find. If you suspect he's otherwise a good builder, do what you can to be on his side here and take care of him.


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