Eating Costs: Why You Feel You Need to Pay for Errors

"Your home is manmade. Jesus was a carpenter, but he wasn't one of the carpenters that built your home".

A few years ago, I was at the International Building Show, where I sat in on a panel discussion featuring John Crabbe of Crabbe Homes, TN, and he talked about setting and managing client expectations (or alignments, as I prefer).

He leaned into the audience and shared the “Jesus was a carpenter” quote, reminding us that new homes aren’t built by divine intervention but by humans, who will make mistakes from time to time, and that we need to learn set processes in our residential construction companies to manage those errors efficiently.

As professional remodelers running construction businesses, we often feel the burden to take financial responsibility for anything that goes wrong on a jobsite and triggers additional costs rather than having a conversation with the client about it.

But a remodel or custom-built new construction is a team effort that involves architects, designers, builders, and clients - and while you want to build solid working relationships and keep them all happy, you also need to know where to draw the line when it comes to rework and additional construction costs.

Why Remodelers Think They Should Pay for Errors

As a professional general contractor, we feel fully responsible for the success of the project, including all the communications between various partners, capturing the full scope of work, accuracy, craftsmanship, and cost data for the project because we want our clients to be satisfied.

After all, we’re embarking on a relationship with them that can last anywhere from 3-18 months, which is a long time to be working with someone - especially if they aren’t happy with you. And you will take it personally if your client is dissatisfied, no matter how big or small the project was or the size of your residential construction business.

This is why we often think we should just “eat this cost” to keep the client happy (and ensure they pay their final invoices and don’t leave negative reviews) rather than return to them with actual costs for errors. 

But that logic sets a bad precedent. Eating costs for errors that aren’t your responsibility devalues your work and opens the door for clients to continue to dissect every labor or material cost and hold you to an unattainable standard of perfection - or look for a cost reduction on the final invoice.  

That line of thinking also spills over into our relationships with our trade and design partners. We rely on trade partners, architects, and designers, all of whom are integral parts of any residential construction project. The possibility of jeopardizing relationships (or future work) with those partners often leads us to think that we should just cover for errors they made and absorb those cost overruns.

There Will Be Errors in Residential Construction

Remodelers build homes; they don’t cut flawless diamonds, which means errors are to be expected - and budgeted for. In fact, approximately 2-3% of your overall project costs in a home renovation will be spent covering missed material or labor costs and errors. Because even when you start with the most accurate estimates, your team isn’t made up of robots.

Humans make mistakes. That’s why they put erasers on the tops of pencils.

But there is a line between what we consider a reasonable error of average cost that should absolutely be charged back to a client, and a grievous error that should be dealt with by the building team.

It’s up to us to educate our clients early and often in the sales process to help them understand that these reasonable errors are direct costs to the job. If we don’t, and we continually cover the extra cost burden of all errors, it will negatively affect the company’s overall gross profit.

The Difference Between Reasonable and Grievous Errors

Residential construction projects involve many people moving at lightning speed, and in that frenzy, things will be missed, and errors will occur. It could be something as simple as an interior partition wall being framed 6 inches in the wrong direction because the team was working with an outdated designer drawing, or there was a miscommunication within the team on the color paint used in the kids' bathroom.  

Spending a few hours to shift that wall back or do some repainting because of a simple mistake is a reasonable cost that you shouldn’t have to absorb. And the cost to the client for fixing that error isn’t going to significantly overextend their budget - particularly on a larger project.

Simple errors and rework for reasonable events are just a part of the organic nature of the building process, and the client should expect this provided we’ve educated them in the sales and pre-construction process. 

A grievous error, however, is one that is extremely serious and falls outside of the scope of a “small mistake.” Grievous errors carry the highest costs, significantly impacting both the project timeline and money spent.

While there’s no set threshold for where the cost of a reasonable error ends and a grievous one begins because every job is unique, the following example would be a case where a grievous error has occurred, and the client should not be involved in covering the cost of fixing it.

Let’s say your team took it upon themselves to engineer a solution for a laterally unsupported top of a masonry wall where they had to connect a third-floor framed platform for a third-story addition.

In doing so, the roof height exceeded city bylaws by 14 inches resulting in the framing team needing to cut into a fully finished roof and redo the work to comply with city ordinances.

The total cost for that rework is $80,000.

This was an error that sits squarely on the team’s shoulders, having skipped a step in the process (consulting with the architect and project engineer to review how to balance the building requirements with the zoning rules).

While that was a simple step missed, it had a significant impact on both the timeline and budget of the project. Which means this should be on the builder to pay for and not the responsibility of the homeowner to bear.

The Difference Between Fixed-Cost and Cost-Plus 

Before you can have conversations with clients about managing and charging for errors, you need to find the line between what constitutes a reasonable error that the client can absorb versus a grievous error that requires the contractor (or their team) to pay for.

When it comes to billing a client for a reasonable error, you also need to account for whether you’re a cost-plus builder or if you bill your clients a fixed cost for a project.

Fixed cost pricing makes charging for errors a little more complicated because it does require going above the already-quoted price to the client, issuing them a change order, and having an awkward conversation with them about why it isn’t included in the quoted price.

The conversation around errors in a cost-plus environment is a little different because it doesn’t always involve a change order (although as a “best practice,” it really should), but it becomes a discussion about what’s “unbillable” to the client.

In cost-plus scenarios, we often convince ourselves that we should reduce our margins or eat internal labor hours to offset the difference between ongoing costs and the initial (or most recent) estimate.

Recently a client wrote me this:

We're wrapping up an addition and on my last billing cycle I forecasted a total of $175K. We're prepping the final invoice and hitting $185K. I can account for all of it, but it basically boils down to change orders I didn't track well enough during the last stretch. Client added changes and I didn't capture them. Unsure how much responsibility to take, maybe shave fee on the overage, apologize for the tracking oversite, etc.

In this case, the project cost increased because the client made knowing additions to the scope of work. The builder fell down on documenting those additions and ensuring the client signed off on them, but the costs involved in those changes are still real job costs.

When it comes to changes in scope from a site condition, client request, or designer/architect site instruction - the cost to perform that work is billable, and you shouldn’t try to convince yourself otherwise or think they are unbillable.

Actionable Advice to Stop Eating Costs for Rework 

I lived the builder life for over 20 years and found myself in plenty of situations where I was eating costs to keep the client, trade partner, or design partner happy. And through those experiences, I’ve developed key tactics you can use to ensure you don’t run into this same profit bleed.

Budget for Errors 

Approximately 2-3% of your overall project costs in a home renovation will be spent covering missed items and errors. Account for them in your fixed-cost remodeling business by adding 2-3% to your project estimate. This way, you’ve budgeted for it and will still make the intended margin you deserve.

Inclusions, Exclusions, and Clarifications 

We start each project with the least amount of information and build on it as the timeline progresses. Adding an addendum to your project estimate that outlines what is included and what’s excluded - and clarifies areas of risk where costs might exceed the contract amount can save you from bleeding profit in both fixed cost and cost-plus billing formats.

Proper Planning Prevents Poor Performance 

Otherwise known as the” 5 Ps of Project Management.” This code reminds you WHY you need to charge for your pre-construction (aka estimating) process. Slowing down that process ensures we capture as much information as possible so we don’t end up framing walls in the wrong spots or painting the kids’ bathroom the wrong color.

Establish Simple vs. Grievous Errors 

Come up with examples from your experience to date about simple versus grievous errors so you can share these examples with your clients to help them understand the difference between them and why they may be billed for them.

Educate Your Clients 

In your sales process, have the tough conversations with prospective clients about how remodeling projects move at lightning speed, and things often change on the fly, leaving us open to mistakes – like forgetting to log changes from a client and/or issue a change order. Help them recognize we are all rowing in the same direction, but that reasonable errors and miscues are likely to occur.

Be Consistent 

Nothing speaks to confusion like not following through on what you’ve told a client. If you’ve given them examples of simple errors, and then you don’t charge for them, you’re creating confusion. And when you confuse, you lose.

Report the News 

When you’re presenting final invoices and/or additional costs to your cost-plus client, it’s important to report the news to your clients with empathy (but without a ton of doubt-raising qualifiers). Also, don’t make assumptions about how the client will react and offer up the farm when they might be happy with a goat.

Protecting Your Bottom Line

We want homeowners to believe they are our sole focus and that their remodel or custom build is being done with the precision of factory-line robots. But, the reality is that we’re constantly juggling multiple projects with many moving parts at lightning speed, and we’re only human. And humans make mistakes. When that happens, errors will inevitably occur. But they shouldn’t always affect your bottom line.

I created the BUILD AND PROFIT SYSTEM to help residential contractors and remodelers run profitable businesses by implementing rock-solid systems that help ensure you aren’t bearing the financial burden for all the errors that can happen on a jobsite.

Click the button below to learn how the BUILD AND PROFIT SYSTEM can help you protect your bottom line and effectively manage clients' expectations.