I have a multifamily residential building owned by multi-member LLC. The LLC hired a contractor to design, apply for all permits, and replace external walkways on my building. We made several payments based on work he said he had performed and materials he said he purchased. Ahead of starting the construction, we found out he had not purchased the materials and not completed required drawings we had paid for. We sent a demand letter from an attorney asking for return of the funds for the materials not purchased and work not completed. He refused to pay.
We contacted the State Construction Contractor’s Board and ended up with a mediated settlement for about 40% of what was owed to us. We had a payment schedule and he made 1 of 6 installments. We then sued him for the remainder of the mediated settlement amount and received a summary judgment for the unpaid amount. He refused to pay the judgment amount, so we returned to the CCB to collect his bond, which amounted to half of what was owed to us. We are still owed about 30% of the mediated settlement amount, which we do not expect to receive.
We have hired another firm to manage our project and most of the original design and permit work needed to be re-done by the new contractor.
My questions are the following:
1) We paid the contractor for a significant amount for work that was not completed. This work was previously reported as “Construction in Process” on our taxes in anticipation this would be converted into a building asset once the work was completed. How should I report these expenses going forward? Should the original work paid for just be included as part of the total cost of the new asset when completed?
2) How should the funds from the one contractor re-payment and the bond funds be treated?
3) How should the unpaid portion of the settlement be treated? Is this a bad debt?
Thanks in advance for any guidance.
-[PII Removed]
