Keeping Construction Costs Under Control: Costs-Plus vs. Guaranteed Maximum Price
One of the most frequent types of construction disputes centers on what is owed vs. what is charged for work. Whether due to poor contractual drafting, incomplete oral negotiations or parties failing to properly reach a meeting of the minds, what a contractor says is owed for its work is often far different from what an owner agrees is owed or is prepared to pay. Many of the issues which lead to such disputes were at the heart of the disagreements in Anway Construction Ltd. v Hunte, 2020 BCSC 601 (CanLII).
In the case the owners had hired a contractor to demolish a home and construct a new home. The owners put out a call for proposals and received several bids. The contractor’s bid was for a fix-price of $766,651.44 and described that price as the upper limit for construction. The parties went back and forth on details and the contractor provided a second quote described as “budget only” for $746,823 plus tax.
Further discussions and negotiations followed and eventually the parties entered into a cost-plus contract with a completion date of 10 months later and the fees to be costs of construction plus 10%. The original contract discussed a guaranteed maximum price (“GMP”) above which the contractor would not be entitled to payment but failed to detail what the GMP would be. To secure construction financing, a version of the contract with at $925,000 GMP was submitted to the owners’ bank. Whether the contractor agreed to this revision was a matter of dispute.
Construction began late for several reasons. As work progressed the contractor did provide ongoing costs of construction and comparisons to the original budget but did not provide information about how far along the project had progressed or provide a detailed construction schedule contemplated by the contract.
The parties began to have disputes about the budget, pricing, costs to complete, whether there was a GMP and whether the contractor exceeded the GMP. The owners’ bank caught wind of the disputes and refused to advance funds. The contractor and its suppliers and subcontractors stopped work and filed builders’ liens against the property.
As the dust settled, while there was some dispute about the numbers which was resolved by the Court, the contractor billed a total of $1,047,916.11, of which $924,54.56 was paid. The Contractor claimed $117,456.17 was owed in its lien. The owners took the position that the contractor was in breach of the contract including by exceeding the GMP. The owners had to re-finance and it cost near a million dollars to get their home to the point where they could move in.
The Court found that the GMP was in the contractor’s contemplation and communications before it was included in the revised contract. It went on to find that the construction contract was amended to include a GMP. Arguments about a lack of fresh consideration for the GMP amendment were rejected.
The Court also rejected that the contractor’s work varied significantly from the original plans such that claims for extras or changes to the scope of work were well-grounded. The court cited the well-known conditions of when extras are chargeable even where no change order is completed as detailed in Kei-Ron Holdings Ltd. v. Coquihalla Motor Inn Ltd.  B.C.J. No. 1237 (S.C.):
- the work performed was, in fact, “extra work” and not covered by the terms of the contract;
- the work was in fact authorized by the owner;
- the owner was aware that the extra work would increase the cost of the project; and
- the owner waived the provision requiring changes to be made in writing or acquiesced in the fact that the parties were ignoring those provisions.
The Court found that the contractor failed to satisfy at least the last two conditions. Even if the GMP did not apply and the contract was cost plus, the contractor had submitted a budget and was obliged to notify the owners when costs where overrunning the budget (citing Infinity Construction Inc. v. Skyline Executive Acquisitions Inc., 2020 ONSC 77), which the contractor failed to do. It was not until late in the construction that the contractor clearly indicated that construction could not be completed within the original budget, leaving the owners unable to do anything to get costs back under control.
The Court declined the owners’ arguments about misrepresentations made by the contractor.
Having found that there was a GMP, the court then turned to damages. The Court found that the owners were entitled to be placed in the position they would have been had the contractor properly performed the contract; more particularly, that work would have completed in 10 months for $925,000 plus GST.
The Court found there was insufficient evidence to explain why completion of the work increased so substantially once a second contractor was brought in to compete the work and, as such, did not make an award based on such increased costs. The Court awarded the following to the owners:
- $505,591.56 being the costs to complete the contractor’s work based on the level of progress achieved and having already been paid roughly the GMP amount;
- $153,135.26 being the amount to clear liens registered by the contractor and its suppliers and subcontractors;
- $113,748.33 being the costs to find alternative accommodations after when work ought to have been completed;
- $428.75 being a partial award of claimed moving costs;
- $7,533.86 being a partial award of claimed storage costs;
- $56,506.27 for additional interest and borrowing costs; or
- $836,944.03 in total.
Anway Construction Ltd. v Hunte is a cautionary tale to both contractors and owners. Had the contractor properly kept the owners informers of what it said were changes to the costs of construction and got such changes approved or had proper change orders executed, it might have succeeded in its claims for payment in excess of the GMP and defended the claims against it. Similarly, the owners had significant exposure in the case as only a small number of findings on contested evidence resulted in the difference between their substantial judgment vs. being found liable to the contractor for a debt in excess of $100,000.
Parties to a construction contract are urged to keep in mind that a budget is generally material to the interpretation and performance of a construction contract whether the contract is fixed or cost plus. Similarly, if the scope of work might be changing, such changes should be well-documented both as to how the scope is changing and what the effects the change will have on price. If the parties wish to have a guaranteed maximum price, contractual clauses related to that should be carefully drafted and kept in mind. Lastly, the best protection to owners and contracts is to have well-informed and well documented discussions of the progress of work, the costs of work to date, the costs to complete work, whether any budget is anticipated to be exceeded and as to the overall progress of work.
For related articles on the subjects in this article, please consider:
- Construction Estimates and Failure to Agree on Contract Pricing;
- Negligent Construction – Who to Sue and What to Sue For;
- Construction Disputes: A Contractor’s Right to be Paid vs. Owner’s Claims for Defective Work; and
- Extras, Delays and Completion Dates in Construction Disputes.
Jeremy Burgess is a litigation associate at Pushor Mitchell with broad experience in litigation including in several issues related to construction disputes. If you have any questions about a legal dispute, we’d be happy to assist you. Feel free to contact Jeremy in a confidential manner toll free at 1-800-558-1155 or at email@example.com. You may also contact our litigation group.
The foregoing is for informational purposes only and is not legal advice, nor should be construed as such.