Project estimating is an essential part of the job. This article seeks to examine some simple steps that you can take to avoid claims when the work exceeds the estimate.
Price models
There are a number of different models of pricing work on a construction project. A commonly used method is known as cost-plus contract (also sometimes referred to as “time and materials”, “T&M” or “cost reimbursable”). Under this arrangement, the Owner agrees to pay the Contractor for its labour and materials used on the project, plus an agreed upon mark-up. Under this type of contract, an Owner takes on the majority of the risk of cost increases, but often retains flexibility to change the project requirements and details as the project goes along. However, this acceptance of risk is not a Contractor’s blank cheque.
Project estimating inaccuracy, and risk
We have been involved in many cases where a dispute arises about a project cost that vastly exceeds an estimate provided by the Contractor. Obviously, estimates are a practical reality, as an Owner will typically seek clarity as to how much a project is anticipated to cost. What Contractors sometimes fail to realize, is that providing an estimate can, if done improperly, raise the Contractor’s risk, if the project cost ends up coming in higher than an Owner anticipated.
Price, or estimate?
Contractors often believe that an estimate will protect them, and that an Owner will simply be required to pay whatever the project cost. They may be surprised to learn, that in some cases, particularly where the contract lacks clarity, an estimate may be found to be the contract price, or may be interpreted to be a project price ceiling, beyond which the Owner does not provide authorization. In assessing this, the court will assess a number of factors including the following:
- How important the project price was to the Owner (and whether/how this was communicated);
- Whether the Owner relied upon the estimate;
- How the Contractor billed (on a time and material basis);
- Whether it was communicated that the risk of cost of the project exceeding the estimate remained with the Owner; and
- Communications about cost as the project went along.
If an estimate is determined to be just that- an estimate- (and not the contract price or a project price ceiling), the Court still requires that the Contractor exercise reasonable care and skill in preparing the estimate.
Reasonable deviation
Final costs exceeding a project estimate are a common source of disputes. An estimate, properly drafted, is not a guarantee or warranty of cost; however, an Owner needs to be able to rely on the estimate to manage its project. In decided cases on this issue, only a “reasonable” deviation from the estimate will be allowed; beyond that, a contractor may find itself responsible for any “unreasonable” cost increases. What is deemed “reasonable” by the court, will depend on each unique circumstance. The trend of case law on this issue, seems to categorize “reasonable” estimate variations as falling between five (5) to twenty (20) percent.
Tips to decrease risk
Contractors may decrease their risk of being held responsible for costs beyond an estimate, if they take the following steps:
- Clarify on the estimate that the Contractor is not providing a guarantee of price, or a price ceiling;
- Clearly set out what is covered by the estimate, by providing sufficient description of the scope of work included in the estimate, and any work excluded;
- Clearly set out whether there are any limitations to the ability to provide an accurate estimate;
- Set out the assumptions upon which the estimate is based;
- Always notify the Owner promptly (preferably in writing), if costs increase beyond the estimated amount;
- Keep careful track of changes, and obtain change orders from the Owner, where the scope of work is altered;
- Provide regular cost updates to the Owner; and
- Decline to provide an estimate if critical information to prepare an accurate estimate is not available.
Estimates may be required to secure the job- but care should be taken to ensure that they are prepared with diligence and care to avoid an unhappy surprise, and likely dispute, at the end of the project.
Please reach out to us here at Synthesis Legal to discuss your project estimating questions.