Cost-Plus Considerations from the Courts
The cost-plus model is a common form of construction contract where the client pays the contractor for the actual cost of the work (i.e. the actual costs of the material, equipment, and labour) plus an agreed percentage or fee for the contractor’s overhead and profit. CCDC 3 is an example of a cost-plus contract. Cost-plus contracts can be used both by an owner who directly retains a contractor, and a contractor or subcontractor that subcontracts to a trade or supplier.
In recent years, the court has released cases with important considerations for owners, contractors, and subcontractors using cost-plus contracts. We discuss three key lessons below from Sjostrom Sheet Metal Ltd. v Geo A. Kelson Co. Ltd., 2023 ONSC 4959 (“Sjostrom”) and Infinity Construction Inc. v Skyline Executive Acquisitions Inc., 2020 ONSC 77 (“Infinity”).
Background
In both Sjostrom and Infinity, the parties used a form of cost-plus construction contract. In Sjostrom, a subcontractor hired a sub-subcontractor to perform sheet metal labour and compensation was based on actual hours spent to complete the labour. The court described this as being similar to a cost-plus arrangement. In Infinity, the owner retained the contractor through the standard form CCDC 3 cost-plus contract.
Key Lesson 1: Use diligence to maintain reasonable costs
The courts in both cases emphasized that contractors and subcontractors carrying out the work under a cost-plus (or other open-ended pricing model) contract must “exercise a degree of diligence” in carrying out the work so as not to incur costs significantly higher than originally estimated or budgeted.
Even if such a term is not found expressly in the contract itself, courts will also often imply terms preventing payment for wasteful or uneconomic use of labour and materials. This incentivizes efficient work by the contractor or subcontractor, as excessive costs may not be recoverable in a lawsuit.
Key Lesson 2: Be accurate when presenting a budget/estimate
When a contractor or subcontractor provides a client with a budget or estimate for work on a cost-plus basis, the final price should fall somewhere reasonably near the estimate (subject to unforeseen conditions and changes, of course). Where there are cost overruns, a contractor or subcontractor must promptly notify its client.
The sophistication, knowledge, and reliance of the parties, as well as any approvals given or restrictions on liability imposed, are relevant factors that the court may consider when assessing a claim of costs that are materially higher than originally estimated.
Key Lesson 3: There is a heavy onus on the contractor/subcontractor
A contractor or subcontractor seeking to recover on a cost-plus basis has a heavy burden to prove its costs in a lawsuit. The contractor or subcontractor should be ready to prove its costs with supporting evidence. Once the contractor or subcontractor proves that it has kept proper accounts and can show documentation to support the costs claimed, the onus then shifts to the other party to provide evidence showing that the amounts claimed or the accounts are incorrect or unreliable.
Once doubt is cast on the costs or accounts, the onus shifts back to the contractor or subcontractor to satisfy the court that the accounts are accurate and supportable. If there is any doubt remaining, the courts in both cases are clear that the contractor or subcontractor will likely fail on the claim.
In terms of labour, it can be difficult to prove the time spent after-the-fact without reliable and accurate records. Materials costs are often easier to prove because there are usually receipts and invoices supporting the amounts, quantities are recorded, and the materials are incorporated into a building that is in existence by the time the claim is brought.
Conclusion
Claims relating to cost-plus contracts can be complicated and difficult to prove. However, any party to a cost-plus contract can help protect its interests by using diligence at the outset of the project to ensure pricing is as accurate as possible, and by keeping detailed and accurate contemporaneous records as the work progresses.
This article is not legal advice and is provided for informational purposes only