Can a General Contractor Significantly Increase Work Costs?

Issues regarding work costs and the type of contract entered into by a general contractor and his client have been the cause of countless conflicts, especially when cost overruns occur along the way. Who should pay for these “extras”: the client or the contractor?

First, it is worth mentioning the three types of service contracts usually used in the construction industry:

• the estimate-based contract,
• the fixed-price contract and
• the cost-plus contract.

This article will focus on the estimate-based and the cost-plus contract.

Contrary to popular belief, these contracts are not the same. Therefore, a contractor would be wrong to claim, for instance, to have entered into a cost-plus contract with a client, solely on the basis of an estimate provided to the latter beforehand. The fact is, it’s either one or the other. The only time that both an estimate and a cost-plus contract will exist is when the parties mutually agree to disregard the contractor’s estimate and instead rely on the actual costs incurred to complete the work.

To properly understand the issues surrounding each of these two types of contracts and to make sure that you enter into a contract that meets both parties’ needs, an overview of the rules underlying each type of contract is relevant.

Estimate-Based Contracts: Greater Protection for the Client

The purpose of an estimate-based contract is to set out the costs for the work to be done. For the client, it represents a “budget,” whereas for the contractor, it’s an approximate price range that he must meet to complete the work. An estimate, in itself, does not constitute a contract; it is upon later entering into a contract based on said estimate that makes it enforceable against the contractor.

Consequently, something that could simply be seen as a way for a contractor to be transparent and to manage its client’s expectations as to the costs of the projected work may actually bind him going forward and may even set out the parties’ obligations.

In this regard, the words of author Guy Sarault in his book “Les réclamations de l’entrepreneur en construction en droit québécois”, which have been quoted on several occasions by the Québec courts, are all the more relevant: “Thus, [...] where the evidence shows that the client’s intention was not to grant the contractor freedom to price the work, but rather to stick to an order of magnitude or an estimated price, then we are dealing with an estimate-based contract which requires the contractor to justify any additional costs over and above the original estimate, which is not the case in a cost-plus contract” (our translation).

That being said, a contractor’s obligation to abide by the estimate is one of means, not result. The contractor is allowed a reasonable variation between the estimated cost and the actual cost of the work and may claim from its client any excess costs that were not foreseeable when the contract was signed, as long as he can prove the unforeseeable nature of these costs and provide adequate justification.

While some contractors may be tempted to include a clause that would prevent an estimate from being binding on the future of the contractual relationship, the courts are not bound by such a clause or by the characterization the parties may give to their contract, the focus of the courts being on the true intent of the parties at the time of entering into the contract.

In light of the above, and in theory, when a contract is based on an estimate, the contractor will be bound by that estimate and will have to bear the cost overruns for the work, unless they were not reasonably foreseeable at the time of providing said estimate to the client.

Cost-Plus Contracts: Greater Freedom for the Contractor

When a contractor and a client choose to enter into a cost-plus contract, they inevitably intend that there will be no limit to the work cost, as long as the contractor reports as accurately as possible on the costs incurred throughout the project, at the client’s request.

In such a contract, there is no question as to whether a contractor can significantly increase the price charged for the work performed, since no price is determined in advance for the work to be performed.

Nevertheless, a contractor’s duty to inform and act in his client’s best interest remains and is even more significant in a cost-plus contract. From the very first contact, the contractor must keep his client informed of any elements that could influence the final cost of the work, such as the price of materials on the current market, and account for any expenses incurred, those that will have to be incurred and the necessary work-related services to complete the entire project. The contractor has a duty to disclose information until a contract is entered into with the client. Once it has been signed and throughout the execution of the work, the client who wishes to know the status of work costs must submit requests to the contractor in order for the latter to account for the status of the work, the services already rendered and the expenses already incurred. The contractor is bound to comply with each of his client’s requests as thoroughly as possible. In other words, if the client does not ask for any information, the contractor is not required to report, and sending detailed and accurate invoices will be deemed sufficient.

From our analysis, we conclude that estimate-based contracts offer more protection to clients than cost-plus contracts in terms of work costs, since cost-plus contracts offer the contractor more flexibility when dealing with a project full of uncertainties and contingencies.

Therefore, it is essential for a contractor to fully understand what is at stake when deciding on the contract to be entered into so that he can conclude contracts that will reflect both parties’ expectations and thus avoid cost overruns that he will then have to bear due to a lack of appropriate and necessary legal precautions.

For any question regarding the various service contracts used in the performance of construction work, feel free to contact our construction litigation team, who will be pleased to assist you.