When an Estimate Isn’t “Just an Estimate”
Carelessness in providing an estimate to a client can have serious repercussions when it comes to claiming entitlement to final payment. This can be true even with cost-plus contracts where the estimate is couched in language stating that it must not be interpreted as having contractual effect.
In a recent case involving a significant home renovation project gone awry, the court considered the context surrounding various estimates provided by a project manager/general contractor to the homeowners. The court found in favour of the defendant owners, who were represented by Jay Spiro and Ian Moes of Kuhn LLP, and ruled that a revised estimate provided during the middle of the construction had binding contractual effect.
The Case of Sea-Bright Builders Inc. v. Graves
A BC couple hired a local general contractor on a cost-plus basis in relation to a significant construction and renovation project. The project was riddled with delays and cost escalations, which quickly and significantly exceeded the owners’ original budget expectations. The owners found themselves underfinanced and uncertain as to how to finish their project. When the contractor estimated the owners required an extra $345,500 to complete, work came to a grinding halt.
The company sued the owners for the amount allegedly owing for work performed and materials provided under the contract until the point when work stopped. The owners counterclaimed, arguing that the losses they sustained from the company’s mismanagement of the project, including negligent estimating, and its deficient work product more than offset the company’s claim.
The Decision
The court found a significant degree of carelessness in the budget estimating. It also found that despite the “boilerplate” language attached to the estimates provided, the parties intended that one particular revised estimate provided by the contractor during the middle of the project, after costs had escalated substantially, had binding contractual effect.
In making this determination, a variety of factors were considered, including:
(1) the contractor’s knowledge of the owners’ financing situation and that costs were of overriding importance to them;
(2) the owners’ lack of experience with and knowledge of construction;
(3) the contractor’s representations in holding itself out as having expertise in estimating;
(4) the owners’ reliance on the contractor’s advice and the fact they obtained additional financing on that basis; and perhaps most importantly
(5) the owners’ clear communications that they could proceed only if the revised estimate was not exceeded.
The court held the contractor to its revised estimate, with a small 5% allowance for contingencies.
The court also allowed the majority of the owners’ claim for deficiencies; consequently, the contractor was left owing the owners for its poor work.
Lessons Learned
1. When giving an estimate, it is important to be diligent and thorough, especially in circumstances where a project is unusual or outside your company’s wheelhouse.
2. Provide regular updates to clients on costs and inform them quickly if costs are exceeding the estimate.
3. Do not assume you are protected by language stating that an estimate does not have contractual effect, particularly when the client clearly indicates costs are an overriding concern.
4. Before engaging in costly litigation, be confident in how your project was managed and in the quality of the work provided.
5. Make sure deficiencies are dealt with, to a reasonable extent, before demanding final payment.
6. Where the work does not meet the standard required under contract, clients may have a valid counterclaim for significant damages.
This article was written by Anne Cochrane, Jay Spiro and Ian Moes, lawyers who practice construction law with Kuhn LLP. This article is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have any questions or comments about this case or other construction or commercial law matters, please contact us at 604-684-8668.
