Construction contracts based on Time and Material (T&M), also known as “cost-plus,” have a certain appeal for project owners versus a fixed price contract due to their built-in transparency for actual costs incurred. The contractor’s profit is also predetermined as part of the fixed hourly labour rate. At the same time, there is an obligation on the contractor not to be wasteful and to maintain reliable records and time sheets.
To illustrate how the courts might view T&M contracts when disputes arise, Rob Kennaley of Kennaley Construction Law references commentary made by Associate Justice Todd Robinson of Ontario’s construction lien court in Toronto, concerning Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Company Limited.
Justice Robinson places emphasis on exercising “a degree of diligence” when it comes to incurring, without prior approval, costs that are “significantly higher” than an estimate, and on the possible denial of costs that are “wasteful or uneconomic.” Timely notice is important as well.
Kennaley notes the justice’s comments place “a heavy onus on a supplier to prove the amounts claimed under such a (T&M) contract.”
However, the onus can shift back and forth as doubt is cast on the reliability of any cost records.
“If the court is left in doubt, the contractor fails.”
“These contracts can be attractive, however, where the design is not certain or where unforeseen conditions are anticipated, such that a fixed price model might not ensure the best possible price,” Kennaley writes.
Although often used in custom home contracts, Justice Robinson’s comments can nevertheless apply to all projects.
Rosalie Clark, partner with Clark Wilson LLP in Vancouver, offers an example of how interest for overdue amounts can factor into a T&M contract, citing the B.C. Court of Appeal case, Highridge Homes Ltd. v. de Boer.
The de Boers were owners of a new custom home under construction. They fell out with their contractor, Highridge, over excavation costs, Clark explains. The owners posted security for the lien, but Highridge commenced an action to perfect the lien, seeking damages and lost profit. They also included a claim for the contractual interest due.
At court, Highridge succeeded for the most part. The trial judge ordered the de Boers to pay the majority of costs, on the basis that the contract had been terminated by mutual consent. However, the interest due on the final invoice amount, calculated from the date that security was paid, was not included.
Highridge appealed that part of the ruling and was ultimately successful.
“As stated by the Court of Appeal – the fact that security was paid to discharge the lien does not mean that the funds were released to Highridge or that Highridge had control of the funds,” writes Clark.
This case adds further caution to the use of T&M contracts.
“(The) Court of Appeal has made it clear that payments made as security to discharge a builders lien will not limit any applicable contractual interest provision that may apply to late payments due under a construction contract,” writes Clark.
She notes Highridge was awarded 56 months of interest at the contracted rate of 12 per cent, adding considerable cost to the dispute.
Kennaley and Clark have other suggestions for parties contracting under T&M arrangements.
“Owners and contractors should carefully review the terms of their contract to confirm what procedures are in place for change orders and authorization for extra costs,” writes Clark. “The contract terms should be followed and neither party should rely solely on a cost estimate as a means of controlling the price in a cost-plus contract.”
Kennaley adds disputes can be avoided if suppliers “give notice if an estimate is going to be exceeded and seek approval or confirmation that the client is nonetheless willing to have the work continue on the cost-plus or T&M basis. The supplier should keep very detailed records of the costs incurred, to be ready to prove the reasonableness of the costs.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.