ARE CONSTRUCTION ESTIMATES BINDING?
In British Columbia, courts have often ruled that estimates can be contractually binding upon the contractors who offer them. However, in such cases, a margin of error from 5% to 25% has been allowed.
On smaller projects, it is common for contractors to perform work on a cost-plus basis. In doing so, the owner is required to pay the contractor for the cost of construction plus a fee, which is commonly expressed as a percentage of the cost of construction and can be in the range of 5% to 15%.
Predictably, at the outset of the project, the owner may ask for, or be offered, an estimate, budget or quote from the contractor. In any of these documents, it is common to see language like “this estimate is not a fixed price but an estimate of the reasonable cost of the work” or “this estimate is subject to change.”
Such language is, of course, included for the express purpose of absolving the contractor of liability in the event of cost overruns. However, courts in British Columbia have often held contractors to their estimates, thus giving them contractual effect. In doing so, the court examines the circumstances in which the estimate was provided, the positions of the two parties, the knowledge of the party providing the estimate and whether it was relied upon by the party requesting it.
In deciding whether to give an estimate contractual effect, the Court, in the oft-cited Strait Construction Ltd, v. Odar, 2006 BCSC 690, considered the following factors:
- Did the agreement provide for a percentage of the project cost as a fee to the contractor?
- Was the price of overriding importance for the owner and was that communicated to the contractor?
- Was an estimate provided and did the owner rely on the estimate?
- Did the owner require the contractor to design a project at a specified cost or seek assurances as to what the project would cost?
- Did the contractor pay for the materials and labour and then bill the owner on a regular basis for the work done?
- Did the contractor make it clear that it was not assuming any of the risk if the final price exceeded the estimate?
- Did the contractor provide the owner with information regarding rates for labour, equipment rental, etc.?
Margin Of Error
The Court in Golder Associate Ltd. v. Mill Creek Development Ltd., 2004 BCSC 665 stated that, if it is determined that the estimate is given contractual effect, it must assess what margin of error may limit the extent to which the estimate is binding. The final price:
… must bear a reasonable relation to that which was estimated. There will be room for error, but the variance must meet a test of reasonableness.
In Patel v W.G. Housing Ltd., 2012 ABQB 734, the Court considered several factors in determining reasonableness:
118. Greater care into estimating accuracy is expected as the amounts at stake increase, militating in favour of a narrow band of variance. The more unique the subject matter of the project, the less experience the estimator will have from which to expect accuracy, militating in favour of a wider band of variance. For a project comprising numerous input costs, the expected variability in each input offset each other to a degree. In such cases the total variability, or range of reasonableness, is therefore narrower than for a project with only a few or just one cost determiner.
The Court must therefore determine:
… the value of the services rendered, by considering the reasonable costs and expenses incurred in performing the services, having regard to the amount of reasonable variance from the estimate in all the circumstances between the parties.” (Golder, para. 29)
- a 5% margin is reasonable for large, multi-million dollar projects with detailed plans, numerous inputs, and when both the estimate and the plans form part of a written contract;
- a 15% margin is reasonable if the project was smaller (in the range of $100,000) with many inputs, but which was not particularly unique in nature to the contractor; and
- a 20% or 25% margin is reasonable if the specifications provided were of a general nature, the improvement was unique, one would not reasonably expect that the estimator would have much experience with such work, the value of the contract was smaller ($50,000) and there were fewer inputs.
Contractors should ensure that owners aren’t surprised by the cost of construction when the final invoices are submitted at the end of the project. When providing estimates, contractors should include clear language that they do not assume any risk if the final cost of construction exceeds the estimate. An effective estimate is therefore one that is transparent, accurate and regularly updated throughout the course of construction to keep the owners abreast of future costs. Avoiding such a surprise will drastically reduce the likelihood of a dispute concerning project costs.