Cost plus or fixed price?

A recent decision of the Full Court of the Supreme Court of Tasmania, Kronenberg v Bridge [2014] TASFC 10, highlights the potential pitfall in a cost-plus contract of attempting nevertheless to provide some indication to the client of the likely total cost to build.

In Kronenberg, the parties entered into a contract for the construction of a residential home, using the standard form ABIC Simple Works contract (ABICSW-I 2002).  The home-owners sought a fixed price contract while the builder wanted a cost-plus arrangement.  In the end, the figure of $340,000 was put as “the contract price” in the schedule to the contract with the words ‘AS A COST PLUS CONTRACT’ written next to it and initialled by all parties.  A separate document with some additional terms was also drawn up which included the words ‘ESTIMATE 340 K EX GST’ but then continued to break that figure down into lump sum payments to the builder, deposit and retention, etc.  The costs blew out, a dispute arose and the builder ceased work.  The owners sued for the costs of completion and the builder cross-claimed for unpaid work.

At trial the owners claimed that the contract was intended in substance to be a lump sum contract or in the alternative a cost-plus contract that was subject to a cap of $340,000.  The court did not agree, giving significant weight to the initialled words above and finding that the words in the additional document signed were merely in the nature of a recital.  However, the owners also claimed that by giving the estimate, the builder contravened the Tasmanian Fair Trading Act 1990, which provides that a person must be engage in business conduct that is, or is likely to be, misleading or deceptive.  Those provisions are practically identical to similar provisions in the Commonwealth Trade Practices Act 1974 and Australian Consumer Law.  The court accepted expert evidence which showed that the estimate given by the builder of $340,000 was so low as to be misleading (the evidence was that the house would instead have been likely to cost around $380,000 – $450,000 to build).  The builder also admitted under cross-examination that he has a suspicion the cost would in the end be more than he estimated.

The court found that by being misled into accepting the $340,000 contract, the owners missed an opportunity they had to accept a fixed price quote they had obtained from another builder for $375,000 and after taking into account the cost to the owners of having the house completed awarded damages of around $208,000.

The case highlights firstly the importance making sure the nature of the contract price, whether lump sum or cost plus, is spelled out in a clear and unambiguous way in the contract, and secondly that if providing a client with an estimate of costs to build that there are reasonable grounds for the estimate given.  A range rather than a single figure would, in many cases, be more appropriate.

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