Put It in Writing

Comply With Insurance Statutory Requirements

All Out Contracting Ltd. v. Gourlay, 2020 BCSC 481, is another reminder that parties should agree to the terms of the construction contract in writing.   Failure to agree to various essential terms is a common problem in the construction industry and is discussed by the court in the first paragraph in this decision:

[1]  All too often, an owner motivated by haste or enthusiasm authorizes a contractor to proceed without ensuring that the relationship is clearly defined. Coincidentally, a contractor eager to secure the project, proceeds without clearly spelling out the nature of the agreement and the manner in which billing is to be done.

In this decision, the contractor agreed with the owners to tear down a failing retaining wall on a residential property and construct its replacement. The contractor and owners executed a document titled “Construction Estimate”. The document was provided by the contractor to the owners. The document set out that:

  • “[it] forms the contract between the Contractor and the Owner”;
  • “The amount estimated to complete the Job is an estimate only and the Job is subject to increased costs based on the circumstances on the Premises and nature of the Job.”;
  • “The set contract rate for the Work is $80,000 to $100,000”; and
  • the work required would be calculated on a “set price cost plus” basis.

The court held that the parties had agreed to how the costs would be levied (costs plus contract) but that the terms of the cost plus arrangement were not agreed to. Specifically, the contractor failed to set out the percentage it would charge as its profit margin and the owners did not agree to pay a particular percentage.

The court assessed the value of the work provided by the contractor, and determined a reasonable price for the work provided by the contractor, upon a quantum meruit basis. The court cited the decision of Rafal v. Legaspi, 2007 BCSC 1944, for the following summary of quantum meruit:

[30]  Quantum meruit will be available if the services in question were furnished at the request or with the encouragement or acquiescence of the opposing party in circumstances that render it unjust for the opposing party to retain the benefit conferred by the provision of the services.

The court noted that quantum meruit, as an equitable remedy, is flexible and can be assessed in a number of different ways, including the cost to the claimant of providing the services, the market value of the benefit, or even the value placed on the benefit by the recipient.

In this decision, the contractor was paying its full-time employees $15-$20 per hour, charging them out at $45 per hour, and then adding 15% as its profit margin.  The court found that this was more than a “cost plus arrangement” and was in fact a “cost plus plus arrangement”.

In determining a fair profit margin, the court considered the expert evidence provided by the parties and found that a profit margin of 7% was appropriate in the circumstances.  The profit margin of 7% was applied to both materials and labour. This resulted in a total amount of $162,194.50 owing to the contractor which was a significant reduction of the $206,505.80 being claimed.  In coming to its decision, the court stated that:

[78]  All of the confusion could have been avoided if All Out [the contractor] had spelled out its costs as matters proceeded. Any uncertainty in the figures is resolved in favour of the Gourlays [the owners].

Practical takeaways
  1. Put it in writing. If it is the contractor’s practice to rely on a proposal/estimate as the contract, then make sure the essential terms (or preferably all the terms) are included in the proposal/estimate.
  2. Contractors should have a standard contract, vetted for the essential terms, which they can confidently rely on when they are in a rush to secure work.
  3. If the contract is “cost-plus” or “cost plus profit” be crystal clear as to how the profit margin is calculated.
  4. The court specifically stated that it resolved any uncertainty in the figures in favour of the owners as opposed to the contractor. This should be a warning to contractors.