“What is it going to cost me?” This is a question every owner contracting for improvements to his property wants answered before signing a contract. And if the parties are entering into a “cost-plus” or “time and materials plus a fee” contract without a guaranteed maximum, not-to-exceed price (see Blog #136), the contractor or architect who gives an estimate for a defined scope of work won’t treat it as a quote. Conversely, the owner will naturally assume that the number is “in the ballpark” and rely on it in deciding to proceed with the project.
What happens if the estimate is wildly off the mark? Does the owner who signed a cost-plus agreement have to pay the full documented costs of the project?
To answer this, we must first eliminate “scope creep” and unforeseen events from the mix. An estimate can be blown up by the owner authorizing added work, by unanticipated delays in construction, and by unknown site conditions. But if none of these factors are present, the estimator’s negligence in grossly underestimating the job may be a legal excuse not to pay the full overage.
“It is the duty of one who volunteers information to another not having equal knowledge, with the intention that he will act upon it, to exercise reasonable care to verify the truth of his statements before making them.” Wyle v. Lees, 162 N.H. 406, 413 (2011). Proof will be needed that the estimator did not exercise reasonable care in fashioning the estimate – and gross disparity between estimated costs and actual costs is a datum tending to prove lack of reasonable care. TMS Architects, P.A. v. Rivers, 2011 WL 8193483 (N.H. Super. July 13, 2011) (“[Defendants’] original cost estimate of 3.5 million dollars was naive and unrealistic. The fact that the final numbers of completion reflected a cost of 7.5 million dollars supports that conclusion.”).
In Unity School District v. Vaughn Associates, Inc., 2017 WL 280695 (D.N.H. Jan. 20, 2017), an architect was sued for negligent misrepresentation when a school district, relying on the architect’s estimated cost of $4.7 million for a new elementary school, hired the architect to act as construction manager for the project on a cost-plus basis. The project ultimately cost $9.165 million to complete. The architect’s effort to dismiss the negligent misrepresentation claim was rejected based on expert opinion evidence that “a reasonable architect would or should know that such a school would cost in excess of $8 million to construct.” (The case was later settled.)
There is no rule of thumb for how much of a disparity between estimated and actual costs is just too much in the eyes of the law. Some courts and commentators have referenced an industry standard of 10-20% overage as being within tolerance. No New Hampshire court has yet applied it. Some states have legislation precluding residential contractors from charging more than a particular percentage above the estimated price. (Pennsylvania, for example, caps the chargeable overage on a time and materials contract at 10%.) New Hampshire has no such statute.
Other factors may bear on whether an estimator exercised reasonable care in fashioning an estimate. Did he know that the owner’s budget for the project was inflexible, or fully financed by a construction loan? Was his estimate based on sufficient experience with the type of construction at issue? Did he first seek prices from subcontractors or suppliers, or consult published cost guides such as R.S. Means?
Parties are of course free to put guardrails in their contracts, such as requiring written approval before the estimated price is exceeded, limiting the allowable overage to a percentage of the estimate (a modified form of a guaranteed maximum price), or reducing the contractor’s profit on costs exceeding the estimated costs.
Defining the parties’ rights in the agreement is obviously smart. If the contract is verbal (never a good idea!) or if the written contract is ambiguous (people actually sign contracts that say ESTIMATE in bold type at the top!), you are courting disagreements over whether the estimated price was or was not intended to be a fixed price instead of a cost-plus arrangement.
What happens if the estimate is wildly off the mark? Does the owner who signed a cost-plus agreement have to pay the full documented costs of the project?
To answer this, we must first eliminate “scope creep” and unforeseen events from the mix. An estimate can be blown up by the owner authorizing added work, by unanticipated delays in construction, and by unknown site conditions. But if none of these factors are present, the estimator’s negligence in grossly underestimating the job may be a legal excuse not to pay the full overage.
“It is the duty of one who volunteers information to another not having equal knowledge, with the intention that he will act upon it, to exercise reasonable care to verify the truth of his statements before making them.” Wyle v. Lees, 162 N.H. 406, 413 (2011). Proof will be needed that the estimator did not exercise reasonable care in fashioning the estimate – and gross disparity between estimated costs and actual costs is a datum tending to prove lack of reasonable care. TMS Architects, P.A. v. Rivers, 2011 WL 8193483 (N.H. Super. July 13, 2011) (“[Defendants’] original cost estimate of 3.5 million dollars was naive and unrealistic. The fact that the final numbers of completion reflected a cost of 7.5 million dollars supports that conclusion.”).
In Unity School District v. Vaughn Associates, Inc., 2017 WL 280695 (D.N.H. Jan. 20, 2017), an architect was sued for negligent misrepresentation when a school district, relying on the architect’s estimated cost of $4.7 million for a new elementary school, hired the architect to act as construction manager for the project on a cost-plus basis. The project ultimately cost $9.165 million to complete. The architect’s effort to dismiss the negligent misrepresentation claim was rejected based on expert opinion evidence that “a reasonable architect would or should know that such a school would cost in excess of $8 million to construct.” (The case was later settled.)
There is no rule of thumb for how much of a disparity between estimated and actual costs is just too much in the eyes of the law. Some courts and commentators have referenced an industry standard of 10-20% overage as being within tolerance. No New Hampshire court has yet applied it. Some states have legislation precluding residential contractors from charging more than a particular percentage above the estimated price. (Pennsylvania, for example, caps the chargeable overage on a time and materials contract at 10%.) New Hampshire has no such statute.
Other factors may bear on whether an estimator exercised reasonable care in fashioning an estimate. Did he know that the owner’s budget for the project was inflexible, or fully financed by a construction loan? Was his estimate based on sufficient experience with the type of construction at issue? Did he first seek prices from subcontractors or suppliers, or consult published cost guides such as R.S. Means?
Parties are of course free to put guardrails in their contracts, such as requiring written approval before the estimated price is exceeded, limiting the allowable overage to a percentage of the estimate (a modified form of a guaranteed maximum price), or reducing the contractor’s profit on costs exceeding the estimated costs.
Defining the parties’ rights in the agreement is obviously smart. If the contract is verbal (never a good idea!) or if the written contract is ambiguous (people actually sign contracts that say ESTIMATE in bold type at the top!), you are courting disagreements over whether the estimated price was or was not intended to be a fixed price instead of a cost-plus arrangement.
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