Alex Vigneault, Carroll Heyd Chown LLP
Cost-plus contracts remain a common choice in construction projects because they offer flexibility. Under these agreements, an owner agrees to pay the contractor for the actual costs of the work—materials, labour, equipment—plus an additional fee or percentage for overhead and profit. These contracts can be used in many contexts, whether between owners and contractors or further down the chain between contractors and subcontractors.
However, there are a number of risks and considerations that come with utilizing cost-plus contracts. These risks and considerations are outlined in two key Ontario Superior Court decisions – Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Co. Ltd., 2023 ONSC 4959 and Infinity Construction Inc. v. Skyline Executive Acquisitions Inc., 2020 ONSC 77.
Firstly – cost-plus does not mean that budget estimates are irrelevant. Although the final cost in a cost-plus job isn’t fixed, courts expect that it will be reasonably close to the initial budget unless there’s a valid reason for overruns.
Contractors and subcontractors also have an obligation to notify their clients promptly if it looks like costs will go higher than expected. If they don’t, they could face challenges recovering their full costs later. Courts look at various factors in these disputes, including how sophisticated the parties are, whether the client relied on the estimate, and whether any contractual limits on liability exist. These contracts are subject to what the court called “the bounds of reasonableness”.
Relatedly, cost-plus contracts do not provide free reign for contractors or subcontractors to run up costs indiscriminately. In fact, the court in Infinity Construction commented that even in an open-ended, cost-plus contract, there is still an obligation on the part of the parties to exercise a degree of diligence in carrying out the work so that they do not incur costs significantly higher than the estimate without prior approval.
Lastly, contractors should be diligent with respect to record keeping – both in terms of costs incurred and approval for extras. In any claim where a contractor is seeking damages or its costs incurred in the context of a cost-plus contract, that contractor bears the burden of proving both the existence of those costs incurred and the reasonability of those costs. With respect to extras claimed, the contractor still has the onus of proving that said extras were approved. Again, good record keeping (i.e., getting those extras in writing via contractual addendum) is absolutely crucial in a claim for extras.
In summation, cost-plus contracts can be useful tools, but they require careful handling. Anyone entering into one should:
- prepare realistic estimates;
- communicate quickly, in writing, about cost changes and/or extras; and
- maintain thorough records from day one.
These steps can help avoid disputes—and improve the chances of success if a dispute does land in court.
Alex Vigneault, Carroll Heyd Chown LLP can be reached at (705) 722-4400 ext. 224 avigneault@chcbarristers.com
