Kennaley Construction Law

                                                                                                                          September 12, 2023

 

Cost-Plus and Time and Material Contracts and Claims in Canada

 

In this article we will explore how Canadian Courts treat claims for payment under “cost-plus” or “time and material” contracts. The two forms are, of course, similar.  In a “cost-plus” arrangement, the hiring party agrees to pay the supplier’s actual costs, plus a fee for profit, while under a time and materials (or “T&M”) contract, the client agrees to pay fixed rates for labour (on an hourly-basis) along with the actual cost of materials supplied.  Under a T&M contract, of course, the supplier’s profit is included in the labour rates.

 

Recently, in Sjostrom Sheet Metal Ltd. v. Geo A. Kelson Company Limited, 2023 ONSC 4959 (CanLII), Associate Justice Todd Robinson of Ontario’s construction lien Court in Toronto offered a very useful summary of how the law applies in relation to such contacts.  In doing so, he referenced a case law review previously conducted by Healey, J. in Infinity Construction Inc. v. Skyline Executive Acquisitions Inc., 2020 ONSC 77 (Canlii).

 

AJ Robinson firstly found that the T&M contract at issue was sufficiently similar to a cost-plus arrangement to apply the case law principles applicable to cost-plus contracts.  His Honour then noted that courts will often deny payment on the basis of an implied term guarding against the “wasteful or uneconomic use of labour and materials”, even where the contracts are “open-ended”.  He then confirmed that, generally speaking, where an estimate or budget is provided and unless the contract expressly provides otherwise:

 

• the supplier of the services or materials must “exercise a degree of diligence” to not incur costs “significantly higher” than the estimate, without prior approval;

 

• the supplier should give timely notice to the client if it is going to exceed the estimate; and

 

• the final price should be reasonably close to the estimate, based on an assessment of a number of factors, including “the relative sophistication and knowledge of the parties”, how the estimate was given, the knowledge and expertise of the supplier, whether it was relied upon by the client, whether the supplier made it clear that it would not be responsible for exceeding the estimate, whether the supplier provided its rates for labour, equipment rental and materials and whether the client encouraged the supplier to proceed with the work despite knowing (expressly or by implication) that the estimate would be exceeded.

 

Perhaps more importantly, AJ Robinson noted that the cases place a heavy onus on a supplier to prove the amounts claimed under such a contract.  He noted that while the accounts and backup don’t need to be kept in any particular way, they must adequately show the quantum of the costs, as well as why they were incurred.  If the dispute proceeds to litigation, His Honour noted that the onuses of proof will shift back and forth between the parties: (i) if the supplier shows that it kept proper records with supporting backup, the onus shifts to the client to show that the documents are incorrect or unreliable; and (ii) if the client casts doubt on the records, the onus shifts back to the supplier to satisfy the court that the accounts are, in fact, accurate.  His Honour then noted that, upon hearing the supplier’s evidence, “If the court is left in doubt, the contractor fails”.

 

As regards the difference between labour and materials, the Court held that while the cost of the materials “may be proved upon evidence somewhat less conclusive, so long as the building is in existence and the system of recording material is capable of providing a substantially accurate result”, “the records for the time of workers must be strictly proved since it is difficult to verify after the fact”.

 

While Sjostrom Sheet Metal and Infinity are both Ontario decisions, Healey J.’s review in Infinity references cases from across Canada.  While the laws of the jurisdiction where the contract arose should be considered, we believe the common law principles set out by Associate Justice Robinson are generally applicable across Canada (with the exception of Quebec, where the Quebec Civil Code applies).  To be clear, the expressed terms of a contact will generally over-ride the common law principles, so long as they are clear and unambiguous and not void for illegality, unconscionability or on public policy grounds.

 

It should be noted that where the client is a “consumer” (as would be the case with virtually all contracts for “residential” clients), consumer protection legislation will generally apply to set out the minimum contractual requirements and put statutory limits on the extent to which a true estimate can be exceeded.  See Ontario’s Consumer Protection Act, 2002, S.O. Alberta’s Consumer Protection Act, RSA 2000, c C-26.3 and Quebec’s Consumer Protection Act, c. P-40.1, for example in that regard.  Certainly, in the residential context, contractors who provide services or materials to consumer clients should ensure that their contracts comply with such legislation.

 

There are lessons to be learned from all of the above.  Clients, of course, should take care in agreeing to cost-plus or T&M contracts, because of the inherent cost uncertainties associated with them.  These contracts can be attractive, however, where the design is not certain or where unforeseen conditions are anticipated, such that a fixed price model might not ensure the best possible price.  Such contracts are particularly popular in the construction of custom-built homes, for example, where the ultimate price will depend on the finishes and fixtures to be selected by the client. 

 

Where cost-plus or T&M contracts are attractive, clients might consider the standard CCDC-3 form of cost-plus contract as a starting point. The CCDC 5A or 5B forms of construction management contracts might also be used.  These can then be amended to meet the needs of the particular project (and to accommodate the payment provisions and particular risks associated with applicable prompt payment and adjudication legislation).

 

Clients should also take care to ask for an estimate of what the costs will be, and to build in clauses which will require the supplier to give notice, and seek approvals, where the costs are going to exceed that estimate.  Finally, clients may want to include a right to audit the supplier’s records (although we believe such a right would be implied into most cost-plus and T&M contracts).  Both parties may want to build-in a process whereby a selected third-party will be appointed to assess the reasonableness of the charges, in order to avoid significant litigation costs in the event of a dispute

 

Suppliers (be they contractors or subcontractors) should be careful to only give estimates or budget amounts if they are confident that they will be able to do the work for approximately that amount.  Suppliers might also consider expressly stating, in the contract, that they do not warrant or guarantee that the estimate will not be accurate.  Regardless, towards avoiding disputes and getting paid, the supplier should give notice if an estimate is going to be exceeded and seek approval or confirmation that the client is nonetheless willing to have the work continue on the cost-plus or T&M basis.  Finally, the supplier should keep very detailed records of the costs incurred, to be ready to prove the reasonableness of the costs (with reference to the agreed scope of work) if required.  It might be difficult, for example, to prove the reasonableness of time incurred if the supplier’s timesheets and records do no more than indicate the time spent, without setting out what was being done on any given day.  Having the client approve timesheets on a daily or weekly basis might assist in this regard.

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Rob Kennaley

Kennaley Construction Law

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