January 22, 2024 By: Taylor Moroz and Troy Baril

G and I Construction Group Inc v Ace Burger Ltd, 2023 SKKB 214 [“Ace Burger Ltd.”] is a recent decision from the Saskatchewan Court of King’s Bench that helps illustrate the confines of cost-plus contracts. This article offers a concise summary of the Ace Burger Ltd decision and delves into the legal and practical implications for entities engaged in cost-plus contracts.

Review of G and I Construction Group Inc v Ace Burger Ltd

In early 2019, 102072408 Saskatchewan Ltd. (“2408 Sask”), the owners of a new Saskatoon restaurant later named “Ace Burger”, entered into an oral agreement with G and I Construction Group Inc. (“G&I”), to renovate the restaurant in anticipation of its opening. The agreement was on a cost-plus basis, without estimates or a stipulated maximum price.

After the renovations were completed, a dispute arose when 2408 Sask expressed dissatisfaction with the invoiced amount, claiming the final costs to be exorbitant. G&I, in turn, initiated legal action for the outstanding balance.

The Court was particularly concerned with the absence of a written agreement and the complexity of the case. G&I, a company engaged in construction and renovations, submitted evidence through affidavits detailing the costs incurred in the renovation of the building. 2408 Sask (i.e. “Ace Burger”) challenged the invoices, citing overcharging and disputing the scope of work.

Multiple versions of G&I’s invoices were presented. The discrepancies between the four versions of invoices included changes in itemized costs, markups, and reductions, raising questions about the accuracy and justification of the charges.

Specific concerns raised by Ace Burger included issues with the costs of cabinets, benches, plumbing, finishing work, drywall, barn door and hardware, painting, patio tables, garbage removal, tile and flooring, lighting, and electrical work.

The Court highlighted the lack of clarity in G&I’s evidence, discrepancies between versions of the invoice, and the need for a resolution. Ace Burger, while expressing dissatisfaction with the charges, acknowledged that the renovation work was consistent with the agreed-upon scope.

Despite attempts at negotiation and partial payments made by Ace Burger in good faith, a resolution was not reached. The Court considered the evidence presented by both parties and the complexity of the case, emphasizing the challenges arising from the absence of a written agreement.

The Court provided a useful overview of how cost-plus contracts operate in Saskatchewan and helped delineate the implicit and explicit legal obligations of parties entering cost-plus contracts.

What are cost-plus contracts?

The Court briefly defined cost-plus contracts, finding that cost-plus construction contracts are a common arrangement in the construction industry, providing a framework for reimbursing contractors for expenses incurred and compensating them with a specified fee on top of those expenses. In a cost-plus contract, the fee is often defined as a percentage of the incurred expenses, and terms and conditions are typically included to set a maximum charge or ensure that certain costs align with estimates.

Assessment of Evidence and Dispute Resolution

The Court observed that both parties shared responsibility for the dispute due to the casual nature of their arrangement. The Court found that G&I’s presentation of accounts lacked transparency, and Ace Burger scrutinized costs excessively, leading to significant distrust. Despite these challenges, the Court proceeded to assess the evidence and determine the reasonableness of the costs incurred.

Principles Derived from Case Law: Infinity Construction Inc. v Skyline Executive Acquisitions Inc.

Much of the extricable legal rules or takeaways concerning cost-plus contracts were borrowed from Infinity Construction Inc v Skyline Executive Acquisitions Inc, 2020 ONSC 77. In this case, the Court provided valuable guidance by articulating key legal principles when dealing with cost-plus contracts, including:

1. Diligence in Cost Management: Even in open-ended, cost-plus contracts, both parties have an obligation to exercise diligence in carrying out the work, avoiding significant cost overruns without prior approval.
2. Preventing Wasteful Use of Resources: Courts may imply terms preventing payment for wasteful or uneconomic use of labour and materials in open-ended cost-plus contracts.
3. Reasonableness of Variance from Estimate: In projects with an estimate, the final price should reasonably align with the estimate, and the degree of variance is subject to the “bounds of reasonableness,” considering project size, uniqueness, and ascertainability of costs.
4. Role of Estimate in Agreement: Various criteria, such as the circumstances of providing the estimate, importance of price to the owner, expertise of the party providing the estimate, and reliance on the estimate, are considered in assessing the role of the estimate in the agreement.
5. Sophistication of Parties: The relative sophistication and knowledge of the parties play a role in determining adherence to the estimate.
6. Notification of Cost Overruns: Contractors are obliged to promptly notify owners of cost overruns in a cost-plus contract.
7. Approval Process for Extras: Inclusion of a process for approving extras implies a degree of certainty around an estimate.
8. Burden of Proof for Cost Recovery: Contractors seeking to recover costs on a cost-plus basis bear a heavy evidentiary burden.
9. Documentation and Accounting Standards: Contractors must keep proper accounts, and once doubt is cast upon the accounts, the onus shifts back to the contractor to prove accuracy.
10. Materials Recording: Strict proof is required for the records of time worked by labor, while a substantially accurate result may be accepted for material recording.

Judgment and Decision

After careful analysis, the Court concluded G&I had proved its account for renovations, though the amount claimed in the initial affidavit was not fully substantiated. The Court determined Ace Burger owed G&I a reasonable amount based on the fourth version of Invoice 1835279, accounting for negotiated discounts (less payments already made). The judgment favored G&I, awarding a balance of $67,364.05, along with prejudgment interest and costs.

Lessons Learned and Takeaways

While this case had a degree of complexity, the Court attributed this complexity to “tangled and untidy facts” rather than complex legal questions. The Court awarded G&I costs, highlighting the importance of proper documentation, transparency, and adherence to contractual terms in cost-plus contracts. The Ace Burger Ltd decision serves as a reminder to parties entering cost-plus contracts to establish clear terms, maintain proper accounts, and engage in transparent communication to avoid disputes and foster amicable settlements.

When engaging in cost-plus contracting, it is crucial for contractors to diligently record keep and ensure they are avoiding cost overruns without first seeking prior approval. Imprecise and incomplete record keeping may lead to cost-plus contractors having to pay out of pocket for improperly accounted for expenses and unapproved cost overruns.

The Ace Burger Ltd decision provides that even where a contract is verbal, imprecise, and open-ended, courts will imply terms to curtail wasteful spending and inefficient uses of labour. Parties engaged in cost-plus contracts may be inclined to drag out the duration of their time on a work site to increase their own respective profits. In doing so, a contractor runs the risk of having the court label these actions as wasteful spending, which could lead to the contractor themselves absorbing these costs.

Ace Burger Ltd underscores the importance of transparent, consistent, and well-reasoned invoicing when entering cost-plus contracts. Justice Elson grappled with how to reconcile, interpret, and apply the law in the context of inconsistent and unreliable billing. For contractors involved in cost-plus contracting, meticulous accounting for costs and expenses is imperative to mitigate legal uncertainties and potential repercussions. The outcome for G&I could have been less favourable had a different Justice taken a less lenient stance on their failure to consistently and accurately account for costs.

Contractors should proactively communicate with the hiring party when a cost estimate is expected to be exceeded, obtaining advance approval before surpassing these cost overruns. Failure to do so may result in the contractor bearing some of the costs beyond the initial estimate. In cost-plus contracts, contractors have a duty to inform owners of cost overruns; neglecting this obligation could lead to adverse financial repercussions for contractors.

Procido LLP has experienced lawyers in the areas of contract and construction law. Our legal team is happy to assist with answering any of your contract or construction law questions.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topics discussed in this article.