Things Left Unsaid – Determining Price Adjustment resulting from Scope Changes
It’s common for the parties to a construction contract to focus on the price of the work to be performed. Less attention is often given to the method of calculating changes to the price for alterations to the scope of work. Uncertainty in this area can lead to a major headache for a contractor trying to get paid, which all too often can lead to a trip (or two) to the Court house. So how can you avoid costly litigation and ensure you are paid for your work? We focus on the recent Alberta case of Architectural Millwork & Door Installations Inc v Provincial Store Fixtures Ltd, 2017 ABQB 390 to provide some helpful tips.
Architectural Millwork & Door Installations Inc v Provincial Store Fixtures Ltd, involved a $19 million stipulated-price contract for the performance of tenant improvements in The Bow tower in downtown Calgary. The owner issued three Change Directives significantly reducing the contractor’s scope of work, and the parties found themselves disagreeing over how to calculate the credit due to the Owner.
At first blush, the Contract seemed to address this situation. After all, the Contract Appendix containing Price and Payment Provisions included a set of 4 scenarios for the calculation of price reductions for scope deletions, depending on the nature and timing of the changes. It should have just been a matter of applying the correct scenario, right?
Wrong. The two scenarios that were potentially applicable both referenced certain “Unit Prices” in the Tender Documents. The problem was, the Schedule of Unit Prices was struck out of the General Contractor’s bid form and omitted from the final Contract.
On what basis then should the price reduction be calculated? The Court was faced with three options:
- Internal Estimating Documents - The General Contractor urged the Court to accept its internal estimate materials as “Tender Documents”, and to apply the Unit Prices in those documents. The Court rejected this on the basis that the owner could not have agreed to prices on internal estimating documents which were not disclosed to it as part of the bidding process.
- “Identified Prices” – The owner pointed to a different Appendix to the Contract listing certain “Identified Prices” for other purposes under the Contract. The Court rejected this as well. It reasoned that the Contract would not have referenced “Unit Prices” if what was intended was actually the schedule of “Identified Prices”.
- Net Cost – The approach favoured by the Court was to attempt to determine the net cost of the deleted items, and to calculate the price reduction form the scope deletion on that basis.
Unsurprisingly, calculating the Net Cost of the deleted items was not a straightforward task. The contractor argued that once the scope of work was significantly diminished, it shouldn’t have to honour the “Incentive Pricing” feature of its tender, used to persuade the owner to award them the entire project. The Court rejected this argument and applied the incentive pricing anyway, noting this was a risk the contractor accepted when bidding on a project subject to possible scope deletion.
Given that the Net Cost adjustment did not contain a deduction for overhead and profit, the Court next had to calculate what portion of the price was attributable to these items. After considering the evidence as to the total materials and shop time for the fabricated products on the project, as well as other provisions of the Contract, the Court landed on the rate of 7.5%, noting that this matched the mark-up permitted to be added where Changer Orders resulted in a net increase to the contract price.
The final result was a credit to the owner for the scope deletion in the amount of $1,525,919.67.
How does this decision affect you? Parties embarking on a new project are planning on the project unfolding as planned, but it is nevertheless important to take precautions in the event that plans change. In the case of a deletion in the scope of work, a clear and complete contract containing a pricing mechanism can give the parties certainty, and avoid messy disputes.