ConstructionPro Week, Volume: 1 - Issue: 27 - 11/05/2012

Must All Costs Be Itemized and Documented?

By Bruce Jervis


A contractor claiming entitlement to construction costs will of course be asked to prove those costs. But does proof require hard documentation of each and every actual expenditure? That was the question recently posed to a court in Utah. The answer was in the negative.


The case involved a cost-plus contract. The contractor was entitled to a fee of 10 percent of total costs, including direct expenditures by the project owner. The court allowed the contractor to use estimates and industry averages to prove total costs. The contractor was not required to support each alleged expenditure with an invoice or other payment documentation.


While this case involved cost-plus contracting, the same principle has been applied to claims for additional compensation and claims for the cost of completing or correcting work. Contract damages -- or costs -- must be proved with reasonable certainty, but not with mathematical precision.


Is this fair or reasonable? Shouldn’t a claim for costs be based on hard proof of actual expenditures, not a figure extrapolated from an estimating guide? Or does this approach simply acknowledge the complexity of pricing construction work and the realities of cost accounting? I welcome your comments.



Besides historic cost data the owner needs to place reliance on some viable expense typically based on receipts, invoices, materials and labor cost.

The cost-plus contract however does lend itself to this type of interpertation as quality and long construction time tend to be the main factors in determining contractor cost.

More often this is typical with military and high end technological type projects.
Posted by: Dane Esdelle - Tuesday, November 06, 2012 3:27 PM

As an owner I would want the contractor to prove, show me the money of every item plus 10%.

What if the an additional item was added to the construction and the contractor gave me an itemized bill showing all of the actual costs, could I come back and say no way because I used an "estimating guide" when I figured out what I should cost. It should at the least work both ways.
Posted by: William Page - Tuesday, November 06, 2012 3:30 PM

Since there is no market or competitive constraints on the amount being "computed" or alleged as actual costs, what protection does the opposing party have that the costs being presented are not inflated compared to actual costs? Remember, the definition of an equitable adjustment is to put the parties in the same financial position had the change not occurred; neither party is entitled to unjustly enrich itself due to a change issue. The detailed documentation required to justify actual costs is not that burdensome; contractors do it every year for their internal cost control and financial reports.
Posted by: Ron Cilensek - Tuesday, November 06, 2012 3:35 PM

This is not the case with a typical AIA Cost plus Fee with GMP contract. Sections reads that CM/GC is reimbursed for "payments made by CM/GC to subcontractors". Accordingly, the CM/GC has to show payments made, and not costs incurred, to recover subcontractor costs from the Owner.
Posted by: PA Construction - Tuesday, November 06, 2012 3:49 PM

I have been an owner's PM for over 25 years and routinely allow contractors to work on a T&M basis but I set the ground rules up front such as they can charge so much per day for general conditions or so much per day if contaminated soil much be rectified, or the like. Works like a charm. I would be horrified to allow a contractor to run up costs without knowing in advance what I would be charged.
Posted by: david - Tuesday, November 06, 2012 4:17 PM

I've been in the industry for over 40 years and have trained contractors all over the country in delivering a project via "Cost-Plus". The principle is the same whether it's from the original scope of work or change orders. The rules are that the contractor's total fee shall be the actual (documented)costs paid for subcontractors' services and materials, rented equipment and supplies plus the Profit and Overhead fee of 15% to 20% or whatever is agreed upon in the contract. The "Cost" of subs and supplies is not a mystery and is not ambiguous. The Costs of Overhead can be very tricky, so no justification is provided for that P & OH fee. When profit and overhead are combined into one component of the fee, it knocks out a lot of the general conditions of insurance, safety, etc. Cost for temporary utilities, office, street barriers are not included in the overhead. But, then all of this can be spelled out in the contract under "Contractor's Fee". Small contractors need to spell out the terms a lot more than the big public works or government boys.
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