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Cost-Plus Contract and the Disorganized Contractor

I'Ashea Myles-Dihigo and Christen C. Blackburn \ 10-30-17

+ construction agreement

Some contractors are better at record keeping than others. I always seem to run into this issue when I’m working with a client, and I’ve asked them to provide me with all of their records regarding the project. The usual answer that I get is, “I don’t keep those kinds of records,” or “All I have are text messages.” Depending on the type of contract dispute, the lack of accurate record keeping may not be such a big deal; however, when there is a dispute regarding a cost-plus contract, recording keeping can become a central issue. This concept is explained by the Tennessee Court of Appeals in the case of Forrest Construction Company, LLC v. Laughlin.

Generally speaking, in Tennessee, when a contractor seeks to recover unpaid fees relative to a cost-plus contract and the owner denies owing fees, the contractor must show the court an itemization of each expenditure made on the project. In Forrest Construction Company, LLC v. Laughlin, the homeowner entered into a cost-plus contract with Forrest Construction Company to build a home. Forrest Construction Company, LLC v. Laughlin, 337 S.W. 3d 211 (Tenn. Ct. App. 2009). Prior to completion, of the house, Forrest Construction and the homeowner began to have disputes about payment. Id. at 216. Forrest Construction stopped work on the home, filed a lien, and thereafter, filed a breach of contract action against the homeowner and an action to recover damages based on the doctrine of quantum meruit. Id. at 218. Forrest Construction claimed that the homeowner breached the contract by failing to timely pay pursuant to the terms of the parties’ agreement. Id. Defendant homeowners filed a counter-claim against Forrest Construction for negligent construction, gross negligence, negligence per se, breach of contract, and violations of the Tennessee Consumer Protection Act. Id. at 218-219.

The contract at issue in Forrest Construction required that the contractor retain a detailed accounting and back-up documents for all expenditures and draw requests on the project. When the homeowner asked Forrest Construction for the accounting records on the project, the contractor could only provide a “two foot thick pile” of unorganized receipts. Id. at 224. The Court found this type of record keeping unacceptable when it said, "In any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper." Id. at 223-224; Kerner v. Gilt, 296 So. 2d 428, 431 (La. App. 4 Cir., 1974). "The contractor is under a duty of itemizing each and every expenditure made by him on the job, and where the owner denies being indebted to the contractor, the latter has the burden of proving each and every item of expense in connection with the job." Id. (citing Wendel v. Maybury, 75 So.2d 379 (Orl. La. App. 1954); Lee v. National Cylinder Gas Co., 58 So. 2d 568 (Orl. La. App. 1952)); see also 17A Am Jur. 2d Contracts, Sec. 495 (2008). Forrest Construction never itemized the expenditures it sought to recover from the homeowner. Id. Instead, it submitted essentially unsubstantiated requests for draws. Id. Moreover, when called upon to provide proper documentation and itemization of the costs, it provided a wholly disorganized, un-itemized box of documents, many of which were unrelated to the actual project. Id. As a result of this finding, the Court reversed the trial court’s decision in favor of the contractor and instead held that the contractor materially breached the contract first.

The take away from this case is when a contractor chooses to work under a cost-plus contract agreement, the contractor should be sure that they are able to maintain the heightened accounting requirement that goes along with that type of agreement. This means fully documenting each expenditure in an organized manner. If your client is like many of my clients, the fixed-fee agreement may work better because it does not require the heightened accounting in order to recover on a dispute of non-payment.

 

I'Ashea Myles-Dihigo is an associate in our Nashville office. She focuses her practice on litigation and dispute resolution specifically in the areas of construction law, real estate law, commercial litigation, and employment law. She may be reached at iashea.myles-dihigo@leitnerfirm.com This article is provided for informational purposes only and is not intended to constitute legal advice. Consultation with an appropriate legal advisor is recommended.