The basic idea behind the law of contract damages is to give the nonbreaching party the money to get the performance it paid for. This plain-sounding concept can often lead into areas where an exact calculation of damages is difficult and may be based on estimates, expert opinions and “actual” costs. For the purposes of this article, note that the gross cost of effectuating the repair—or for bringing the contract into compliance with the specifications—is rarely a consideration.


Another basic concept is a partner of this idea of damages. When a party signs a construction contract, he or she accepts an absolute duty to perform. Putting your contract agreement in these terms—an absolute duty to do something—may strike you as unusual or even extreme, but it isn’t. If a specification calls for green paint, an equal quality red paint is not acceptable. If the contract requires completion in 100 days, late completion is a breach. If the contract says no splices or no lead-based welding, these prohibitions are strictly enforceable.


During construction, if the general contractor with which you have an agreement finds that your installation does not meet the specifications, it can order you to repair or replace even if the installation works fine. Any failure to repair or replace gives the other party the right to perform the work (or estimate the costs of correction) and seek the money from you for that work. Unless the contract states otherwise, you may also be liable for the consequential damages that arise because of the noncompliance with the contract.


There are instances where the price to repair far exceeds the price of the original installation. Even so, you have an absolute obligation to perform, and the owner has an enforceable right to get exactly what he or she contracted for.


There are extreme cases, however, when these two basic ideas of contract obligations and damages for nonconforming work lead to what appears to be an unjust result. These cases venture into the very fuzzy area of the “economic waste” doctrine.


A prime example of this doctrine’s application comes from a fairly old, but still viable, case involving a home construction. The mechanical specifications clearly called for a specific kind of piping to be installed. After the building was completed, the owner learned that the subcontractor had installed a different kind of pipe.


Using traditional theories of contract rights and damages calculation for defective performance, the owner sued for the cost of replacing the piping. Doing that work would have meant tearing out walls, ceilings and floors; removing fixtures; and inconveniencing the owner. On the other hand, not doing that work would not harm the building. The incorrect piping had no leaks or other problems, and the piping was expected to last a long time.


The court ruled that the costs of changing all of the piping to bring the building into conformance with the specifications would amount to—in the eyes of the court—economic waste. As a result, the owner did not recover the estimated replacement costs he had sued for. Instead, the court limited the owner’s damages to the difference in the marketplace value of the structure between the two types of piping—called diminution in value. (There was none in this case.)


The elements of the economic waste theory, which the court outlined in its decision, were the following: 1) there had been “substantial performance” by the contractor (another hard-to-define idea), 2) the contractor had committed no intentional wrongdoing (a questionable criterion), and 3) a cost/benefit analysis (very subjective) weighed in favor of not making the repair. Other unspoken elements were that the nonconforming work did not have any major aesthetic implications, as it was hidden behind walls, ceiling and floors, and there were no health or safety risks caused by the nonconforming work.


This cost-benefit analysis behind the “economic waste” defense cannot be easily defined. In the piping case, there would be severe damage to the entire building if the pipe were replaced. The result probably would have been different if, say, only the garage were affected. 


Something might appear to be economically wasteful, but the contractor may still have to perform the repair.


For example, an electrical contractor was required, among other things, to install hundreds of light poles in a parking lot for a federal government project. The specifications called for the steel poles to be painted with one coat of primer and two finish coats of a certain color. The manufacturer of the poles had just developed a new technique of coating the poles with a baked-on finish, guaranteeing the finish for 20 years (far in excess of the contract’s two-year paint warranty).


Under the contract’s inspection clause, the government had the right to require strict compliance with its specifications. Therefore, the government directed the electrical contractor to sandblast the manufacturer’s coating off of the light poles and then prime and paint as the government had specified. The coating was fine; what was provided was in excess of what was specified, and there were no visible differences. Even so, the waste involved was not sufficient to allow the specification to be ignored.


The doctrine of economic waste can have better success as a contractor defense when it can be coupled with proof that during construction the owner was aware, or should have been aware, of the nonconforming installation. The argument is not that the owner waived a specification by allowing the work to go forward. Rather, the point is that, if the nonconforming work is otherwise acceptable, it would be inequitable for the owner to have allowed the contractor to continue on the wrong path and thereby increase the contractor’s ultimate repair costs.


Remember, the economic waste doctrine is equitable in concept, meaning that it should only be applied where the contractor is not guilty of some wrongdoing, such as intentionally ignoring the specifications and hoping to get away with it.