A Dollar Is Not Necessarily A Dollar

Published On
Mar 15, 2016

A popular TV show centers on antique owners, all of whom seem to feign interest in learning from experts how old the item is, who crafted it, where it came from, and whether the object is well-made. Ultimately, the focus is always on the item’s worth, and the experts finish by giving their estimates. If you listen closely, those estimates reflect the different ways “money” is calculated.

The three most common bases for the experts’ opinions are at retail, at auction, and for insurance purposes (i.e., replacement value). For unique or rare items, there may not be a retail equivalent or a replacement value, and anyone who has been to an auction knows how prices there can be unpredictable. The question of worth in dollars remains somewhat uncertain.

Contract law also has a variety of criteria and terms for the dollar equivalent of goods and services. You will hear words and phrases such as “direct and indirect costs” and “incidental and consequential damages,” for value received and for valuable consideration. These words and phrases can be confusing. There are also misunderstandings over more basic terms, such as cost, price and value—all very different concepts in the law’s eyes. Adding to this mix of terms for money in contract law is the uncertainty some courts have expressed in deciding whether certain real-dollar losses should be considered to be indirect or consequential or whether the price of a contract or change order covers the losses.

Often, courts will view certain cost items, such as lost profits or lost business opportunities, as consequential. Where the contract provides that neither party shall be liable to the other for consequential damages, is that limitation directed only at lost profit? Is excess or extended field-office overhead and supervision also included? Where does interest on late payment fall? Or, the loss of an early completion bonus?

An example may help demonstrate the conundrum, particularly with regard to cost versus price versus value. In a recent case, a general contractor entered into a contract with a large museum for a comprehensive renovation. At the time the contract was signed, neither party could agree on a lump-sum price; the owner had too many decisions yet to make. When the job was finally over, still without an agreement of a lump sum, the contractor submitted a claim for “extra costs including delay damages.” The owner argued that the contractor had caused many of the delays, so delay damages should not be awarded. Furthermore, the owner contended that there had never been an agreement for the contractor to be paid on a cost-plus basis and it was unjustified to go that route after the work was done. So how was the contractor to be paid?

Prior to trial, this payment issue was presented to a judge by motion for clarification. The judge ruled that the contractor was entitled to be paid a “reasonable amount” for its work but not for delays that it caused. This ruling was not much of a clarification and the judge’s lack of direction on how to account for delays made matters even more vague.

The owner claimed that the contractor’s delays overlapped those caused by the owner, so neither party would be entitled to delay damages for those periods. The judge agreed with this analysis. However, during these periods of overlapping (concurrent) delays, the contractor’s work was proceeding, and it was entitled to receive a “reasonable” amount for that work. So what parts of the delay damages would not be recoverable? The primary reason these serious questions remained is the choice of the word the judge used for dollars—an “amount”—rather than cost, price or value.

In a cost-plus-fee contract, the parties will often go to some lengths to define what costs are reimbursable. In these circumstances, cost usually means contractor out-of-pocket costs. Where there are design/build elements, these costs may also include hourly rates for designers, engineers and estimators, costs that in other contracts might be deemed to be indirect and part of overhead or, with regard to an estimator’s time spent on change orders, the cost of doing business. By making a list in the contract of the reimbursable costs, the parties are redefining “cost” and removing it from its legal meaning. However, the “plus fee” part is supposed to cover all other indirect and possibly consequential costs (field and home-office overhead, profit, insurance premiums, telephone and computer charges, etc.).

The term “price” relates to a different concept. In the sale of goods, price relates to what the seller is willing to sell for and what the buyer is willing to spend, and it may not have a direct relation to out-of-pocket cost. In construction, the contract price relates somewhat to projected out-of-pocket costs, but it will also reflect working conditions, site access, weather and other imponderables that affect productivity and difficulty of the work as well as a profit margin.

You should look at some of your contracts and highlight where the words “cost” or “price” appear. You may find that a suspension of work clause entitles you to standby costs, or that a change-order clause refer to the price of extra work, or that the contract price will be adjusted.

Then there is “value,” often used to mean fair market value, which that may or may not have any relationship to cost. A homeowner might invest $10,000 in home improvements, yet the market value of the home may not have increased. This idea of added value is often the legal foundation for recovery in a quantum meruit claim, particularly in federal government contracts. Construction lending institutions will often look at “value added” in deciding how much a contractor should be paid on each pay requisition. Some contractors use the idea of value in pricing out the use of company-owned equipment by charging a rental rate for comparable equipment (i.e., comparable value).

A problem in using the concept of value for a disrupted job is obvious. The cost of installing overhead lighting, for example, might be doubled because of interferences, yet the value of the lighting in place remains the same so far as the owner is concerned.

In any change-order proposal or claim, more than one of these concepts of cost/price/value may need to be employed or may be required by the contract itself.

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