Warner Construction Consultants Reaction to I'Ashea Myles-Dihigo's Post: "Cost-Plus Contract and the Disorganized Contractor."

Warner had sent me a reaction to I'Ashea's post concerning cost-plus contracts and I thought I would pass it along.  Great dialogue and contribution.  Thank you!

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This article is a response to compliment the excellent blog article of the Division I Dispute Resolver, written by I’Ashea Myles-Dihigo of the Leitner, Williams, Dooley & Napolitan, PLLC firm in Nashville, Tennessee, “Cost-Plus Contract and the Disorganized Contractor.”  Ms. Myles-Dihigo’s article in reference to Cost-Plus Contract project delivery and a Contractor’s exposure as a result of inadequate cost record keeping and accounting is on point. The article specifically references risk of non-payment and non-entitlement in the event of inadequate cost records as support for payment.

In addition to the article’s focus is the concept that: there is no such thing as a cost-plus Contract. This is in the sense that the Contractor thinks it can spend “whatever it costs” to execute a project, and expect payment in kind – i.e. “Hey, it’s a Cost-Plus Contract…”

Typically, Cost-Plus engagements are often much sought after and prized by Contractors due to the perception of a “softer” method of procurement and delivery. This is a typical, but mistaken approach on the part of some Contractors. They anticipate a project with less demand on tight/controlled management, supervision, and efficient execution. This is because there are not productivity targets necessary to achieve profitability and virtually no risk of financial loss, since costs will be paid as expended – efficient or not.

Nothing could be further from the truth.

In contrast to Cost-Plus contracts, is Stipulated Sum contract project delivery. Under this system the Contractor has a finite price for which to execute and deliver the project. As such, costs must be tightly managed and controlled in order for the Contractor to financially survive. Much can be (and has been) written and debated as to the merits of different Contract delivery systems, and most all of them uniquely depend upon specific project factors and variables. This includes the position that Cost-Plus is appropriate where project scope is not well defined and Stipulated Sum where project scope is well defined and detailed.

However limited project scope definition and Cost-Plus contract does not translate to no need for establishment of budgeted scope, quantitative, and cost targets, even if based on conceptual or schematic project definition.

In fact, Cost-Plus Contracts and project delivery arguably place, if not more, then equal pressure on the Contractor to tightly plan, execute, and account for the cost of the work. While cost-plus delivery implies unlimited budget, Contractors be warned that every project has a budget, and thereby funding limit. This is true whether the project is for a public entity or a wealthy private Owner/Client with implied unlimited funds and apparently little attention to cost. Cost-Plus delivery typically has more to do with limited project scope definition that it does ample available funds.

Uncontrolled execution of the work and cost expenditure will at some point catch the attention of the Client. At that point not only will the manner of cost management and record-keeping be brought into question, but attention will turn to overall project planning and execution in general. In all, this would be a very bad situation for a Contractor to find itself, and one that could be devastating to its reputation.

The subject article focuses on the demand for proper cost accounting and payment entitlement under a Cost-Plus Contract structure. However, proper cost management and accounting is also in the best interest of the Contractor’s financial performance, success, and survival. Proper, effective, and disciplined cost management and accounting, along with efficient work planning and productivity, is a necessary element of profitability, and therefore viability. Proper cost management also serves as the basis for the Contractor’s cost estimation and its ability to competitively procure work in an ever-more-competitive construction contracting market.

At the end of the day, a disciplined contractor’s cost management systems, processes, procedures, and controls should be established and implemented according to best practices regardless of Contract delivery method. Those systems can then be properly and credibly adapted and adjusted to different Contract requirements and processes across its portfolio of work. 

Myles-Dihigo , I. (2017, September 09). “Cost-Plus Contract and the Disorganized Contractor”. Retrieved November 15, 2017, from http://abaconstructionforumdivision1.blogspot.com/search?q=Cost-Plus%2BContract%2Band%2Bthe%2BDisorganized%2BContractor%E2%80%9D


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The author, Tony Manning, Vice President, Program and Project Management Group at Warner Construction Consultants, Inc., may be contacted at 301.670.9020 or tmanning@warnercon.com. 

The Dispute Resolver is pleased to introduce its newest regular contributor, I’Ashea Myles-Dihigo of the Leitner, Williams, Dooley & Napolitan, PLLC firm in Nashville, Tennessee.  I'Ashea  focuses her practice on litigation and dispute resolution specifically in the areas of construction law, real estate law, commercial litigation, and employment law.  As a construction law attorney, I'Ashea regularly handles matters related to the building and development of both commercial and residential property. Her experience includes representing owners, contractors, subcontractors and suppliers in federal and state courts. She also counsels contractors and developers at the beginning of projects to avoid the need for litigation. She advises her clients with bid negotiations, contract drafting, liens, employment law matters and compliance with changing regulations. 

Thank you I’Ashea for your contributions to Division 1 and the Forum.  Enjoy her post:   

“Cost-Plus Contract and the Disorganized Contractor”

Some contractors are better at record keeping than others.  I always seem to run into this issue when I 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, 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 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 retained 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 to be 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.