A cost-plus contract is an agreement to pay a contractor its total costs for completing a project, plus a specific amount of profit, usually stated as a percentage. The contractor’s total costs typically include labor, materials, supplies, subcontractor payments, and overhead. In a cost-plus contract, the contractor will need to provide documentation of its costs to receive payment. It is typically implied that the contractor’s costs must be reasonable and proper, and based on the amount actually spent to complete the project. While some courts have recognized fiduciary duties arising from cost-plus contracts, the Nebraska Supreme Court recently rejected this approach and declined to impose on contractors implicit fiduciary duties under a cost-plus contract.
In Goes v. Vogler, 304 Neb. 848, ___ N.W.2d ___ (2020) the plaintiffs, owners of a house destroyed by fire, hired the defendant, a general contractor, to construct a new home. The parties’ contract stated “[t]he agreed upon price is $282,000” and that “[t]his contract is to be executed as a cost plus contract where all costs for the project will be presented to the homeowners and the builder’s fees will be completed at … 10% of the total cost of all work performed.” The owners made the initial down-payment and the first two draws. The owners made only a partial payment on the third draw, and cited shoddy workmanship, a fear the contractor would not finish the project, and a lack of accounting as factors underpinning their refusal to pay the full amount. The contractor terminated the contract for nonpayment and the owners hired another contractor to finish the home.
The contractor and two of its subcontractors filed construction liens and subsequently moved to foreclose on them. In response, the owners first asserted the contract was a fixed price contract as evidenced by the contract’s language which stipulated, “the agreed upon price of $282,000.” Based on this cost-plus analysis, the owners asserted the contractor was not entitled to draw payments. The owners also argued in the alternative, stating that if the contract was cost-plus, it imposed on the contractor a fiduciary duty to provide prompt, detailed accountings of costs already incurred for completed work. Under this analysis, the owners argued the contractor had violated its fiduciary duty.
Rejecting the owners first argument, the court viewed the contract language as a whole and categorized the agreement between the parties as a cost-plus contract. Rejecting the owners’ second argument, the court noted the contract’s absence of language explicitly creating a fiduciary duty. The court held that in the absence of language creating a fiduciary duty, no such duty will be implied as a matter of law based on the contract’s status as cost plus. The court determined that the contract language did not require “only retrospective payments” or “extensive accounting.” The court remarked that although it would have been helpful had the contractor provided periodic detailed invoices, it appeared from the record that the parties held occasional conversations regarding costs. These conversations were sufficient to conclude the contractor met its obligations under the contract.
Contractors should carefully review any proposed contracts and consider deleting any language that the contractor accepts a “fiduciary duty,” accepts a “relationship of trust and confidence” with the owner, or other similar language. Further, contractors should avoid language referencing any specific “agreed upon price” in a cost-plus contract to avoid an assertion that the contract is for a fixed price. Any specific dollar amounts referenced in a cost-plus contract should be tied to a non-binding estimate. Finally, contractors should provide detailed invoices and documentation to the extent reasonably possible to support their claims for payment.
If you have any questions about pricing or payment provisions in your construction contracts, or construction contract negotiations, please contact one of Woods Aitken's construction attorneys.