Who Has to Pay for Unforeseen Project Expenses in Construction Projects?

The (Tacoma) News Tribune released a story today about cost overruns and "unforeseen" project expenses for the newly renovated Cheney Stadium. Apparently, after much praise regarding the project and the success of timely completion, the city of Tacoma is now faced with a demand by the builder for an additional $821,000 in "unforeseen site-related expenses." Unfortunately, in the construction field this is an all-too-common circumstance of projects... which leads us to the question: who has to pay for the unforeseen project expenses in construction projects? The Owner? The Builder?

The answer to this question is usually found within the parties’ contract. [Side note: always have a contract, those handshake or verbal agreements are usually more likely to end up in a dispute – do not learn this the hard way]. Within Washington, the law is generally settled in that contracts are construed against the drafter and construction contracts are strictly construed against the builder; in that, if a builder agrees to construct a building for an agreed price he must do so at such price. This is essentially fundamental to contract law, and this principal was summed up by Judge Louis Brandeis in United States v. Spearin, 248 U.S. 132, 136, 39 S.Ct. 59 (1918), wherein he stated that “[w]here one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered.” As such, if a builder is to protect himself against difficulties in soil, weather, labor, unforeseen site-conditions, or other contingencies, he must do so in his contract.

As a contractor, you must be prepared for such contingencies arising and you must have a process for submitting change orders. An agreed upon change order is usually the only way that a contractor can seek additional compensation. This generally requires that the contractor provide notice to the owner upon discovering the unforeseen circumstance. These contingencies must also be something that was unexpected and not initially bid or anticipated by the contractor. Contracts require an element of good faith, and thus, a contractor cannot conjure up frivolous “unforeseen” circumstances. Any such dishonest act by the contractor may invoke a claim for a Consumer Protection Act violation (RCW 19.86).

Under Washington law, when a contractor submits a bid or agrees to do a job, he, in effect, represents that he will perform that job in a workmanlike manner, according to the specifications provided him, in the time stated, and for the price quoted. Eastlake Const. Co., Inc. v. Hess, 102 Wn.2d 30, 49, 686 P.2d 465 (1984). The contractor’s representations, in his estimate or bid, serve to induce potential purchasers in much the same way an advertisement or representation by a salesman would. Id. Thus, a contractor’s business practice of providing estimates to purchasers, with which he is unable to substantially comply due to reasons which should be reasonably foreseeable in light of the contractor’s knowledge and experience, is an “unfair or deceptive act or practice.” Anhold v. Daniels, 94 Wn.2d 40, 46, 614 P.2d 184 (1980).

Given the foregoing, it is clearly understandable why bidding a project is not an easy process for contractors. Building projects can take months if not years to complete. During such time, costs of labor and materials fluctuate. Weather is inconsistent. Subcontractors and material suppliers are not always on the same page with one another. Building fads change… and hence owners change their minds. Yet, all the while the general contractor must be fully prepared, upfront and in advance, for all such fluctuations and contingencies when bidding on a project. Thus, it is important for a contractor and an owner to have a game plan for these contingencies within their contract.