Quotes vs Estimates
It is common practice in the construction industry for clients to ask a contractor to provide a quote or estimate on a project.
What is a quote?
A quote is an offer to carry out the work for an exact price. Once a quote is accepted, the contractor is unable to charge more than the agreed price, subject to variations, cost fluctuations and provisional sums.
The benefits of a quote are that both parties are aware of the costs from the outset and can budget for the project accordingly. However, this can be a high risk path for the contractor if they fail to adequately price any element of the project as they are contractually required to bear any losses from their mispricing. The high-profile losses by Fletcher Construction on the International Convention Centre is an example of this.
What is an estimate?
Unlike a quote, an estimate is a best guess of how much a project might cost. It is a contractor’s best guess of what the labour, materials and margin is going to be from start to finish. An estimate does not carry with it a legal obligation to carry out the work at a fixed price and does not provide a cap for the total cost. While a contractor is not legally bound to its estimate, it owes a duty of care to the principal when providing the estimate.
An experienced contractor is likely to price a project on this basis if they consider the project too risky to provide a fixed price. This would be more common particularly in the current market. The uncertainties could include their ability to obtain materials, the site conditions, and the scope of works itself.
Estimates in court
A common dispute that arises is where the principal claims that it was provided a quote as opposed to an estimate.
In Jefferson v Straw Homes Limited [2017] NZHC 1766, the contractor and principal entered a residential building contract. In that case, the agreement was specified to be for “managed labour only” and the contract price was not stated. The principal had limited funds available to it which were sourced mostly from borrowings. This was made known to the contractor before work commenced and it was communicated that this was the limit.
Two written estimates were provided both containing words stating that it was a “price estimate” for $646,060.63. This was subsequently inserted into the contract as the “contract price”, at the principal’s request. As the project progressed, the principal enquired as to the cost to complete the project. The contractor informed him that there was approximately $100,000 of work still required over and above the estimate. After that, the relationship between the parties deteriorated and the principal stopped paying the contractor’s invoices.
At Court, the principal relied on the “contract price” in the agreement. However, the Court considered that the interpretation of the phrase “contract price” must be determined according to what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean, and the facts and circumstances known and likely to be operating on the parties’ minds at the time.
In considering the facts of the case, the Court held that a reasonably and properly informed third party would have considered the words “contract price” in this instance to mean an estimate as per the written estimate provided at the same time, as:
- The contractor indicated that it was not prepared to commit to a fixed price at the time;
- The plans were still fluid when the contract was entered into;
- The estimate gave imprecise figures for a number of items;
- The estimate was based on plans with a smaller floor area and a large plan was being considered at the same time;
- A third party would understand that the parties had agreed on a managed labour contract with the hope that the project could be completed for less with labour input from the principal;
- The principal’s behaviour was consistent with there being no fixed price; and
- The contractor continued to invoice the principal when the “contract price” had been exceeded, and the principal paid those invoices.
Having found that it was an estimate, the Court proceeded to consider whether the contractor owed the principal a duty of care in providing its estimate and whether that duty was breached.
On this issue, the Court held that in circumstances where the contractor was made aware of the principal’s financial situation and wished to limit the amount they wished to spend, this gave rise to a duty on the contractor, in contract and in tort, to ensure that accurate cost estimates were given before work commenced. This would have enabled the principal to make decisions to ensure that it remained within its financial limit.
In any event, the Court considered that while there was a breach, the principal did not suffer a loss. The Court held that it was wrong to consider the additional expenditure they were forced to incur as a loss when some of the additional expenditure was not caused by the contractor. Furthermore, the principal received a larger asset.
Conclusion
For contractors, the takeaways are to always be clear whether you are providing an estimate or a quote. Frequently, we encounter contractors providing estimates headed up with the word “quote” when it had no intention to provide a quote.
Additionally, contractors owe a duty of care to the principal in preparing its estimate. Practically, this means that a contractor may be required to do more than review plans and designs when preparing the estimate by visiting the site or engaging a quantity surveyor to ascertain the materials required.
Likewise, for the principal, if you are not sure whether you have received an estimate or quote, seek clarification from the contractor. Inform the principal of your financial situation and what you can afford before entering a construction contract, and regularly update the contractor on your financial situation as your project progresses.
The impacts of COVID-19 to local and global supply chains have resulted in unprecedented pressure on the construction industry as a result of price increases on some building materials. In some cases, this made projects unaffordable for principals and contractors alike, with elevated risk of budget blowouts. As such, care should be used in the current market when assessing when to issue a quote or an estimate for a particular job.
Contact us if you are considering embarking on a construction project and are weighing up proceeding with a fixed price quote or an estimate. Our lawyers at Norling Law can review your options and discuss the pros and cons as they relate to your specific situation as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.