When it comes to construction projects, the choice of payment arrangement between the parties is a crucial consideration. In a fixed price (lump sum) arrangement, the total payment for the required work is determined from the outset. Responsibility falls on the contractor to stay within the fixed price or risk financial losses. In a cost plus arrangement, the price paid by the owner depends on the amount of work actually performed by the contractor plus a fixed or percent fee. The owner generally provides more oversight to prevent inflated or inappropriate costs.
Whether you are an owner or a contractor, it is important to understand how your payment arrangements for a project can be interpreted by a court. In Twister Developments Ltd v. 1406676 Alberta Ltd( Twister), the Court ruled the payment arrangement between the parties was a cost plus contract, even though the parties had entered into written fixed price contracts. Twister Developments Ltd. (the General Contractor) and 1406676 Alberta Ltd. (the Owner) agreed to construct two buildings in Fort McMurray, Alberta. However, events beyond either party’s control caused delays and the relationship broke down before the project could be completed. The Owner subsequently hired a new contractor to complete the project, and refused to pay the General Contractor’s last invoice.
In Twister, theCourtruled it was “not fair or reasonable to try to impose the terms of the fixed price contract on the parties when their history and relationship establishes that it was not reflective of the agreements under which they were operating” (emphasis added). A number of factors in how the parties carried out the project led the Court to this conclusion:
- Adherence to legal formalities: The parties carried out the project informally and without adhering to what had been formally set out in their written agreements. They did not obtain legal assistance when drafting the contracts and had recycled contracts from previous projects.
- Budget involvement: The fixed price was determined based on a budget the Owner and General Contractor created together. They watched budget items and sought cost savings together. The fixed price was mutually amended in light of a price reduction on a large line item. For cost plus contracts, it can benefit both parties to reduce large budget items. While in a fixed price contract, the Owner would not be concerned with budgeting since the fixed price protects them from changes in costs, and the responsibility to come under budget falls on the General Contractor.
- Intent of parties: The parties never intended to rely on the executed written contract. The fixed price contract was only used to secure financing from the bank. The General Contractor operated as if they were to complete the project for the budget, plus a profit for themselves.
- Invoice process: even though the fixed price contract stipulated progress payments based on the percentage of work actually completed, the quantity surveyor/project monitor appointed was not instructed to, nor did they, certify the General Contractor’s work in that manner. Instead, the surveyor certified each invoice as being “fairly reflective of the work that had been completed” by the General Contractor.
As a result, the Owner was ordered to pay the General Contractor’s last invoice of CA$173,012. Had the Court ruled a fixed price arrangement existed, the Owner may have been entitled to set off damages arising from the General Contractor’s failure to complete the project against the General Contractor’s last invoice. The ruling in Twister is in line with existing principles of contract law. If subsequent conduct of parties to a written contract indicate they do not consider themselves governed by that contract, and instead have developed an alternative arrangement that is established on clear evidence, it is unreasonable to impose the written contract on the parties.
 Ibid at para 14.
 Ibid at para 28.
 Ibid at para 32.
 Ibid at para 24.
 Ibid at para 22.
 Ibid at para 25.
 Ibid at para 24.
 Ibid at para 23.
 Ibid at para 34.
 Ibid at para 32.