Where an Owner’s Budget Becomes the Measure of Lost Profit

The Dispute

A construction management company had spent more than two years planning a building for a non-profit association when the association ended the arrangement, with nothing built. Its fee and its profit were both a percentage of what the building would cost, and the two sides had never settled on that cost. So the company was left to prove the value of a job that never started.

The Parties’ Positions

The construction manager contended that the estimate should be taken from the design the owner’s architect had submitted for rezoning approval, which its principal costed at roughly half again the owner’s stated budget. It relied at the inquiry on unchallenged expert evidence putting the cost higher still, but predicated the claim on its principal’s lower figure, he being more familiar with the project. Having accepted the Registrar’s overhead percentage, it applied that percentage to the gross anticipated fee rather than to the fee net of the subconsultant’s share, and added three months of unpaid management fee to the claim.

The owner maintained that no award for anticipated profit could be made at all, there having been no meeting of the minds on the construction cost, actual or estimated. It relied on Kelly v. Watson and Arnold Nemetz Engineering Ltd. v. Tobien, submitting that the court should not make a contract for the parties and that the evidence of their intentions was too vague to support an inference of any specific amount. In the alternative it put the estimate at the revised drawings on which construction proceeded years later under a different manager, a considerably smaller project, and endorsed the Registrar’s overhead percentage.

The Court’s Decision

The Supreme Court of British Columbia disagreed with both parties’ approaches and confirmed the Registrar’s recommendation, which Rule 18-1 of the Supreme Court Civil Rules permits it to vary or confirm. It reiterated that the absence of agreement on the estimated construction cost did not obviate the manager’s entitlement, and fixed the anticipated fee at the contractual percentage of the budget the owner said it expected to pay. It rejected the manager’s higher estimate, its overhead calculation on the gross rather than the net fee, and its addition of unpaid management fees.

The court rejected the owner’s alternative figure too, the smaller building constructed years later having ignored what the owner was prepared to pay. The claim was assessed in the low six figures, less credit for advance payments, costs to be spoken to. The profit the contract allowed on termination survived, measured by the ceiling the owner held to.

Key Lessons for Construction Managers and Owners

• Treat the counterparty’s stated budget as a likely measure of lost profit. The court fixed the anticipated fee at the contractual percentage of the cost the owner said it expected to pay, so the ceiling it held to in negotiation also set what it paid on termination.
• Establish whether an overhead deduction runs against the gross fee or the fee net of subconsultants before pricing the claim. The court applied the agreed percentage to the fee net of the subconsultant’s share, and the two bases produce materially different deductions on the same percentage.
• Prepare for a reference whose outcome may be a recommendation rather than a certificate. Where the registrar is not directed to certify a result, the rules require a report and recommendation the court may vary or confirm, and this one was confirmed over both objections.
• Keep a termination claim within the compensation the contract provides. The addition of unpaid management fees did not accord with an agreement measuring the entitlement as a percentage of the estimated construction cost, a point that decides quantum in construction litigation.

The outcome of this assessment turned on the terms of the construction management contract, on the findings made at trial, and on the evidence placed before the Registrar and the Supreme Court of British Columbia. A similar claim may be assessed differently.

ATAC LAW acts for owners, construction managers and contractors in construction disputes at trial, on references and assessments, and in arbitration.

Mike C. Stewart acted for the construction manager at the hearing that determined the loss of anticipated profit claim.