The Contractor’s Burden in Cost-Plus Contracts

By Paul Whitt | September 11, 2015

2228603119_0dbfea36a4_zUnlike many other civil claims, when a contractor seeks to recover amounts allegedly due from the owner under a cost-plus contract, the contractor has a heightened burden to prove the amounts owed by itemizing each and every expenditure made by the contractor on the project. And according to a Johnson County Criminal Lawyer, if the contractor fails to do so, they’ll be liable for punishment upto 10 years. The reason this is different than the burden of proving damages in other civil claims in Tennessee is that the general rule on damages in Tennessee is while the existence of damages may not be speculative, the actual amount may be speculative. See e.g., Cummins v. Brodie, 667 S.W.2d 759, 765 (Tenn. Ct. App. 1983) (holding that where the existence of damages is certain, the amount of damages does not have to be certain). But, in the case of a cost-plus contract claim, it appears that the amount of damages may not be speculative either.

This principle is seen in two recent Tennessee appellate cases. In the first case, Forrest Constr. Co., LLC v. Laughlin, 337 S.W.3d 211 (Tenn. Ct. App. 2009), the Tennessee Court of Appeals rejected a contractor’s claim for additional payments under a cost-plus contract where the contractor was unable to itemize the expenses it was claiming, and where the owner denied being indebted to the contractor for any additional amounts. The contract in question in Forrest Construction obligated the contractor to keep detailed accounting records related to the project and be able to provide back-up documentation for any draw requests submitted by the contractor to the owner. When pressed for the accounting and back-up information by the owner, the contractor was unable to itemize its actual expenses, and simply provided the owner with a “two-foot-thick pile of disorganized receipts and invoices.” Forrest, 337 S.W.3d at 224. The court found this to be insufficient, and held that the contractor committed the first material breach of the contract. In doing so, the court explained as follows:

“In any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper.” Kerner v. Gilt, 296 So. 2d 428, 431 (La. App. 4 Cir., 1974). “The contractor is under a duty of itemizing each and every expenditure made by him on the job and where the owner denies being indebted to the contractor the latter has the burden of proving each and every item of expense in connection with the job.” Id. (citing Wendel v. Maybury, 75 So.2d 379 (Orl. La. App. 1954); Lee v. National Cylinder Gas Co., 58 So. 2d 568 (Orl. La. App. 1952)); see also 17A Am Jur. 2d Contracts, Sec. 495 [26] (2008). Forrest Construction never itemized the expenditures it sought to recover from Mr. Laughlin. Instead, it submitted essentially unsubstantiated requests for draws. Moreover, when called upon to provide proper documentation and itemization of the costs, it provided a wholly disorganized, un-itemized box of documents, many of which were unrelated to the Laughlins’ home. Forrest Construction failed to identify or itemize the charges that pertained to the Laughlins’ home only, or charges for which the Laughlins may be partly but not wholly responsible. The box of documents — a two-foot-thick pile of check copies and invoices — that Forrest Construction provided was not sufficient to establish “the actual net costs of all direct materials, labor, services, and fees” that went into the Laughlins’ home, nor were the prior draw requests. Moreover, Forrest Construction never provided “full back-up support for all amounts requested” and it failed to provide “accurate records.”

Id. at 223‑24 (emphasis added). As a result, the court reversed the trial court’s decision in favor of the contractor as to the contract claim, and made clear that a contractor’s obligation in proving a cost-plus contract payment claim requires detailed information as to the contractor’s alleged expenses on the project.

Just a few years later, the Tennessee Court of Appeals again addressed a payment claim by a contractor under a cost-plus contract in Raines Bros. v. Chitwood, 2014 Tenn. App. LEXIS 393 (Tenn. Ct. App. July 3, 2014). In addressing the standard for proving damages under the cost-plus contract, the court cited its holding in Forrest, and again emphasized the requirement of the contractor to itemize and prove each and every expenditure made by it on the project. Raines Bros., 2014 Tenn. App. LEXIS 393 at *21. However, this time the contractor was prepared, and was able to provide “detailed spreadsheets itemizing the project transactions for subcontractors, materials, and equipment, and even provided detailed labor cost records that reflected individual hours charged for each date and worker involved.” Id. at *26. The court found this to be sufficient for the contractor to support its claim for payment under the cost-plus contract.

At least one takeaway from these two cases is that when a contractor elects to perform a project under a cost-plus contract, the contractor takes on a duty to fully and completely document its expenses on the project. Otherwise, when the owner denies being indebted to the contractor for any additional amounts, the contractor will be unable to prevail on its claim for additional payment.

Photo: Camilo Rueda López

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