Construction contract on a directional basis, or not?

Construction contract on a directional basis, or not?  

When a contractor and a client agree that the contracting agreement is “on a cost-plus basis,” it means that the contractor may charge the actual costs incurred. In a cost-plus contract, only the hourly rates and unit prices of materials are agreed upon. In that case, therefore, the client has no certainty in advance about the final price he will pay. Construction law lawyer Myrthe de Vries explains about the guide price, construction contract on a directional basis and contingencies.

Price estimate and target price

Because the lack of that certainty makes many clients feel uncomfortable, they often ask the contractor to estimate what the contractor expects the work to cost. When the contractor gives an estimate at that moment, he runs the risk of creating an expectation with the client and not being allowed to simply invoice all costs incurred. Legally, such an estimate is often a guide price, which cannot be exceeded indefinitely.

Reasonable price when contracting on a directional basis

Indeed, when no fixed price is stipulated in the contract for work, but it is agreed that the work is performed on a cost-plus basis, the client is liable to pay a reasonable price under the law. The question of what constitutes a reasonable price takes into account the contractor's expectations of the likely price. This means that if a target price is set, this target price is the expectation that the contractor has raised.

What is a guide price?

There is a guide price if the contractor has given an estimate or an indication of the total price of the work. For example, in a quotation, which states that the contract will be performed on a cost-plus basis, but which does give an indication of the costs. An indicative price can also be given in an e-mail or a brochure. Incidentally, the word ‘target price’ does not always have to be used. Terms such as ‘estimated price,’ ‘price indication,’ "approximate," and the like can also indicate a target price.

Supplements, additional work, building contract on a directional basis and a target price. These are important concepts in construction that the contractor must consider in pricing and in the content of the building contract.

Suppositions as a guide price

We encounter the target price not only in the case of the building contract based on direction, but also in the contract in which a (more or less) fixed price is agreed upon. This is because in that type of contract there are usually set items included, the actual price of which is determined in the work. Thus, even set items are then often regarded as guide prices. A guide price can also be given at additional work.

Exceeding target price  

The law (Art. 7:752 paragraph 2 jo. 7:752 paragraph 3 BW) states that the guide price may not be exceeded by more than 10%, unless the contractor has warned the client as timely as possible of the likelihood of a further overrun. Thus, the contractor will have to warn as soon as a further overrun is imminent. Constantly sending invoices is not sufficient for this purpose, even if they are paid by the client. Indeed, the warning of overrun should be ‘timely’ and ‘concrete’. Timely means that the client still has sufficient opportunity to adjust or simplify the work to be performed. Concrete means that the contractor indicates to which parts of the work the overrun relates and what costs that entails. 

Failure to warn about exceeding target price

If the contractor does not give a timely or concrete warning, the parties are bound by the target price plus a maximum of 10%. The contractor can then no longer charge the actual costs incurred, despite the fact that these costs were actually incurred.

Construction law attorney for building contract

However, it is possible in a contract or terms and conditions deviate from the legal standard of 10%. For example, this standard can be completely disregarded or increased. It is also possible to deviate for part of the work, or, for example, specific set items or materials. In doing so, specific conditions must be met: not every provision in the general terms and conditions can pass, especially if the client is a private individual. Therefore, contact the lawyer construction law of Lexys Lawyers for advice.