Quite often, faced with a claim or potential claim for delays and impact costs, stakeholders in the construction industry will ask themselves the following questions: What does “impact costs” mean? Aren’t impact costs already included in the cost of each change order? Should I add a notation on change directives and change orders regarding additional delays or impact costs? Alternatively, should I strike out any such notation? A decision rendered on April 10, 2015 by the Quebec Court of Appeal answers these questions.
Essentially, the decision in Consortium MR Canada Ltée v. Commission scolaire de Laval1 does the following:
- Distinguishes the notions of impact costs, administrative costs, and head office costs;
- Re-affirms the principle that the general contractor must “scrupulously” respect the procedure for changing the contract price;
- Validates the repeated refusal of the architect in this case to accept the general contractor’s notation on change directives and change orders that the “impact costs” generated by the change and the costs associated with additional delays will be dealt with separately at a later date.
The facts of the case were as follows. For every change order involving the construction site at issue, the procedure followed by the parties was always the same: the architect sent the general contractor change directives; the contractor responded with change requests as per the terms of the contract; on each such request, the general contractor made a notation to the effect that its quoted price did not include the “impact costs” generated by the change, or the costs associated with additional delays, which would have to be dealt with separately at a later date. Upon receiving the change request, the architect would strike out the notation added by the general contractor and add one to the effect that such costs were already included in the contract. The architect and the general contractor would then negotiate a revised price and a new deadline for completion of the work. Once that was finalized, the change order was prepared and sent to the general contractor, who once again would make a notation on it to the same effect as those on the change requests and return it to the architect, who once again would strike out the notation and add “inadmissible – all costs included”. In each case, the general contractor and the project owner agreed on the price of the work asked by the change order, except for the additional costs referred to in the notations made by the general contractor. The dispute over those costs was what the Court of Appeal had to decide. The cause of the additional delays was not at issue on appeal; it was settled that they had been caused by the owner.
The Court of Appeal first of all legally distinguished impact costs, administrative costs and head-office costs, which are often claimed en bloc in such cases, and were claimed in a somewhat jumbled fashion by the general contractor in this instance. Impact costs were stated to be additional costs impossible to associate with a particular change but rather with the repercussions of a change or series of changes on the rest of the project, such as additional costs inevitably incurred in winter. In our view the term “impact costs” creates a lot of confusion. For they are nothing more – or less – than a combination of indirect costs associated with one or more changes. Normally a general contractor should be able to evaluate such costs when negotiating the change(s), although that may not be possible in some special circumstances (such as a major change that has a severely disruptive effect on the construction site or a huge series of changes whose impact is difficult to evaluate during the negotiations regarding them). As for administrative costs, they are not to be confused with head-office costs. The former are fixed costs incurred by the general contractor in order to keep a construction site operational. The latter cannot be associated with any one particular site but are incurred for the operation of the enterprise as a whole.
The Court then went on to robustly reaffirm the principle of the immutability of the respective obligations of the parties to a fixed-price contract and, in turn, the principle whereby the general contractor must “scrupulously” respect the procedure for changing the contract price. In this particular instance the costs claimed that were in the nature of administrative costs were known to the general contractor when it negotiated the revised price and therefore should have been included in the prices quoted on the change requests and subsequently on the change orders. The architect was thus fully justified in systematically striking out the contractor’s repeated notations to the effect that these administrative costs would be claimed at a later date.
In conclusion, as the Court itself conceded, the principles applied in this case are not automatically transferable to other cases, given the extent to which contractual provisions on changes to construction projects can vary. The Court nevertheless arrived at conclusions similar to those in an earlier landmark decision in this regard (Développement Tanaka Inc. v. Corporation d’hébergement du Québec, 2011 QCCA 1278), despite the fact that the respective contractual clauses at issue were quite different. In other words, the Court of Appeal seems to be sending the following message: the principles it has established in this case will sometimes be transferrable to other such contracts.