Construction Contracts in Alberta: Understanding the Cost Implications of Prime Cost Sums and Cash Allowance Clauses

Construction project costs can be unpredictable, especially in Alberta where parties must contend with inclement and sometimes unpredictable (winter) conditions. As a result, parties forced to work through these conditions cannot always accurately determine certain costs at the tendering stage. “Prime Cost Sums” (“PC Sums”) and/or “Cash Allowances” provide mechanisms to allow parties to account for these unpredictable costs. However, both Contractors and Owners must remain alive to the potential cost implications of these terms.

As will be seen, Alberta Courts have defined PC Sums as synonymous with Cash Allowances. Just like Cash Allowances, PC Sums allow a contractor to provide an Owner with a reasonable estimate of anticipated costs within a particular scope of work that cannot be precisely determined at the tendering stage. Actual costs that exceed the estimate require the Owner to pay the outstanding amounts, while actual costs less than the estimated amount require the Contractor to provide the Owner with a credit.

The Canadian Construction Documents Committee (“CCDC”) has standardized construction contracts in Canada. CCDC contracts create a uniform set of terms to govern parties entering into an agreement. One option parties may choose is a “CCDC 2 – Stipulated Price Contract” (“CCDC 2 Contract”). The CCDC 2 Contract establishes a “single, pre-determined fixed price, or lump sum, for the project”[1] with procedures and processes for Cash Allowances covered under the “general conditions” (“GC”).

PC Sums may be defined in the contract.[2] In the absence of a contractual definition though, as is the case for standard CCDC 2 Contracts, the caselaw is informative. The few decisions in Canada that have considered PC Sums indicate that parties should be alive to the term and its implications. This article focuses on disputes related to PC Sums, the significance of these terms, and how courts have interpreted them. It will also look to Cash Allowances as an analogous term within a CCDC 2 Contract.

Interpretation of PC Sums – British Columbia

(1) Canusa Construction Ltd v Central Native Fishermen's Cooperative (1982 CarswellBC 2661)

The British Columbia Supreme Court defined PC Sums in this decision. The facts involve a Contractor unable to provide an exact cost for transportation. Instead, they provided a “fair” figure that subsequently increased. The Owner accepted the increase but refused to pay any costs exceeding the revised amount. The Contractor asserted this figure was designated as a PC Sum to avoid incorporating a “large contingency factor” into the contract price; its use was based on “the impossibility of determining in advance with any degree of certainty the actual transportation charges”.[3] The court relied upon experts that defined a PC Sum as follows:

(1) a sum the engineer[4] anticipates will be incurred but which cannot be defined precisely. It is either unavailable or unknown to the Contractor during the tender period;[5] and

(2) a cash allowance which is set aside in a construction contract for an item of cost that cannot be completely identified or ascertained by an Owner or Contractor at the time of [bidding and] contracting. It is adjusted later to reflect the actual amount incurred for that particular work item. The cost is unknown at the time the contract is prepared because there is not a firm price for the work...[6]

After accepting these definitions, the court found the following:

[16] If one accepted the defendant's submission that the Contractor bound itself to a fixed or stipulated price for carrying out the transportation services then the term "P.C. Sum" has no meaning and could have been omitted entirely without changing the obligations of the parties. I reject such an unreasonable interpretation.

[17] The parties incorporated a well-known, widely used, engineering term in the contract. That term signified that the price quoted for transportation services was provisional only and in accord with established practice, if carried out by the Contractor, would be charged to the Owner at cost. This conclusion is in accord with the wording of paragraph "C" of the original proposal and with industry practice.[7]

This decision defines, interprets, and applies “PC Sums” as a “well known” term operating alongside a CCDC 2 Contract to add costs (as agreed upon) to the “stipulated price”.

Recent Considerations of PC Sums – Alberta

The Alberta Court of Queen’s Bench (“ABQB”), as it then was, has interpreted such terms in two relatively recent decisions. First, the court in Hendriks Construction Ltd v Jackie[8] interprets PC Sums directly. Next, the court in ASC (AB) Facility Inc v Man-Shield (Alta) Construction[9] interprets “Cash Allowances” as found in a CCDC 2 Contract.

(1) Hendriks Construction Ltd v Jackie (2015 ABQB 782)

Hendriks was involved in a dispute related to a Design-Build Stipulated Price Contract. The ABQB defined a PC Sum as an amount included in the contract where the exact price is unknown at the outset and as “another term for a cash allowance”.[10]

In this case, the Owner (also “JHF”) accepted a “PC Sum Letter” (the “Letter”) from the Contractor (also “HCL”) as part of a change order. This Letter defined various items as PC Sums. The Owner subsequently disputed the Contractor’s entitlement to “claims in excess of the PC Sums” as set out in the Letter. They argued the Letter should not be binding and that the Stipulated Price Contract terms should govern. The ABQB held that the parties were familiar with “PC Sums” and that the Stipulated Price Contract became a Cost-Plus contract after the Letter was incorporated:

[73] The original Contract was a Stipulated Price Contract. All of the work contemplated by the Contract and the costs associated with that work, subject to change orders relating to that work, are fixed. However, the costs referred to as PC Sums in the PC Sum letter are not subject to fixed prices. These costs which now form part of the Contract by the incorporation of the PC Sum letter in Change Order 3 are subject to a cost-plus agreement. They are subject to the cash allowances provision in General Condition 4.1 of the Contract. JHF agreed to this when it signed Change Order 3 incorporating the PC Sum letter and the lawyers cannot now be heard saying that they did not know or understand what they had agreed upon.

[74] As a result, the contract between HCL and JHF was amended as of March 2, 2007, when Mr. Jackie signed Change Order 3 on behalf of JHF. All of the work contemplated by the original Contract remained subject to stipulated costs, as varied by Change Orders. The work contemplated by Change Order 3 and specified in the PC Sum letter as a PC Sum, was subject to a cost-plus arrangement between HCL and JHF.[11]

The ABQB found that the Letter, by including PC Sums, modified the character of the agreement, making it both a “Stipulated Price Contract” for the original contract amounts and a “Cost-Plus Arrangement” for the determined PC Sum amounts. The Contractor was entitled to claim PC Sums, but only as set out in the Letter and agreed to in the Change Order.[12]

(2) ASC (AB) Facility Inc v Man-Shield (Alta) Construction (2018 ABQB 130)

The ABQB in Hendriks stated that PC Sum was another term for “Cash Allowances”. In Man-Shield, the ABQB interpreted General Condition 4.1 of a CCDC 2 Contract addressing “Cash Allowances”.

The parties in Man-Shield entered into a CCDC 2 Contract to build a retirement residence. The consultant responsible for contract administration and interpretation withheld payment for deficient and incomplete work. At issue is whether the consultant erred in interpreting the contract or in determining deficiencies.

One of the consultant’s decisions involved landscaping work. The Contractor (Man-Shield Construction) argued that landscaping fell under a “Cash Allowance” and therefore they were owed full costs for work that was performed regardless of the price. The Owner (ASC Facility) asserted that once a cash allowance is set through a change order, the completion price is finalized. The court first described cash allowances as amounts for “certain portions of the Work … unknown at the time of calling bids” and maintained until the actual price is confirmed by a change order.[13] It then set out General Condition 4.1.4 of the CCDC 2 Contract:

Where the actual cost of Work under any cash allowance exceeds the amount of the allowance, the Contractor shall be compensated for the excess incurred and substantiated plus an amount for overhead and profit on the excess as set out in the Contract Documents. Where the actual cost of the Work under any cash allowance is less than the amount of the allowance, the Owner shall be credited for the unexpended portion of the cash allowance, but not for the Contractor’s overhead and profit on such amount. ...

*(Note: this wording is from the 2008 CCDC 2 Contract; the 2020 CCDC 2 Contract differs slightly)[14]

Each party interpreted “the actual cost of the work” differently: the Contractor stated it can only be known after the work is complete; and the Owner stated that it “means the agreed price of the work, once the specifications of the work are known but before it is performed”.[15] The ABQB denied the Contractor’s interpretation and held that:

-        Cash Allowances are inserted as a placeholder during tendering;[16]

-        GC 4.1.4 addresses overhead and profits which are accounted in the contract price, and not the Cash Allowances;[17]

-        the Contractor’s interpretation was inconsistent with the scheme of CCDC 2 Contracts and GC 4.1 as a whole;[18]

-        one “central feature” of CCDC 2 Contracts is that it has processes to revise price, timing, and scope of work through a “change order”; [19]

-        Owners have “bargained for the right to know and to control its costs in advance, [and] not to be surprised and indebted after they have been incurred”;[20]

-        if the specifications are known prior to performance, parties may agree on cost via a “change order” and the usual performance and payment can be carried out; and[21]

-        GC 4.1.4’s reference to “excess incurred and substantiated” must be read to mean the costs as authorized by the Owner and recorded in a Change Order.[22]

Although the language under GC 4.1.4 changed with the 2020 CCDC 2 Contract, the operation of Cash Allowances for this discussion are not impacted significantly. Actual costs in excess of the Cash Allowances are still to be paid, with profits and overhead paid in accordance with the contractual documents. Just like PC Sums, the use of Cash Allowances, if properly incorporated, can impact, and increase the payment obligations under a contract.

(3) PC Sums & Projects Involving Consultants

One issue that arises from time to time, and which McLennan Ross recently took to Arbitration under a CCDC 2 contract, is what happens when a Consultant fails to provide the Owner and Consultant with an interpretation or decision under the CCDC 2 contract regarding the assessment and payment of PC Sums. In such a case, it would appear that the Parties must resort to GC 8, being the Dispute Resolution provisions of the CCDC 2. There should be no impediment to doing so where a Contractor and Owner are left without a decision from Consultant on the reasonableness of a PC Sum under the contract.

Takeaways

The above discussion demonstrates potential disputes that may arise when certain undetermined and/or indeterminable costs are governed by PC Sums or Cash Allowances. Cash Allowances are well defined in a CCDC 2 Contract. However, the presence of a Cash Allowance term does not prohibit parties from incorporating often undefined PC Sum terms through the Contract Documents or a Change Order (as seen in Henricks). In fact, PC Sums have the ability to change the character of an agreement and add costs beyond the stipulated amount. These potential costs present a risk to parties not alive to the implications of such terms. They may affect Contractors carrying out work without a determined price when they seek to collect on the PC Sums, as well as Owners who may unintentionally become responsible for significant sums beyond the stipulated price. Furthermore, both Contractors and Owners must remain alive to the role of parties such as consultants that are involved in overseeing the project and who may be responsible for the assessment and payment of PC Sums under an agreement.

Parties entering into construction contracts in Alberta are well served to understand the function, implications, and interpretations surrounding Cash Allowances and PC Sums prior to submitting a tender or accepting a tender. The application of these terms may have a significant impact on the amounts owing under the contract. Proactive steps to understand the nuances of these terms (and the CCDC 2 Contract more generally) can potentially save both Contractors and Owners significant headaches (legal, financial, and otherwise) before they become headaches.

For any questions related to Cash Allowances or Prime Cost Sums as they apply to your construction contract, please contact a member of our Construction Law team at McLennan Ross. We are happy to advise you at any stage, whether you are tendering a bid, considering accepting a proposal, or if a dispute has arisen in relation to any of the foregoing.