January 15, 2016

When is an Estimate Not Just an Estimate?


Design professionals and contractors are frequently called upon to draft estimates for proposed projects. For an engineer or an architect, this estimate may occur early in the planning stage, when many of the assumptions regarding design are in flux. Contractors create estimates based on design assumptions which may change during the course of a project. As a result of these changes the estimate may end up being substantially different than the ultimate project cost.

Estimates are clearly an essential part of the construction process. They provide a framework for time, scope and financing of the project, and provide guidance to the owner and developer regarding anticipated costs and scope of work necessary to bring the project to completion. They are, however, by their very nature, inexact.

Although it is generally understood that estimates are just that — estimates — unless they are carefully worded, estimates can be a basis for liability. Under Oregon law governing misrepresentation, statements made to another, if inaccurate, can form the basis for a claim for negligent misrepresentation.1

The essence of the claim, brought either by the owner/developer or the contractor, is that they are entitled to rely on the professional estimate of the contractor or design professional. It is difficult to argue that the other party is not entitled to rely on the projection and analysis when it is included in the scope of work.

In the construction setting, developers and owners may rely on the estimate as a basis for financing and scheduling. Finance charges and interest payments accrued as a result of scheduling, and completion assumptions, may be asserted as items of damage. Depending on the form of the contract estimate (project delivery forms vary from unit price to lump sum), the estimate can form the basis of a negligent misrepresentation claim. The estimate can be used to establish detrimental reliance by an owner in the event the project subsequently comes in substantially over budget.

Recently, I was involved in a case involving the construction of a subdivision. An early estimate identified three costs associated with a sanitary lift station. The cost was for the equipment itself and did not reflect construction or installation costs. The estimated cost for the lift station was several times the original estimate, largely due to changes in criteria required by the permitting agency. The nature and extent of the estimate, and its intended use, became critical issues to the case.

How do you protect yourself while preserving the essential analysis of the estimate?

  1. The estimate should contain language that is subject to change in scope, time, and financing.
  2. The estimate should contain language limiting the projected use of the estimate — i.e., it is not to be used for financing (alternatively, if it is, limit the scope and duration of the estimate).
  3. Distinguish between types of estimates: preliminary estimate, intermediate estimate, or final estimate. Each estimate should reflect the degree of certainty and progress of the project.

Ultimately, the estimate can be as important a document to the project as the original contract. As with the original project contract, it is essential to ensure the language in the estimate defines the use and degree of reliance on the estimate. If the project ultimately goes south, you can be sure the estimate will be a document at issue.

1Onita Pacific v. Trustees of Bronson

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.


Tags: Construction, Construction and Development

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