UNDER FIRE AND SHOT TO PIECES¹ – THE IMPORTANCE OF EFFECTIVELY MANAGING COST ESTIMATES AND BUDGET EXPECTATIONS

EXECUTIVE SUMMARY

The NSW Supreme Court matter of Construction & Design Australia Pty Ltd v Robinson² and subsequent appeal,³ highlight the issues that can arise when expectations around project cost estimates and budgets are misaligned. The matter provides valuable insight into what steps can be taken to better manage the communication of cost estimates and budget expectations early on.

Background

The owners wanted to build a residential property in Kiama for $750,000. During construction, disputes developed over escalating costs. The owners later refused to pay certain amounts, causing the builder to suspend works. When the builder resorted to claiming the unpaid amounts in legal proceedings, the owners responded with allegations of misleading and deceptive conduct.

The owners alleged the builder made three representations, namely that:

1. The cost of building the dwelling would not exceed $550,000;⁴
2. The builder could build the dwelling for not more than $750,000;⁵
3. Total items listed in the builder’s estimate spreadsheet would be about $457,000.⁶

The Representations – Court’s Assessment

The $550,000 Representation

The owners said the builder represented to them that the cost for building the dwelling would not exceed $550,000. The builder denied this, saying the estimate only related to the main living area of the house.

After an extensive evaluative exercise, the Court preferred the builder’s account of events because it was consistent with other evidence, particularly the existing contemporaneous documents.

The court found the owners’ version to be unlikely and held that the builder did not represent it could build the dwelling for $550,000.⁷

The $750,0000 Representation

The owners relied on the following in support of the $750,000 representation:

1. details completed by the builder in the NSW long service levy lodgement which noted the “Estimated value of Work” as $750,000;⁸
2. clause 8 schedule 1 of the Contract which recorded that the “Total Estimated Funds” for the Project was $750,000;⁹
3. the Home Warranty Certificate provided by the Builder which recorded that insurance was issued for a “Contract Amount” of $750,000;¹⁰ and
4. the builder’s failure to advise that costs would considerably exceed $750,000 (the amount that the owners relied on as their budget).¹¹

The Court found that:

1. the builder told the owners that their $750,000 budget was ‘under fire’ and that they would not be able to build the dwelling for that amount;¹²
2. on several occasions, the owners when they enquired about costs, did not communicate their understanding that the dwelling would be built for $750,000.¹³

The Spreadsheet Representation

The owners finally alleged that the spreadsheet the builder had provided (and which estimated costs of around $457,000 over a four-month period) constituted a representation that the costs would not be substantially more than this amount.¹⁴

The Court found that the builder appropriately qualified this spreadsheet, including as a ‘rough estimate’ and that the representation in the spreadsheet was ‘cautious and qualified’.¹⁵

Key Takeaways

There are several key takeaways for both owners and builders:

1. 1. Be mindful about engaging in discussions about costs and estimates when the design is still incomplete. If these discussions do occur, appropriate records may be kept or follow-up correspondence sent, making sure the basis for any estimate is communicated;¹⁶
   2. An owner should appreciate that a cost estimate given prior to a complete design, may only be a ‘guestimate’;¹⁷
   3. When the design is complete, a more accurate cost estimate can be given, but even then, the basis for the estimate should be set out. At this stage it may still be a ‘rough brief’.¹⁸

The builder should specify that the cost estimate is subject to change, including if the brief changes (and should suitably qualify any cost representations);

• The owner should clearly communicate any expectations before signing the contract, and be conscious about entering into, for example, a fixed price or cost-plus contract;¹⁹
• If the owner has a specific budget, that he or she does not (or cannot afford) to overshoot, it is important to communicate this clearly to the builder before contract signing;²⁰
• In the interest of managing ongoing expectations, any estimated costs (including forecasts) can be tracked by the builder to ensure costs are accurately accounted for during the project. These amounts should be communicated to the owner at regular intervals. The owner, in turn, can then clearly communicate any concerns;²¹ and
• If disputes arise as to escalating costs, appropriate records may be kept at meetings and when emails are exchanged, the language used should be clear, careful and calm.²²

The above guidelines may assist owners and builders to effectively manage the communication of cost estimates and budget expectations early on, thereby mitigating the risk of potential costly litigation later on.

This article is written by Lucas Keogh, Partner, Jacques Lourens, Special Counsel, and Christian Nehme, Solicitor

^[1] Construction & Design Australia v Robinson (No 2) [2024] NSWSC 376 at [78], [82], [86], [89] and [98].

² [2024] NSWSC 376.

³ Robinson v Construction & Design Australia Pty Ltd [2024] NSWCA 314.

⁴ Construction & Design Australia v Robinson (No 2) [2024] NSWSC 376 at [28].

⁵ Ibid [30].

⁶ Ibid [29].

⁷ Ibid [253].

⁸ Ibid [30].

⁹ Ibid [168].

¹⁰ Ibid [183].

¹¹ Ibid [30].

¹² Ibid [249].

¹³ Ibid [250].

¹⁴ Ibid [255].

¹⁵ Ibid at [256]-[277].

¹⁶ Ibid at [49].

¹⁷ Ibid at [161] and [272].

¹⁸ Ibid at [50].

¹⁹ Ibid at [40].

²⁰ Ibid [250].

²¹ Ibid at [268].

²² Ibid at [89].