Legal Blog

Extras – Cost

A contractor wants compensation for its labour and material costs as an extra. How does it calculate the labour cost? Does it take its actual labour cost and then mark it up for profit and overhead or does it charge some all-in hourly rate that it may (or may not) have used to estimate its labour when pricing the job? This question was answered in McLarty v. 2210961 Ontario Limited, a 2020 decision of the Ontario Superior Court of Justice.

Dispute

This was a run-of-the-mill lien action in which the contractor sued the owner for payment of money due on contract and extras and the owner counterclaimed for damages for deficiencies and delay. The owner terminated the contract when the project was almost completed. The judge found that the owner did so improperly and awarded the contractor the money due on contract less $36,500, which the judge calculated as being the value of the incomplete work. The judge also found that the deficiencies were trivial and awarded the owner only $1,700 for them.

Extras

The contract stated that the owner was to pay for any extras on a time and materials basis. Unfortunately, it did not state how the labour rate was to be calculated. The judge agreed with the owner that, as an implied term of the contract, any labour charge had to be reasonable; however, the parties disagreed on what was reasonable.

The contractor calculated its labour rate at $60.00 per hour, which included its overhead. The contractor testified that it had charged this rate for more than six years and used the rate when it bid the job. The owner submitted that the contractor had used temporary unskilled labour at $17.50 per hour and that, even with a 20% markup for profit and overhead, a reasonable hourly rate should be no more than $21.00 per hour.

The judge had this to say about the labour rate to be used:

“I find that the rate charged by the plaintiff is reasonable and standard in the industry regardless of the actual wage paid by McLarty to his temporary employees. McLarty is a general contractor. In preparing the original quote, his estimate included labour charged at $60 per hour. The plaintiff’s out of pocket expense for labour is not relevant much the same way the out of pocket wage expense of an auto repair shop is not reflected in a quote for automotive repair. Similar to the situation at hand, the labour cost is the same for all customers regardless of the wage cost of the individual actually performing the repair work.”

We are not enamoured with this reasoning. A contractor is performing construction work; not replacing a muffler. We are not convinced that a contractor who pays $17.50 per hour for its labour is justified in charging $60.00 per hour for that labour.

The contractor had also charged time and one half for the labour when done on an overtime basis. The judge held that the same logic she used to allow the $60.00 “shop rate” disentitled the contractor from claiming overtime. Because an enhanced hourly rate was not provided in the contract, she allowed the contractor only the shop rate for actual time spent to complete the extras.

We would not have awarded the labour costs in the same manner as the judge. We would have used actual cost plus a reasonable markup. We would have allowed overtime, but only if the owner authorised the actual use of overtime; if the same work could have been done during regular time, there would be no reason to pay overtime.

Excess Lien

The actual award in favour of the contractor, after all debits and credits, was $87,400. The contractor liened for $203,400. The owner had claimed $25,000 in damages arising from an “exaggerated” lien. Without setting out the specifics of section 35, the applicable section of the Construction Act, the judge concluded that the lien claim was exaggerated. However, she noted that owner did not present any evidence to prove it suffered damages as a result of the exaggerated lien claim. Accordingly, she dismissed that claim.

We assume that the owner had not bonded off the lien from title because, if it had, the cost of that bond, and the legal fees spent in doing so, would have been obvious damages.

Legal Costs

The contractor had claimed costs between $84,000 to $91,000, depending upon the scale of costs used and the calculation of costs. The judge acknowledged that the contractor’s award exceeded the amount that the contractor had offered to accept in an offer to settle; this would result in costs at a higher scale. However, she also noted that the contractor had registered an exaggerated lien. She said, “This litigation may have been less adversarial and more amenable to early resolution if the plaintiff had not registered a lien (which was ultimately vacated on a motion brought by the defendant) to which he was not entitled and instead restricted his claim to his true liquidated damages.”

Although she did not directly reference them, prior cases have reduced costs available to a successful lien claimant if that lien claimant registered an exaggerated lien. The judge awarded the contractor legal fees and disbursements of $58,000 and, therefore, implicitly considered the exaggerated lien in setting her costs award.

Image courtesy of Edar.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.