Estimate in formation of construction contract

Abstract

Offers and acceptances are the basic process in the formation of contracts. It is a common practice in the construction industry for employers to request contractors, subcontractors and suppliers to give quotations or estimates. The main purpose of estimates in the context of construction industry is the enable a client/employer to know his financial commitment before deciding whether or not to proceed with a land development project. Generally the term estimate is always treated as estimate in its ordinary dictionary meaning. The practice of using estimates may give rise to disputes when the actual costs of the works exceed the amount in the estimates. The main issue is therefore whether estimate is a firm offer that may be treated as basis for valid acceptance in the formation of an enforceable contract. For example, in a leading case of Crowshaw v. Pritchard the court held there was an enforceable contract based on an estimate. The objective of this research is therefore to identify whether estimates are valid offers that may be a basis for a valid acceptance in formation of construction contract. The research is carried out by examining the construction contract cases that relate to the use of estimates. A total of six leading cases from the United Kingdom, New Zealand and Australia were identified. The analysis of those cases revealed that only one case from Australia where the Supreme Court had held that the estimate used in the formation of the contract was not an offer. In all the other five cases from the United Kingdom and New Zealand, the courts in those countries had held that the estimates were valid offers and the makers were contractually bound by their estimates. It appears that the main reason for the decision is, when an estimate is given by a skill and experienced person in a particular trade, albeit negligently, and the recipient relies on it and is induced by it and they enter into a contract, that person making the estimate is contractually bound by his estimate. If the actual cost of the work exceeds the estimate, he may only recover the estimated amount. Therefore, an estimate could or could also not be an offer in formation of contract due to several events. If the maker intends that the estimate is a mere estimate, there must be clear expression to that effect. Contractors and subcontractors are advised to be extra careful when asked to give estimates. If they intent the estimate is to be treated in its ordinary meaning there must be clear words expressly stated in the document to that effect. If this is not properly stated, disputes may arise when the actual cost of the work is more than the estimate. Finally, it is submitted that even if an estimate is meant to be an estimate, a contractor making the estimate may be held liable to the recipient if the estimate is grossly inaccurate and the actual cost greatly exceeds the estimated amount. Therefore a contractor must fully utilise his experience and expertise in making the estimate. He must not be negligent.