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Legal - Risk management strategies for cost plus contracts in Texas

image Brandon L. Rutledge, Peckar & Abramson, Houston, TX

HOUSTON - The release of the AIA A102™–2007 Cost of the Work Plus a Fee with a Guaranteed Maximum Price (“AIA A102™–2007”) marked a turning point for cost-plus construction contracts by formally standardizing a guaranteed maximum price (“GMP”). The change followed an inauspicious trend of owners reallocating risks for cost overruns back to contractors. Consequently, today’s most common cost-plus contract forms all but guarantee that owners pay the lesser of the final GMP or the actual costs of a project plus a negotiated percentage-fee.

    However, several cases in recent years beg the question: However, several cases in recent years beg the question: How much risk did the AIA A102™–2007 shift to contractors?
    Across the country, courts in other jurisdictions, including states such as Oklahoma, Louisiana, and Mississippi, have ruled that certain cost-plus contracts vested contractors with an obligation to protect an owner’s financial interests and to keep costs to a minimum. Courts in these states largely based rulings on language found in Article 3 of the AIA A102™–2007 and the AIA A102™–2017, which purports to establish a “relationship of trust and confidence.”  In other states, several courts have construed the language in Article 3 to impose even stricter “fiduciary” duties on contractors. This development should serve as a cautionary tale to Texas contractors who frequently operate under cost-plus contracts. A fiduciary duty involves far more than just an obligation to avoid committing fraud. Namely, the imposition of a fiduciary duty carries with it a legal obligation to always act in the best interest of another party—even when an action entails negative consequences for the fiduciary. As a result, the imposition of fiduciary duties on Texas contractors could effectively preclude contractors from obtaining any benefits at the expense of the owner.

Would Texas courts actually impose this type of harsh and far-reaching obligation on contractors?
    The AIA A102™–2017 Standard Form of Agreement between Owner and Contractor, the contract most commonly used in the construction industry, does recognize an obligation on the part of contractors to not act solely in their own self-interest. Specifically, the section describing the relationship of the parties, Article 3, states, in relevant part:
The Contractor accepts the relationship of trust and confidence established by this Agreement and covenants with the Owner to cooperate with the Architect and exercise the Contractor’s skill and judgment in furthering the interests of the Owner; to furnish efficient business administration and supervision; to furnish at all times and adequate supply of workers and materials; and to perform the Work in an expeditious and economical manner consistent with the Owner’s interest.

    Article 3 not only expressly establishes a “relationship of trust and confidence”, but also references the “owner’s interest” twice—first stating that a contractor must exercise judgment to further the interests of the owner, and secondly directs the contractor to perform work in a manner consistent with an owner’s interest. In fact, in instances where courts in other jurisdictions found that an express fiduciary relationship existed between a contractor and an owner, they often focused on these exact words. Yet, courts across all jurisdictions seem to believe that this language does modify the typical contractor-owner relationship, though the degree of such a change varies significantly depending on the jurisdiction and the facts of each case. For instance, while some states treat this language as imposing as a duty on contactors to reasonably control or minimize costs, other states interpret this language to merely obligate contractors to keep owners aware of cost overruns.
    The Texas Supreme Court has never addressed whether this language creates a fiduciary relationship under Texas law. However, on one occasion, in a case involving a residential construction dispute, the Austin Court of Appeals treated contractual language creating “a relationship of trust and confidence” as forming a fiduciary relationship. In that case, the owner claimed that the contractor owed a fiduciary duty and breached that duty by overstating the amount of a draw request. The issue on appeal was not whether the contractor owed a fiduciary duty under Texas law but whether sufficient evidence existed to support the jury’s finding that the contractor did not breach that duty.  Therefore, the case is not instructive of how Texas court will decide future cost-plus fiduciary duty claims.
    Given the prevalence of Construction Management at-risk and other cost-plus type contracts, particularly in connection with public projects, this issue is likely to come to the forefront in construction law. As a result, contractors should keep in mind the following suggestions for managing some of this risk in cost-plus contracts:
    1.    Contractors should consider striking the above-referenced contract language during contract negotiations, which could help remove any doubt should a fiduciary duty be alleged by the owner.
    2.    Accounting records, including job cost details and backup documents may be subject to production in discovery. For this reason, contractors should be mindful and maintain consistent and accurate job cost records. This means keeping clear, accurate, and itemized records that account for the supplies and labor expended on every cost-plus project.

Brandon L. Rutledge is an Associate in Peckar & Abramson’s Houston office, where he focuses his practice on litigation matters, complex commercial transactions, and construction law. He may be reached at: brutledge@pecklaw.com

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