Construction Law Update: Iowa Court of Appeals Issues Ruling on Cost-Plus Contracts
In Olmstead Constr., Inc. v. Otter Creek Investments, LLC, 2019 WL 4678167 (Iowa Ct. App. 2019), the Iowa Court of Appeals issued a decision on a dispute involving a cost-plus contract. The project owner, Otter Creek, entered into a cost-plus contract with Olmstead Construction to build a convenience store and gas station in Robins, Iowa. In response to invoices submitted by Olmstead Construction, Otter Creek requested documents substantiating the billed costs. Olmstead Construction did not provide the requested documents, so Otter Creek did not pay the invoices. Olmstead Construction thereafter posted a mechanic’s lien and filed a lawsuit foreclosing the lien and claiming breach of contract.
The Iowa Court of Appeals noted that “[n]o Iowa case has addressed whether a cost-plus contract requires the contractor to justify the expenses billed on a project.” As part of its analysis, the Court explained that “a cost-plus contract, by nature, demands that the contractor maintain accurate and detailed expense records” which “allows the owner to check on the contractor’s expenditures.” The Court ultimately concluded that “any contract requiring an owner to reimburse a contractor’s costs implicitly allows the owner to approve the contractor’s accounting system and audit contract costs and pricing data.” Therefore, “if the owner disputes the billing, the burden is on the contractor to prove ‘each and every item of expense,” and the contractor has the “duty . . . under a contract on a cost-plus basis to keep adequate records to justify the actual costs reported and further to keep the usual documents to substantiate its claims for reimbursement.” Because Olmstead Construction did not provide Otter Creek with the requested documents that substantiated the billed costs, Otter Creek was not required to pay the disputed invoices and its failure to pay those invoices did not constitute a default under the contract. As a result, even though Olmstead Construction justified and proved the costs in the disputed invoices at trial, the Court ruled that Olmstead Construction was not entitled to recover attorney fees under the contract because “[h]ad Olmstead Construction provided the explanation of costs Otter Creek requested, it would have eliminated much of the confusion regarding the . . . invoices and, perhaps, the litigation in its entirety.”
Cost-plus contracts are common in the construction industry. Therefore, this case will have wide application in Iowa. In its decision, the Court warned that “[c]ontractors who fail to keep ‘meticulous cost records’ may find their expenses are not reimbursable,” and it noted that “costs based on estimates or approximations of expenses are insufficient.” Contractors would be wise to heed the Court’s warning and be sure to keep updated and detailed records substantiating the costs they bill. Not only is that a good business practice, but it is now a legal requirement in Iowa for contractors to be entitled to payment under cost-plus contracts.
Contact attorney Steve Marso at 515-288-6041 for more information about this or other construction matters.