When an owner is entitled to damages due to faulty construction work, errors or omissions in the design, or other breaches of a construction or engineering contract, damages are generally limited to an amount sufficient to place it in as good a position as if the contract had not been breached. But improvements made to the “fix” superior to what was originally bargained for would place the owner in a better position than its contract originally contemplated. The doctrines of betterment and first costs prevent this—costs for “bettering” a non-breaching party’s position should be excluded from a damages calculation. In other words, the non-breaching party is not gifted a blank check to fix a problem it otherwise would have had to pay for at the outset.
Betterment and first costs are widely recognized in the construction industry and apply to a variety of construction disputes involving both design professionals and contractors.[1] Note that betterment is often used to describe the same circ*mstances as first costs, however, for the purposes of illustrating these concepts they will be referred to separately in this article.[2] Consequently, the first costs concept described herein can be considered a version of betterment.
The issues of betterment and first costs can arise in a multitude of fact patterns. For clarity purposes, only two simple circ*mstances will be addressed in this article. In the context of a construction contract between an owner and a contractor – the issue of betterment may arise when an owner corrects defective construction with superior materials, a different or improved design, or other enhancements not included as part of the original contract. In the context of a design contract between an owner and a design professional (engineer or architect) – the issue of first costs may arise when the design professional omits a necessary component of the project in the design plans.
This article will first explain the concepts of betterment and first costs, then briefly describe scenarios where betterment and first costs considerations arise when calculating damages, and finally suggest actions that damaged parties should consider to safeguard their claimed damages from these doctrines.
This brief article will not (and could not) address the multitude of factual scenarios where the doctrines of betterment and first costs apply nor the many exceptions to these defenses. This article will also not address the implications from differences in contracting scenarios (design-build, construction manager at-risk, etc.) or contract terms setting the parties’ obligations and duties that could materially alter the outcome associated with a betterment or first costs defense. As eloquently stated in Construction Law: “The doctrine of ‘betterment’ is sometimes easier to state in theory than to apply in principle.”[3]
Betterment – You Only Get What You Bargained For
The concept of betterment generally arises when in the course of making repairs to defective work an owner adopts a more expensive design or includes other enhancements that give the owner a “better” project than it would have otherwise received. The analysis for what work constitutes betterment should begin with the contractor’s contract and the scope of work as provided in the plans and specifications. The contractor should only be responsible for the costs associated with providing the owner the project as set forth in the contract.
Failing to segregate the costs resulting from repairing faulty construction from the additional enhancements added during the repair could jeopardize the entire claim for repair costs. Although courts do not agree on whether the doctrine of betterment is part of the claimant’s burden of proof or an affirmative defense for the contractor. While the party claiming damages bears the burden of providing a reasonable basis for calculating its damages, proof of damages with mathematical certainty is not required. And many courts characterize betterment as a defense and place the burden of proof on the defendant.[4]
One case that illustrates the potential consequences for when an owner fails to segregate betterment costs in its claim is the case of City of Westminster v. Centric-Jones Constructors, where a City’s total cost claim against a contractor for the replacement of defective structures was denied in a directed verdict.[5] In City of Westminster, the City sought the total costs of removing, redesigning, and rebuilding defective construction. But the City failed to provide any basis on which the jury could apportion damages, either between the benefit of the City’s bargain with the contractor and additional benefit to the City from rebuilding the structures to new specifications, or between particular breaches by the contractor and design errors of others for which the contractor was not responsible. The City offered no evidence to apportion costs based on the contractor’s breaches or betterment of the replaced structure. Therefore, the City’s total cost claim was denied.
First Costs – You Would Have Had to Pay for that Anyway
The concept of first costs arises when a design professional omits a component of the project from a design that is necessary for a functional project. When this omission occurs, the project owner is generally only entitled to the increased costs that could have been avoided by originally designing or specifying the work. These increased costs could include additional design expenses and out-of-sequence construction costs.[6] Otherwise, allowing a nonbreaching owner to recover the full price of the work omitted from the design plans would generally result in a windfall for the owner. The owner, without the error or omission by the design professional, would have had to pay for this necessary work as a first cost for a functional project (but not the out-of-sequence construction costs).
In Lochrane Eng’g v. Willingham Realgrowth Inv. Fund, the Court of Appeal of Florida provided a simple, yet helpful hypothetical for explaining first costs that should be borne by the owner in a damages calculation.[7] If an engineer negligently designs a 1,000 square foot drain field, and it is subsequently determined that an adequate design required a 1,200 square foot drain field, the owner, not the engineer, should pay for the additional 200 square feet of drain field. The necessity for the additional 200 feet of drain field was caused by the owner’s need to dispose of the sewage and was not caused by the engineer’s failure to have correctly designed the drain field necessary to meet that need. But if the cost of later installing the additional 200 feet of drain field costs more than it would have cost if installed as part of the original undertaking, the engineer would be liable for the difference as well as any other consequential damages.
Suggested Actions for Parties Entitled to Damages
Below are some suggested actions to consider to help avoid issues that could arise from defenses of betterment or first cost. While in many circ*mstances the burden of proof may be placed on the defendant with respect to these defenses, a prudent plaintiff can take reasonable actions to qualify its costs to reap the full benefit of the damages to which it believes it is entitled.
- Segregate Costs
Non-breaching parties should take reasonable efforts to segregate costs between damages incurred for a specific breach (e.g., defective work or omitted design) and other work when incurring costs expected to be included as a claim against a breaching party. Costs attributable to betterment or first costs should be factored in when calculating damages.
Accounting systems often allow for setting up cost codes for work that is part of a forthcoming claim to track specific work contemporaneously, and separately from other work, as it is performed. The back-up for these costs—daily reports are a common example—can (and in many instances should) include a description of the work sufficient to connect the work performed to the specific breach giving rise to the damages.
- Mitigate Damages
Regardless of whether the damages claimed are subject to the defenses of betterment or first costs, injured parties have an obligation to minimize their losses. The law does not reward idleness or negligence. When a contract goes awry, the injured party should take reasonable steps to lessen the impact, not sit back and rack up the bill. Damages that could be recovered from a breach may be reduced if they reasonably could have been mitigated or avoided by the nonbreaching party. One example of a reasonable action that could be taken is resequencing work to lessen the impact of the damages that will be later claimed.
- Provide Notice
Don’t hide the ball when an issue is discovered and costs are starting to mount up that will ultimately be a breaching party’s responsibility. Timely notice that damages will accrue or are accruing avoids surprises and provides a potential opportunity for early resolution. Also, a detailed notice of the issue and expected or resulting damages demonstrates confidence in the validity of the claim and a seriousness that it will be pursued in potential litigation.
One strategy that can be considered before litigation ensues and the inevitable communication breakdowns occur is for the parties to jointly inspect the work to be rectified before the remedy work is performed. In addition to providing the parties actual notice of the issue, joint inspections can provide useful contemporaneous documentation of the status of the construction such that when the damages are calculated, the factual dispute regarding the amount of work remedied could be mitigated.
Additionally, proper and timely notice of identified issues and the potential for damages are often part of contractual notice obligations that trigger entitlement to damages. And when insurance is involved, which it often is when errors or omissions by design professional are involved, the insured and the insurer should be put on notice that a claim is imminent or has arisen.
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The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.
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[1] Philip L. Bruner & Patrick J. O’Connor Jr., Bruner and O’Connor on Construction Law §§ 17:99, 19:26-19:29 (2002).
[2] See, e.g., Salomon Constr. & Roofing Corp. v. James McHugh Constr. Co., No. 1:18-cv-21733-UU, 2019 U.S. Dist. LEXIS 195150, at *10 (S.D. Fla. Mar. 21, 2019) (“the doctrines of ‘first cost’ and ‘betterment’ . . . provide that a plaintiff may not recover damages above and beyond the value of the original ‘benefit of the bargain’ . . . .”)
[3] Patterson et al, Construction Law 747 (2nd ed. 2019).
[4] Tulsa Zoo Mgmt. v. Peckham Guyton Albers & Viets, Inc., No. 17-CV-644-GKF-FHM, 2019 U.S. Dist. LEXIS 66303, at *4 (N.D. Okla. Mar. 5, 2019).
[5] City of Westminster v. Centric-Jones Constructors, 100 P.3d 472 (Colo. App. 2003).
[6] Miami Heart Inst. v. Heery Architects & Eng’rs, Case No. 88-1714-CIV, 1991 U.S. Dist. LEXIS 4086, at *7 (S.D. Fla. Jan. 4, 1991) (distinguishing an owner’s damages against an architect between first costs and second costs).
[7] Lochrane Eng’g v. Willingham Realgrowth Inv. Fund, 552 So. 2d 228 (Fla. 5th DCA 1989).
