4/12/2006
Contract vs. Customer Goodwill

By PAUL RHODES, BComm, ACA, CA, Senior Manager

In the construction industry, a contractor commits to perform some substantial piece of work for a defined amount of compensation, as set out in the initial contract.

Due to the nature of such projects, the specifications of the work are often subject to change and the changes may represent additional work that can be billed.

However, where the extra work cannot be clearly identified, it may simply be given away. This conflict between the construction or labour side and administrative side of the business is the subject of this article.

Any changes from the work specified in a contract can either be “contract variations” or “extras”. A contract variation is a change to the initial work to be performed; an extra is an additional piece of work requested by the customer, outside of the initial contract. An extra requires a separate legal contract.

The need to perform under the initial contract can often override all other considerations. For example, contracts usually include a provision for liquidated damages in certain situations; that is, damages that are quantified within the contract.

Therefore, if the contractor delays performance of any labour under the initial contract while an extra is agreed upon and formally documented, he/she may be left susceptible to legal action under terms of the initial contract.

Similarly, where agreement over the work is reached, an agreement as to the price to be paid is often not.

For these reasons, contractors are often reluctant to go through the formal documentation process before agreeing upon and initiating the extra work, and extras requested by the customer are frequently informal in nature. Subsequently, an extra requested by the customer and performed by the contractor may not be supported by an express contract and the contractor has to prove that an implied contract exists.

Aside from the legalities, further issues can arise due to the informal nature of these agreements, including payment for extra work. In particular, supporting written documentation is the most reliable to identify the work performed. Therefore, if the documentation is not available, cannot be found or simply does not exist, billing for the work may not be possible.

From a business perspective, not delaying performance of the work often takes a priority both because of the existence of liquidated damages in the initial contract and also in order to establish and maintain the goodwill of the customer.

Since it may seem to be in the best interests of the contractor to initiate extra work outside the initial contract without the delay of drawing up additional documentation, the question arises as to how to clearly identify such additional work so that it can be billed. It is important that all possible measures be put in place in order to guard against the giving away of unintended “freebies”.

The following list of measures should be considered when the possibility of taking on extras arises, though it is far from exhaustive:

- Site managers and supervisors should be aware of the need to document the additional work performed at the customer’s request. Such documentation would include: labor hours and materials directly expended and the effect, including any incremental costs, on the initial contract work.

Record keeping in this area usually shows room for improvement, especially given the verbal nature of these agreements. It has been said that record keeping is not complete unless the project can be played back like a movie when it is finished.

- Administrative requirements are often overlooked by site staff because by nature they are more interested in performing the work itself and keeping the customer’s own site staff satisfied.

The attitude that “billing for the work performed is an accounting function and not related to us” often prevails. In many organizations a change of culture may be required.

- Wherever possible, additional work performed should be identified and billed as the work progresses and should not be left until substantial completion of the whole project.

This may mean that cash is collected earlier, reducing the amount of work in progress tied up in the contract, and reducing the need for argument and delay at completion, during which the contractor has to then identify and quantify the additional work performed.

In cases where the billing for additional work is left until the end, the value of such work often becomes a bargaining chip, because the contractor wishes to bid on upcoming projects of the customer and wants to avoid the loss of goodwill.

Clearly this idealistic list may go some way to satisfying the requirements of an enthusiastic lawyer, but more often than not the business must take a more pragmatic course; to compensate for this, adequate controls must be in place.


This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.