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TED Jacob Engineering Group, Inc. v. Ratcliff Architects

August 23, 2010

TED JACOB ENGINEERING GROUP, INC., PLAINTIFF AND APPELLANT,
v.
THE RATCLIFF ARCHITECTS, DEFENDANT AND APPELLANT.



(Alameda County Super. Ct. No. 808110-6), Steven A. Brick, Judge.

The opinion of the court was delivered by: Bruiniers, J.

CERTIFIED FOR PARTIAL PUBLICATION*fn1

The Ratcliff Architects (Ratcliff) provided design services under contract with the County of San Mateo (the County) for a hospital renovation and expansion project. Ratcliff subcontracted with Ted Jacob Engineering Group, Inc. (TJEG) for mechanical and electrical engineering services. The scope of the project increased over time. TJEG submitted claims for additional fees based on the increased basic scope of work and for additional services it alleged it was directed to perform by Ratcliff. Ratcliff paid some, but not all, of TJEG's claims. TJEG sued Ratcliff and prevailed in a jury trial. The trial court awarded prejudgment interest on TJEG's recovery and awarded TJEG its attorney fees and costs. Ratcliff argues the judgment must be reversed because the instructions to the jury were contradictory and confusing, and because TJEG's claims were not sufficiently certain to support an award of prejudgment interest. We affirm.

In the published portion of this opinion we hold that, in the absence of a negotiated agreement upon price, and assuming no contrary contractual provision applies, a subcontractor may still pursue a claim seeking a judicial determination of additional fees when it performs work demanded of it by the general contractor constituting a material change in the scope of work defined under the contract. If good faith negotiation between the parties fails to result in agreement on price, the subcontractor is not required to elect between abandoning the job and forfeiting its right of recovery if it elects to perform the required work.

I. Trial Evidence*fn2

The Project

In about 1992, the County commissioned Kaplan/McLaughlin/Diaz (KMD) to study a potential renovation and expansion of the San Mateo County General Hospital (the Project). The KMD study, which was completed in May 1992, included a design with an estimated construction cost of $45,808,424 without cost escalation or a 10 percent contingency (concept A-8). The KMD study concluded that the central plant of the hospital would have to be replaced.

The County then directly commissioned TJEG to further study the central plant issue. TJEG's study (the Central Plant Study), completed in July 1992, concluded that the cost of the central plant replacement would be much higher than had been originally estimated by KMD.

The County began hiring a design team for the Project. Consistent with custom and practice in the industry, the County intended to contract directly with an architectural firm, which would in turn contract with consultants to assist in the design of the Project. The architectural firm and its consultants collectively would comprise the design team. Ratcliff asked TJEG for a proposal for the mechanical (including HVAC and plumbing) and electrical design work on the Project.

Notwithstanding the conclusion of TJEG's Central Plant Study, Ratcliff told TJEG to base its fee proposal on concept A-8 from the KMD study and TJEG did so. At an August 17, 1992 meeting with Ratcliff and the County, TJEG principal Ted Jacob asked how TJEG's fees would be adjusted if the Project scope exceeded what was anticipated in the KMD study. He received "strict instructions to base [his] fee on the KMD scheme A-8 on the hospital and the central plant, and... [was told that] at the end of the design development they [would] make the adjustment" based on estimated construction costs at that time. Jacob memorialized this understanding as to the scope of work included in TJEG's proposal in an August 17, 1992 letter to Ratcliff.

Based on concept A-8, Jacob proposed a fee of $1,072,270 for mechanical and electrical design work. Its fee proposal stated: "The following items are not outlined in the KMD Master Plan but must be performed as recommended in the Central Plant Study and per our meeting with Fred Countryman. It is agreed that the additional fees will be allocated to us after design development." A list of additional tasks and fees followed. Shortly thereafter, Ratcliff directed TJEG to commence work on the Project.

Stephanie Bartos, Ratcliff's manager on the Project until January 1995, testified that she believed "there was a discrepancy between the work defined in the KMD study and what actually had to be done... to complete the work according to code and good design practice."*fn3 (Ellipsis in original.) She testified that the County's representative on the Project, Fred Countryman, had insisted that Ratcliff base its fee on concept A-8 and promised that the fee would change if the scope of work changed.

Ratcliff/County Contract

On August 25, 1992, Ratcliff and the County executed an Agreement for Architectural Services (Ratcliff/County Contract). The contract defined the Project scope to be "as described in the Facility Program and Conceptual Design Report, Volumes 1 and 2, prepared by Kaplan/McLaughlin/Diaz, dated May 1992, and the Central Plant Feasibility Study prepared by Ted Jacob Engineering Group, Inc., dated July 1992, with any subsequent revisions agreed upon by Owner and Architect." (Italics added.) A fixed fee of $4,076,949 covered Ratcliff's performance of "Basic Services" on the Project, which included programming verification, schematic design, design development, preparation of construction documents, and construction contract administration. (Paragraph 5.01.) From this fee, Ratcliff was responsible for payment of its subcontracting consultants. (Paragraph 5.06.)

Paragraph 5.05 of the Ratcliff/County Contract provided, "Substantial changes in the Project's scope shall provide sufficient basis for renegotiation of [Ratcliff's] fee." Ratcliff was also entitled to additional compensation if it performed services that were not encompassed in Basic Services. (Extra Services; Paragraph 5.03.) Paragraph 5.03 of the contract provided that: "Extra Services shall not be rendered by [Ratcliff] under this Agreement unless they are first authorized in writing by [the County]. The Payment to [Ratcliff] for Extra Services shall be at the [hourly] rates set forth" in an exhibit to the contract.

Ratcliff/TJEG Contract

Although Ratcliff directed TJEG to start work on the Project in August 1992, Ratcliff and TJEG did not sign a written contract until August 1993. In February 1993, Ratcliff sent TJEG a draft contract, which incorporated by reference the Ratcliff/County Contract and required TJEG to perform services in accordance with the that contract. TJEG had by that time received an executed copy of the Ratcliff/County Contract. TJEG's fee for Basic Services in the draft Ratcliff/TJEG contract was set at $1,212,800.

By February 1993, the defined scope of the Project had already changed, as described in greater detail post. TJEG refused to sign the February 1993 contract as drafted without clarification that its fee was based on the KMD study scope of work alone. A revised version of the draft contract prepared in March 1993 changed the fee to $1,197,270, but it also was not signed. In May 1993, Ratcliff published a design development report that reflected the changed scope of the Project and included new construction cost estimates.

In a July 26, 1993 letter to Ratcliff, TJEG wrote that its fee was based on the KMD study and did "not reflect any increases to the building areas and estimated construction costs which have occurred during the design development process." TJEG requested $304,690 in additional fees based on this increased scope of work. In an August 12, 1993 letter to Ratcliff, TJEG again requested the $304,690 fee increase for services "which are required due to building area and construction cost increases which have occurred to date." The August 12, 1993 letter stated, "The fees listed in the Architect/Consultant Agreement (Part III, Compensation) dated March 25, 1993 were based upon construction costs extracted from the KMD May 1992 Report. These fees do not reflect any increases to the building areas and estimated construction costs which have occurred during the design development."

On August 13, 1993, TJEG principal Ted Jacob signed the March 1993 revised Ratcliff/TJEG contract, but with a modification. At Part III, Compensation (which provided for a fee of $1,197,270 for Basic Services), he added the notation, "Revised as noted in Ted Jacob Eng. letter dated August 11, 1993" and he attached to the contract the referenced letter and its enclosures (which included TJEG's Aug. 13 and 17, 1992 letters). The contract also provided in Part IV for payment for Additional Services at specified hourly billing rates, with "prior written authorization" from Ratcliff. Ratcliff signed this modified version of the contract (Ratcliff/TJEG Contract).

Thus, the seeds of this litigation were sown when Ratcliff and TJEG signed a contract which both parties explicitly understood was based on a defined scope of work excluding the Central Plant Study, although Ratcliff had earlier contracted with the County for a defined scope of Basic Services explicitly including that study. Ratcliff, however, did not appear to be fully cognizant of this discrepancy until much later. Stephanie Bartos agreed in her testimony that the $1,197,270 fee in the August 1993 Ratcliff/TJEG Contract was based on work under the KMD Master Plan, but believed that the August 1992 Ratcliff/County Contract was as well. She did not believe the fees in the August 1993 Ratcliff/TJEG Contract would be sufficient to compensate TJEG for the mechanical and engineering work on the Project that was actually underway in August 1993.

Change in Project Scope During Schematic Design and Design Development

As noted, the Project scope, even as defined in the Ratcliff/County Contract, had changed between August 1992, and August 1993. In the schematic design phase, which culminated in a December 1992 report, the footprint of the Project changed and the estimated square footage and construction costs increased. Ted Jacob testified that the mechanical and electrical engineering work involved in modifying the site utilities for the new layout required was a "[m]onumental task." TJEG discussed the issue with Ratcliff in a series of meetings and asked for increased fees for these services.

Bartos knew in the fall of 1992, that the scope of the Project would increase and that the increase would cause Ratcliff and TJEG to incur additional costs. However, Countryman had told her that any increase in the construction budget would be a political problem because the County Board of Supervisors had to vote to continue the Project. She decided to wait until after the Board approved the Project in December 1992 before requesting additional fees. Ratcliff's cost consultant initially estimated the cost of the Project as modified in the December 1992 schematic design at $60 million, but the cost consultant later reduced that figure in order to keep it within budget. The cost consultant achieved the reduction in price in part by reducing the contingency cushion from 10 percent to 5 percent and by decreasing projected cost escalations from 7 percent to 5 percent.

Countryman testified that Ratcliff told the County at the end of the schematic design phase that the estimated costs for the Project had not increased, and that Ratcliff "assured the County that both the construction costs and their fees were adequate."*fn4 He said that he had specifically asked Bartos if there was any change in Ratcliff's design fee and she confirmed that there was not. Ratcliff told the Board of Supervisors at the December 1992 meeting that the Project was still within budget and that the Board approved the Project with that assurance. The County later denied certain of Ratcliff's requests for additional fees on the basis that they should have been presented at that time. An expert witness for TJEG, David Zion, opined that Ratcliff misrepresented the cost of the Project to the Board of Supervisors in violation of its professional standard of care.

In a May 1993 design development report, estimated construction cost was $18,888,000 for the inpatient wing (compared to $14,634,120 in the KMD study's concept A-8); $14,619,000 for the clinic (compared to $12,848,700 in concept A-8); and $9,812,000 for the central plant (compared to $5,474,150 in concept A-8). The total construction cost was $53,905,000 before escalation, compared to $45,808,424 before escalation in the KMD concept A-8.

In the summer of 1993, the Project scope expanded further when the County adopted a long-range plan adding a Diagnostic and Treatment building to the hospital.

Requests for Additional Basic Services Fees Based on Increased Scope of Work

As noted, in letters dated July 26 and August 12, 1993 (and again in an August 27, 1993 letter), TJEG requested $304,690 for additional Basic Services fees based on the increase scope of the Project reflected in the May 1993 design development report. In the meantime, TJEG was in "constant communication" with Bartos on the issue. In an August 29, 1993 memorandum memorializing a meeting between TJEG and Ratcliff, Jacob wrote, "The additional design fee of $304,690.00 will be presented by The Ratcliff Architects to the County." At Ratcliff's request, TJEG later revised its additional fee request to $256,205 based on lowered construction cost estimates following the design development report.*fn5

Bartos testified that she "agreed to... incorporate this material into ongoing fee requests to the County for additional fees," and did so both orally and in writing. She testified that she would not have sent TJEG's request on to the County unless she thought TJEG was entitled to the additional fees. "However,... I would only think they were entitled to receive them from us if we got them from the County.*fn6

In May 1994, Ratcliff submitted TJEG's additional fee request to the County. In approximately the summer of 1994, TJEG and Ratcliff met with the County about the fee request and Countryman agreed to prepare a contract amendment to pay the request if Ratcliff provided a detailed letter supporting the request. Between May 1994 and March 1995, Countryman waited for Ratcliff to submit such a letter, but Ratcliff never did so. When Countryman asked Bartos about the letter, she said she had not sent it because Ratcliff wanted to request additional funds and she wanted to submit the requests together. TJEG was never paid these additional fees.

In November 1994, Ratcliff and the County executed a contract amendment (Ratcliff/County Amendment No. 2) increasing the estimated construction cost of the Project based on the changes caused by the adoption of the long-range plan adding the Diagnostic and Treatment building and also increasing Ratcliff's fee. TJEG's expert Zion opined that Ratcliff violated the standard of care and ethical duties of an architect when, while negotiating additional Basic Services fees for the long-range plan, it did not include TJEG's request for about $300,000 in fees based on changes to the scope of the Project before adoption of the long-range plan. He opined that Ratcliff did not timely submit TJEG's request for additional fees to the County.

In May 1995, Ratcliff compiled all of the outstanding additional fee requests for the design team into a binder that came to be known as the "Red Book." Fred Jacob of TJEG testified that he met with David Thurston of Ratcliff as part of this compilation process, that he discussed the correct valuation of TJEG's fee adjustment resulting from the change in the original master plan, and that he came to an agreement with Thurston that $395,630 was an appropriate fee adjustment for TJEG for the Basic Services and was a fair and reasonable valuation of TJEG's additional work. TJEG performed all of the work covered by this fee request. In the Red Book, Ratcliff asked for this $395,630 fee adjustment as part of an overall fee adjustment of $865,001 for Basic Contract Scope Change for the whole design team.*fn7 Kit Ratcliff denied that Ratcliff had agreed $395,630 was a fair and reasonable evaluation of TJEG's work or that TJEG was entitled to be paid that amount, and said Ratcliff was merely "moving their proposals forward." Thurston did not testify.

In August 1995, Ratcliff sent TJEG an amendment to the Ratcliff/TJEG Contract (Ratcliff/TJEG Amendment No. 2), which increased TJEG's fee to cover increased work caused by adoption of the long-range plan. TJEG did not sign the amendment because it did not include all of its outstanding fee requests based on the increased scope of the Project. TJEG was paid the additional fee provided in the amendment, but that fee did not cover any part of the amounts that TJEG sought to recover in the litigation.

On December 31, 1995, TJEG sent Ratcliff a series of invoices for its outstanding claims for additional fees on the Project. One of these invoices was for "Basic Contract Scope Change" in the amount requested in the Red Book of $395,630.

In about February 1996, the County argued in a letter to Ratcliff that the design team's fee requests in the Red Book based on increases in the basic scope of work lacked merit because the work was already encompassed in the definition of Basic Services in the Ratcliff/County Contract. Kit Ratcliff "went back and reread [Ratcliff's] agreement with the County. And in looking at the scope of work that was required of [Ratcliff] in the agreement and looking at his words, it was pretty sobering, because I felt like he had made some very strong points in his statements." He concluded Ratcliff would not prevail if it pursued its claim against the County based on an increase in the originally defined scope of the Project. He also concluded that TJEG's $395,630 claim lacked merit because the work was encompassed within the definition of Basic Services in the Ratcliff/County Contract. Ratcliff nevertheless continued to seek additional fees to see if the County would grant them. In an August 21, 1996 letter, Ratcliff disputed the position taken by the County in its February 1996 letter and requested mediation of the fee issues.

In August 1997, Ratcliff again compiled all outstanding additional fee requests for the design team in a binder that came to be known as the "Purple Book." The Purple Book again requested a $395,630 fee adjustment for TJEG for Basic Contract Scope Changes (as part of the overall request for $865,001 for the entire design team), although Ratcliff omitted certain other claims because Kit Ratcliff felt they would be difficult to win.

Failing to reach agreement on the fee disputes, in about March 1998, Ratcliff gave notices terminating its contract with the County and its contract with TJEG. Ratcliff and the County executed a written termination agreement, effective May 13, 1998, which acknowledged satisfaction of all fee claims, with the exception of those set forth in the Purple Book, which Ratcliff continued to pursue.*fn8

Construction Contract Administration Costs

In lieu of hiring a general contractor, the County hired a construction manager who worked with multiple prime contractors. As a result, the design team's construction contract administration costs were much higher than usual. TJEG incurred additional construction contract administration costs of about $16,000 a month for the entire period of construction.

In the May 1995 Red Book, Ratcliff requested $1,732,210 in additional compensation for itself and $57,954 for TJEG for the increased construction administration work resulting from the lack of a general contractor. Ratcliff did not discuss this request with TJEG before submitting the Red Book to the County.

In an August 31, 1995 letter to Ratcliff, TJEG requested $234,067 in additional compensation for construction administration from June 1994 through August 1995, and projected $96,536 in additional construction administration fees for September 1995 to February 1996, for a total of $330,603. Fred Jacob discussed this letter with Thurston, who agreed on TJEG's methodology for calculating the additional fee request. Ratcliff directed TJEG to perform all of the additional construction administration work and TJEG performed the work. On December 31, 1995, TJEG invoiced Ratcliff $330,603 for unpaid contract administration services.

In June 1996, Ratcliff and the County executed a contract amendment (Ratcliff/County Amendment No. 3) that increased Ratcliff's Basic Services fee by $400,000 for contract administration plus a separate $50,000 Extra Services allowance intended for TJEG. The amendment also stated, "Approval of this Amendment settles any and all claims by [Ratcliff] which have been previously submitted regarding the Contract Administration of Phases I through III." The County's representative, Countryman testified that as part of an amendment to the Ratcliff/County Contract the County had approved about $200,000 for TJEG's services, which he assumed was part of the $400,000 figure in Ratcliff/County Amendment No. 3. TJEG's expert Zion opined that Ratcliff violated its duty of care to TJEG when it negotiated additional construction contract administration fees from the County for itself, waiving further claims, but failed to request adequate fees to cover TJEG's additional construction administration costs.

In August 1996, Ratcliff and TJEG executed an amendment to the Ratcliff/TJEG Contract (Ratcliff/TJEG Amendment No. 3), which provided $50,000 in additional compensation to cover the expense of a TJEG employee's attendance at a weekly meeting with contractors through October 1997. This $50,000 in compensation was in addition to the $16,000 a month in additional costs encompassed in TJEG's already outstanding fee request. TJEG did not intend to waive its claim for those fees by signing Amendment No. 3.

In the August 1997 Purple Book, Ratcliff omitted its own construction contract administration fee requests because Kit Ratcliff concluded the $400,000 it had received under Ratcliff/County Amendment No. 3 "was the best deal we were going to get." The Purple Book, however, did include TJEG's construction administration claims for $244,184 for June 1994 to December 1996; $145,083 for January to ...


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