QUESTION II – 33% – 1 Hour -- 4 PAGE LIMIT

Tom planned to build an addition to his house consisting of a bedroom, a full bathroom, a small living room, and a kitchenette, suitable for use by his widowed mother-in-law, as a residence.

After settling on a plan developed by his architect, Archie Tech, Tom sent the detailed plans to several general contracting firms specializing in home remodeling, and asked if they would submit bids. The plans, prepared by Archie, included a standard A.I.A. (American Institute of Architects) residential construction contract for the work and indicated that bids should conform to the specifications in the plans and to the terms of the A.I.A. contract. The contract provided for a 10% downpayment. The form contract also contained a provision stating that subsequent payments would be made monthly, beginning after two months, for work completed each month. The first such progress payment, to be made at the end of the second month, would be for work completed in the first month. Subsequent payments would continue in this manner, with payment due one month after the work represented by the bill had been completed. All of these progress payments would be made only after the architect’s approval of the work for which payment was sought.

In addition, fifteen percent, of the amount due for each month would be retained by the owner, with payment of the accumulated retained amounts due upon final completion of the work. The retained amounts would even then only be paid, after issuance of a "Certificate of Occupancy" by the City Building Inspector’s Office and a "Certificate of Proper Completion" by the owner’s architect. Tom’s letter to the various contracting firms stipulated that the bids were to be for no more than $80,000, the estimated amount that Archie had told him to anticipate spending.

Included among those, to whom Tom sent the plans, was Van Richwood. Van was a friend of Tom who had done numerous small building and home repair projects for some of Tom’s friends, but whom Tom knew had never taken on a project quite this size.

Within a few weeks, Tom received several written bids from different contractors. The prices ranged from $73,000 to $81,000. Tom, however, had not yet received anything from his friend Van. Concerned that Van not be precluded from being considered, Tom called Van and asked him if he wanted to bid on the project. Their conversation, on May 11, was as follows:

Following this discussion, Tom told Shelly about Van’s bid. Shelly was worried about not having anything in writing from Van, and insisted that Tom send Van a letter confirming their conversation. The next day, Tom sent the following letter to Van:

In anticipation of having the work done for only $62,000, Tom sent letters to all of the other contractors who had bid on the job, rejecting their bids. In addition, he spent $15,000 of the money he had borrowed for the project on a variety of furniture and other household items, including a home theatre system, living and bedroom furniture for Shelly’s mother in law, and so forth.

At the end of June, Tom called Van and told him to begin work. Tom sent Van a $6,200 down payment and shortly thereafter, Van started on the addition. Van hired subcontractors who excavated the crawl space, set the foundation, and installed the rough plumbing for the kitchenette and bath. His own crew erected exterior framing for the room. After two months of work, in accordance with the terms in the A.I.A. form contract, Van submitted a bill to Tom for an additional $15,000 for his expenses in completing this portion of the work.

At about the same time, Shelly discovered she was pregnant. She and Tom abandoned their plans to have Shelly’s mother move in with them, and discussed with Archie the best way to convert the partially completed addition for use as a nursery and playroom for their child. Archie made several changes to the plan, eliminating the kitchenette and converting the space to storage. Archie advised Tom that these changes would make the addition somewhat less expensive to complete, since a storage space was cheaper than a kitchenette.

Tom advised Van of this change of plans and asked Van to recompute his bid based on the proposed changes. The next day, when Van looked over his figures, he realized that $62,000 had been his out-of-pocket cost for the job and that he had failed to include any markup for himself. He, and other contractors, customarily marked projects up by 20% as compensation for their own time and effort, to cover general overhead expenses, and as profit. If Van had done this, he would have bid $74,400 for the work, instead of $62,000. He had, as well, failed to include the $3,000 it would cost to install a roof on the addition. This extra amount, together with an additional 20% markup, would have raised his original price to $78,000.

Further, because much of the plumbing work necessary to install a kitchenette had already been done, the proposed modification to the plans would only save him $2000 in expenses for the "finish" work on this aspect of the job. Accordingly, Van stopped work and refused to continue unless Tom assured him that he would pay a total of $76,000 to complete the work as now proposed, with the kitchenette eliminated. Tom, in turn, refused to pay Van the $15,000 bill Van had submitted several days earlier for work completed a month ago. In the past month, before Tom & Shelly’s plans changed, Van had completed work costing an additional $12,000 for which a bill was not to be submitted for another month. He has, in addition, purchased $5,000 worth of materials, including items to be included in the kitchenette, which he cannot return without a substantial ($2000) loss.

Archie, who had been concerned all along that Van’s bid had been too low, refused to approve the work completed to date. Nevertheless, the work had passed the interim inspections completed by the City Building Inspector. With one exception, Van’s work otherwise appeared to meet the specifications in the detailed plans Archie had previously prepared. The outside perimeter of the addition was ½ foot deeper into Tom’s yard than indicated on the plans, making the space originally planned for the kitchenette, 7 square feet larger. This additional space, undesirable in a kitchenette, provided Tom with more storage space in the revised plans. Despite this discrepancy, there is no reason to believe that the project will not receive a "Certificate of Occupancy" if work continues in the manner in which it has been completed thus far. For his own part, Van refused to work further until he was paid $27,000 for the completed work (the $15,000 completed a month ago and the $12,000 just finished), and until the remainder of the $76,000 total Van is now demanding, is placed into escrow with an independent third party.

In response to Van’s refusal to continue work, Tom contracted with City Construction, to complete the project for $50,000, the lowest price of any of the contractors Tom had contacted about completing the job left undone by Van.

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