Substantial overrun of the estimate and the duty to notify

In this article, estimate (eelarve) means, in the sense of § 639 of the Law of Obligations Act (võlaõigusseadus, VÕS), the estimated cost of the work agreed in the contract for work (töövõtuleping). It is not the contractor's internal detailed budget covered in the budgeting guide. The law allows the parties to agree that the estimate is either binding or non-binding for the contractor, and if there is no such agreement, a binding estimate is presumed (§ 639(1)). How to tell the two types apart and which contract clause reverses the presumption is described in the article a binding or a non-binding estimate.

With a binding estimate, the question of an overrun does not arise in the same form. According to the Supreme Court (Riigikohus) case-law review "Töövõtuleping" ("Contract for work", 2022), where the estimate is binding the contractor cannot claim payment above it (Supreme Court judgment of 19.12.2017 no 2-15-15662/55, para 12). The procedure described below therefore applies to a non-binding estimate.

VÕS § 639 "Exceeding the estimate" is short, and the client's whole protection lies in three subsections. The following is an unofficial translation.

The contractor may claim contractual extra payment for an overrun of a non-binding estimate only if all three conditions are met. If only the prompt notice is missing, a claim limited to unjust enrichment remains (see below). Each condition is a separate checkpoint for the client.

The law does not say when an overrun is substantial. The Law of Obligations Act gives no percentage or amount for this, and the client should not accept a "usual" threshold based on the other party's assertion without checking it. If the parties want to avoid the question, they can agree in the contract on the level of overrun from which the contractor must give notice.

Foreseeability is the most disputed of the conditions. According to the Supreme Court case-law review, the contractor may claim extra payment for an overrun of a non-binding estimate only if the overrun could not have been foreseen (Supreme Court judgment of 12.11.2014 no 3-2-1-102-14, paras 19 and 22). According to the same review, the mere fact that an overrun is large does not prove that it could not have been foreseen (Supreme Court judgment of 05.11.2008 no 3-2-1-79-08, para 13). On the contrary, a large overrun may suggest that the estimate was drawn up too optimistically from the start.

The consequence of failing to give notice is written directly into the law: the contractor may claim the amount exceeding the estimate only to the extent that the client has been unjustly enriched (§ 639(2), third sentence). In that case there is no contractual extra payment.

The purpose of the duty to notify is to give the client a choice in good time. According to the Supreme Court case-law review, the client must be able to decide whether to accept the overrun or to terminate the contract. A final invoice that exceeds the estimate and arrives at the end of the works no longer gives the client a choice, because the work has already been done.

§ 639 does not set the form of the notice, so it is in the client's interest to require written notice in the contract. A useful clause provides that the overrun is notified in writing, that the notice states the cause of the overrun, the expected new cost and the effect on the deadline, and that until the client decides, no work is done whose price exceeds the estimate. The date of the notice is often decisive in a later dispute, and how to record it in the documents is described in this branch's article on construction records.

When the notice arrives, the client has two legal routes, and the cost of each must be calculated before deciding. The first route is to accept the overrun. Consent should be given in writing and for a fixed amount or a fixed calculation method. According to the Supreme Court case-law review, a non-binding estimate is a preliminary calculation, and the parties may agree to change the price (3-2-1-79-08, para 12). Such an agreement replaces the estimate with a new price and closes the question of whether the conditions were met. Consent does not have to be unconditional: the client can accept part of the overrun or make it a condition that the new amount is binding.

The second route is to terminate the contract because of the overrun. In that case the client does not have to pay the fee exceeding the estimate (§ 639(3)). This differs from ordinary termination, which the client may carry out at any time under VÕS § 655: there, the contractor is entitled to the agreed fee, less what it saved because of the termination or what it acquired, or could have acquired, by using its workforce otherwise. How to calculate the amount payable under § 655, and when it is cheaper or more expensive, is described in the article on the client's right to terminate at any time, and what it costs.

Termination is a decision whose cost is not measured by the contract alone. Finding a new contractor, waiting time, handing over the site and accepting the work done are costs that have to be compared with the amount of the overrun. Termination is a strong lever precisely because it exists: a contractor that knows the client is ready to terminate will justify the overrun more carefully.

The first step is to ask for the cause in writing. The client should ask the contractor to describe what caused the overrun, when it became known and why it could not have been foreseen when the contract was concluded. The answer shows whether this is an overrun of the estimate at all, or additional work, to which a different procedure applies; that distinction is explained in the branch's other article on additional work and changed work.

The second step is to check the timing of the notice. If the contractor knew about the overrun earlier and gave notice only once the work had been done, the notice was not given without delay. The construction works diary (ehitustööde päevik), the minutes of site meetings and correspondence often show when the issue was first raised.

The third step is to decide in writing and on time. Silence is dangerous, because the work continues and the client's conduct may later be interpreted as consent (VÕS § 29(5)). The decision should state clearly whether the client accepts, and for what amount, or terminates the contract, and which provision it relies on.

The fourth step is to calculate the cost of termination before deciding, not afterwards. A client that knows what ending the contract would cost can also negotiate the size of the overrun. If a contingency has been provided for separately from the contract price, using it is a separate decision; planning a contingency is covered in the article on contingency and unforeseen costs.

The following example is fictitious and only illustrates the reasoning. The client of a commercial building concluded a contract with a non-binding estimate of 400,000 euros. After the foundations have been poured, the contractor gives notice that, because of a rise in the price of steel for the load-bearing structures, the expected cost is 452,000 euros, that is 52,000 euros over the estimate.

First, the client asks when the price rise became known. The correspondence shows that the contractor mentioned the price of steel at a site meeting 2 months earlier but did not give written notice. Second, the client asks whether the price rise was foreseeable when the contract was concluded: if the price rise was already public knowledge at that time, this is an argument against unforeseeability. Third, the client calculates what ending the contract and finding a new contractor would cost. On the basis of these three answers, it has grounds for negotiation: whether to accept part of the overrun in exchange for a binding new price, or to terminate the contract. Whether 52,000 euros is a substantial overrun of this estimate, the law does not say, and the example takes no position on that question.

For a contracting authority, the room for a non-binding price is limited. According to the Supreme Court case-law review, the price agreement in a public contract cannot be completely non-binding (3-2-1-102-14, paras 13, 14 and 19). For a contracting authority (hankija), the question of changing the price is therefore a question of the Public Procurement Act, covered in the public contract branch of this guide.