Great News for Construction Design Professionals: “First Cost” Defense Formally Recognized by Florida Courts

The affirmative defense of “First Cost” was formally recognized by a Florida court in the recent decision Sch. Bd. Of Broward County v. Pierce Goodwin Alexander & Linville, 2014 Fla. App. LEXIS 3916 (Fla. 4th DCA Mar. 19, 2014).  The concept of first cost has been understood throughout the construction industry for quite a while, but had yet to be formally recognized by that name in Florida courts.  See id. at *30.  This blog examines the first cost defense and its application in the Pierce Goodwin Alexander & Linville case.

The concept of first cost most often arises in claims against design professionals (i.e. architects and engineers) for breach of contract or malpractice.  See e.g. 8 Fla. Prac., Constr. Law Manual § 20:18.  The first cost defense (sometimes referred to as the betterment defense) involves the cost of constructing the proper design in the first place.  Id.  If the design was proper at the outset, the owner would have been required to pay the cost of the proper design in the first place.  Id.  The first cost defense excludes the cost of constructing the project correctly the first time from claims against design professionals.  Id.  Design professionals are only responsible for additional costs to implement the new design at the time of the loss.  Id.

In Pierce Goodwin Alexander & Linville, the owner-plaintiff sued its architect, arguing that various change orders the owner had to pay the contractor were a breach of the contract to provide design services.  Pierce Goodwin Alexander & Linville, 2014 Fla. App. LEXIS 3916

at *1.  The change orders arose from changes in the initial design plans in response to determinations by the building code official that the initial design did not comply with the building code.  Id. at *1-5.  “The architect raised an affirmative defense of ‘first cost,’ asserting that ‘any of the school board’s claims determined to be First Cost Items, should be barred.’”  Id. at *27.  The jury failed to deduct the amount of first cost in reaching its damages verdict.  Id. at *36.  The trial court then ordered remittitur equal to the first costs.  Id.  The appellate court upheld the remittitur orders where the first cost defense was properly proven.  Id.

In its legal analysis, the court noted that no prior Florida cases formally recognized the concept of first cost.  The court formulated its own definition for the defense of first cost, after noting that neither party clearly defined the concept or put forth much legal support for the concept, and relying on the use of similar concepts in two previous cases.  Id. at *28-33 (citing Lochrane Eng’g, Inc. v. Willingham Realgrowth Inv. Fund, Ltd., 552 So. 2d 228, 232 (Fla. 5th DCA 1989); and Soriano v. Hunton, Shivers, Brady & Associates, 524 So. 2d 488 (Fla. 5th DCA 1988).  The court’s definition can be stated as follows:  damages collected by the owner-plaintiff should not include costs for construction that the owner-plaintiff would have incurred if the initial design plans matched the final design plans.  Id. at *28.

The court’s holding rests on sound policy.  The first cost defense assures that the party entitled to damages is not placed in a better position than which he would have occupied has the contract been performed as agreed.  Id. at *29.  The court provided a good example as explanation.

If the school board would have paid a cost for construction in accordance with the code-compliant final design plans, an award of a [change order expense] against the architect attributable to a change in the initial design plans for the same cost would put the school board in a better position than if the design services had been performed as agreed.  Stated another way, if there had been no change between the initial plans drawn for bidding by contractors and the final construction plans, the owner would have been solely responsible for paying all construction expenses incurred for the renovation. Id.

The Sch. Bd. v. Pierce Goodwin Alexander & Linville decision provides us with valuable clarification as to the implementation of the first cost defense.  First costs are a question of fact to be decided by the jury.  Id. at *35-37.  In support of the first cost defense, a design professional should demonstrate that the first cost of the alleged claims could not have been avoided by an initially code-compliant design.  In other words, the owner would have paid the first costs anyways.  On the other side, the owner-plaintiff should show that if the initial design plans were code-compliant, the first cost associated with the alleged claim could have been completely avoided.  Meaning, the costs only arose because of the improperly designed plans.