ConstructionRisk Report (July 2026)

Inside this Issue

• A1 - Gross Disprortionality Rule Applies to Limit Damages
• A2 - Architect entitled to fee based on estimated construction costs of low responsible bidder that was double the Owner’s estimate

Article 1

Gross Disprortionality Rule Applies to Limit Damages

See similar articles: Damages | disproportionality

The gross disproportionality rule may apply in a breach of a construction contract dispute. Gross disproportionality is calculated by using the diminution in value approach, which measures the difference in value between what is built (the value of the property/structure without the contracted work) and what was supposed to have been built (the value of the property/structure if the contracted work had been performed). The breaching party has the burden of invoking and proving gross disproportionality. If the breaching party does not prove gross disproportionality, then the non-breaching party’s proven measure of damages applies. Corotoman, Inc. v. Central West Virginia Regional Airport Authority, Inc., No 24-661,WVA Supreme Ct of Appeals, (2026)

This question arises from a breach of a construction contract lawsuit filed by Corotoman,Inc. (“Landowner” or “Owner”), against Central West Virginia Regional Airport Authority (“AirportAuthority”). The United States District Court for the Southern District of West Virginia (“district court”) ruled that the Airport Authority breached the contract by failing to remove a hill from the owner’s land andgranted partial summary judgment in the owner’s favor. However, the district court determined that the gross disproportionality rule applied and only awarded the owner nominal damages. This was reversed on appeal because the appellate court found that the Airport Authority failed to prove gross disproportionality.

In this case, the Airport Authority decided to remove a large hill at the end of the airport’s runway. The Authority offered the owner $260,125 for the property (an amount significantly more than its appraised value) and the Owner rejected that offer. The parties then entered into an agreement providing, among other things, that the Airport Authority could enter the property and remove the knoll. Per the agreement, after the Airport Authority removed the knoll, it would overblast the property to decrease the elevation an additional thirty-five feet, making it flatter and easier to develop.

The Airport Authority completed the knoll removal project but failed to perform the overblasting, a process by which holes are drilled to the required depth and then explosives are placed in the holes and detonated to loosen the land. The landowner then sued the Airport Authority claiming breach of contract. The court granted the landowner’s motion for partial summary judgment, concluding that the Airport Authority breached the agreement by failing to overblast the land, and that no valid defenses excused the breach.

The next step in the litigation was to determine the measure of damages to be awarded the landowner.  Expert witnesses provided opinions on the cost of performing the overblasting, and the parties agreed it would cost $4,381,080.

This amount, concluded the trial court, would be grossly disproportionate to the land value.   The court determined this would service only to penalize the Authority and act as a windfall to the landowner and, therefore, concluded the proper remedy for the Authority’s breach of contract was to award damages for the diminution in value of the land. The landowner, however, failed to present evidence to allow the court to determine the diminution in value, the court awarded only nominal damages.

In deciding that West Virginia courts should apply the gross disportionality rule in construction contract disputes, the appellate court explained:

“The gross disproportionality rule is often used interchangeably with“the economic waste doctrine.” As one law review article noted:

In contract law, the economic waste doctrine is often described as the jurisprudential justification for providing an alternative measure of damages (i.e., diminution in value) in connection with the breach of a contract when it is shown that the preferred measure of cost of performance has no rational relationship to the objective or market value such cost will achieve. This alternative measure of damages generally has been reserved for construction contracts.”

In a breach of a construction contract case, the appellate court concluded, “gross disproportionality is calculated by using the diminution in value approach which measures the difference in value between what is built (the value of the property/structure without the contracted work) and what was supposed to have been built (the value of the property/structure if the contracted work had been performed).”

Once a plaintiff proves there has been a breach of contract, as was done in this case, the party that breached the contract then has the burden of proving gross disproportionality. In the case at hand, the appellate court found the breaching party failed to prove gross disproportionality.   The landowner, therefore, argued, the court should apply the non-breaching party’s proven measure of damages, i.e., the cost to repair, replace, or complete.  The court agreed and held that where the breaching party does not prove gross disproportionality, the non-breaching party’s proven measure of damages applies.

 

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 28, No. 5 (July 2026).

Copyright 2026, ConstructionRisk, LLC

Article 2

Architect entitled to fee based on estimated construction costs of low responsible bidder that was double the Owner’s estimate

See similar articles: construction cost estimate | fee dispute | responsible bidder

Project owner breached its design professional contract when it “unilaterally walked away from the [contract]” without paying the balance of the architect’s fee, and deciding, based on its own calculation of “estimated cost,” that it had already paid the designer in full. The fee was to be based on percentage of construction cost.  The architect argued that it had earned the full fee based on a $7 million low, responsible bid, and in contrast the project owner chose to reject that bid and award to a lower bidder of about $3.5 million who the architect rejected as non-responsible.  Multiple bids had been received in the $7 million dollar range.  The court determined that the architect was in the better position than the owner to determine that this was a non-responsible bid.  Further, the architect’s fee was based on the estimate of construction costs up front and was entitled to its full fee upon completion of the design services.  The actual construction costs would not be relevant to determining the fee.  Rauhaus Freedenfeld & Associates (RFA) v. Carrollton West Pet Hospital, 24-P-956 Appeals Court of Massachusetts (April 26, 2026).

Following a bench trial, the trial judge awarded judgment to the Architect. On appeal, the appellate court affirmed the way the judge determined the damages awarded. RFA was retained to design a veterinary hospital for the project owner.  The owner had a construction budget of $3.3 million but stated that it wanted the new facility to be the “best of the best” and that “price was no object.”  The parties executed a design contract that divided the project into three phases: the “design phase,” the “construction documents phase,” and the “construction phase -- administration of the construction contract.” Only the first two phases are relevant to the present appeal because the parties severed their relationship before construction began.

Compensation framework. RFA's compensation “for basic services” in the design and construction documents phases was set at the greater of “8% of the construction cost or $18 per square foot,” setting the “preliminary construction cost” at $200 per square foot. In turn, the contract defined “the [c]onstruction [c]ost” as “the total cost or estimated cost to [CWPH] of all elements of the [p]roject designed or specified by [RFA].”

Specific payment milestones distributed RFA's total fee across project subphases: programming ($3,500 fixed fee for a project area of over 10,000 square feet), schematic design (thirty percent), construction documents (fifty-five percent), bidding and negotiation (five percent), and construction administration (ten percent).

Project design phase. After executing the contract, RFA met with the owner to develop the project program. RFA sent the owner a series of photographs depicting his vision for the facility: a European-style chateau with steeply pitched roofs, intricate masonry, a great hall, and ornate finishes. RFA issued the first version of the project program, dividing the project into two phases, and reflecting a total project area of 21,887 square feet.  A cover letter accompanying the program noted that the first phase was estimated to cost more than $2 million over CWPH's initial articulated budget. The owner then had “numerous discussions” with RFA concerning ways to reduce the project's square footage.  RFA subsequently submitted a revised project program with reduced square footage and the owner approved that program but noted beside its signature “3.3 million budget.” And a couple months later, RFP presented an initial schematic design that added some square footage.   The owner didn’t object to this.  RFP proceeded with revising the schematics to incorporate changes requested by the owner and the Owner approved those.

Construction documents and cost estimation. When the construction documents were close to being completed, RFA asked a construction contractor to prepare a cost estimate for the project to address the owner’s “concerns over the cost that RFA was building into [the] project.” The cost estimate came in at $7.2 million.  The Owner rebuffed that estimate as “grossly inaccurate.”

“The parties’ communications thereafter revealed a fundamental disagreement over CWPH's payment obligations. CWPH refused to pay an advance to RFA, asserting it was unwarranted because the construction documents were incomplete and unapproved, and that the latest round of revisions were part of RFA's basic services. CWPH further maintained, based on Barnes's personal calculations, that it had already paid RFA the majority of its total fee. RFA countered that the redesign requests represented significant compensable changes. Despite the dispute, in November 2012, CWPH requested thirty-one material upgrades and eleven area increases.”

After the bids came in, RFA invoiced the owner for a balance due of approximately $237,030, based on RFA's total base fee calculated at eight percent of a construction cost of $7,165,361 (which was the lowest bid received during the bid solicitation).  Based on Barnes's belief that the bids were unreasonable and had been solicited without proper approval, CWPH refused to pay the invoice. RFA treated the nonpayment as a material breach and, after unsuccessful efforts to resolve the dispute informally, filed suit against the owner to recover this fee.

Addendum to the Contract to Resolve Dispute. While the litigation was still pending, the parties attempted to resolve their dispute without the assistance of counsel and executed a written addendum to the original contract. The addendum provided, inter alia, that RFA's base fee would remain eight percent of the construction cost as calculated on the “lowest responsible bid” received for the project, and that the owner retained the right of final approval of the successful bidder. The addendum did not define the term “lowest responsible bid” or specify what would happen if the parties disagreed on which bid met that term.⁶

Rebid and renewed dispute.  RFA then rebid the project with agreed-upon changes to the plans. Ultimately, nine contractors submitted bids ranging from approximately $3.9 million to $7.9 million. RFA analyzed the submissions and determined that the lowest “responsible bid” that included “a complete schedule of values for each line item, no conflicts or inconsistencies in the numbers, reference checks, responsiveness of bidders to RFA's requests for further information, and a reasonable cost per square foot,” had been submitted by one of the contractors whom the Owner had previously sought a bid, at approximately $7.29 million.

The owner, however, insisted that another of the contractors who bid approximately $3.99 million, was the “lowest responsible bidder,” despite RFA's documented concerns about that contractor’s limited qualifications and the incomplete scope of its bid.

RFA invoiced CWPH for its fee based on eight percent of the $7.29 million bid, representing compensation for all work performed to date and filed suit when the owner refused to pay.

Trial. A bench trial commenced in February 2023. On June 30, 2023, the trial judge issued his findings of fact, rulings of law, and order for judgment.

“The judge found the addendum to the contract “fundamentally flawed” and unenforceable because there was no meeting of the minds on essential terms; to wit, how to “define ‘lowest responsible bid’ ”or the mechanism for resolving disputes about the bid process. The judge reasoned that the evidence showed that Freedenfeld, who was “far better qualified,” believed he would determine the lowest responsible bid, whereas Barnes believed CWPH could unilaterally select the lowest bidder based simply on price. Because the parties did not agree on who had final decision-making authority, and the addendum lacked a method to resolve such a dispute, the judge deemed the addendum unenforceable and that the parties’ rights were governed by the contract.”

The judge then analyzed the parties’ conduct under the contract and found that CWPH [Owner]committed a breach when it “unilaterally walked away from the [contract] in late 2015” without paying RFA the balance of its fee, and deciding, based on its own calculation of “estimated cost,” that it had already paid RFA in full. The judge credited Freedenfeld's (RFA’s designer] testimony as “an experienced architectural design professional with decades of experience in this niche area of practice.…”

Calculation of RFA's fee under the contract. “As the judge noted, under the contract, “construction cost” is defined in article 5.1.1 as “the total cost or estimated cost to the [o]wner of all elements of the [p]roject as designed or specified by the architect” (emphasis added). This definition allows for flexibility in computation of cost, permitting calculation based on estimated cost before a project's completion.”

The appellate court, in upholding the judgment in favor of RFA stated:

“ a reading of the contract as a whole shows that the parties contemplated that payments would be made to RFA throughout the term of the relationship and prior to completion of the project. The parties specifically agreed that “progress payments” of a percentage of the construction cost would be made upon the completion of the schematic design and the construction documents phases. Indeed, ninety percent of RFA's fee was to be paid before the construction phase of the project began. Also, the parties agreed that the “[a]rchitect shall be entitled to compensation in accordance with this [a]greement for all services performed whether or not the [c]onstruction [p]hase is commenced” (emphasis added). Clearly, the parties intended for payment to be made to RFA even if the construction did not take place.”

The appellate court also agreed with the judge that the calculation of estimated cost, and RFA's fee therefrom, must be based on a reasonable bid and not simply the lowest bid, and that the Tri-Star bid of $7,287,167 was a reasonable estimated construction cost. The court didn’t find the addendum to be ambiguous as argued by the Owner but instead concluded that the flexible “construction cost” definition ensures that a fee can be ascertained throughout the project's phases and if the construction phase is never commenced.

Comment:  The architect here had a fee based on percentage of estimated construction costs.  That fee was earned as the architect performed its work and it was based on the $7.29 estimated cost and not on whatever the actual final construction costs might be.  Federal government contracts allow this type of billing based on estimated costs but forbid a designer being paid based on a percent of final construction costs.  The thinking is that this might encourage cost overruns and the designer would benefit from such cost overruns.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 28, No. 5 (July 2026).

Copyright 2026, ConstructionRisk, LLC