Getting paid for unfinished or uncontracted work: quantum meruit, substantial performance and progress claims

Every contractor, fabricator and service business eventually meets one of three uncomfortable situations. A job ends part-way through, because the customer cancels, runs out of money or the relationship breaks down. Extra work gets done on site because someone asked for it, but nobody agreed a price. Or the work proceeds before the contract is finalised, and the contract never is. In each case the business has spent labour and materials, and the question is the same: what, if anything, can it be paid?

The answer depends on what agreement existed, what the agreement said about payment, how the work came to be done and what records the business kept. The law has several tools for these situations: rules about entire and divisible obligations, the idea of substantial performance, claims for a reasonable sum known as quantum meruit (“as much as it is worth”), and, for construction work, statutory security of payment schemes that give a right to progress payments. They interact in ways that surprise many business owners, and the most important factor is usually what was written down before the work started.

This article explains these ideas in general terms and focuses on what a business can do to protect its right to be paid. It is general information, not legal advice. Payment disputes often have strict time limits, particularly under security of payment legislation, so take advice promptly.

Three different situations

It helps to separate the scenarios, because different rules apply to each.

Figure 1Which route to payment?

?What agreement covers the work that was done?

A contract that ended earlyIts payment terms firstplus damages if the other party was in breach

Work outside the contract's scopeThe variation clause firsta reasonable sum only if it does not apply

No enforceable contractA claim for a reasonable sumsubject to statute and the circumstances

Entire and divisible obligations

The first question when a job ends early is how the contract structures payment.

An entire obligation is one where payment is only earned when the whole of a defined task is complete. The classic illustration is a lump sum to build something, payable on completion. If the work is abandoned part-way, the strict position at common law is that nothing is earned under the contract, because the condition for payment was never met. The law developed this rule in cases where the builder walked away, and it can operate harshly.

A divisible (or severable) obligation is one where payment is tied to separate parts of the work, such as stages, milestones, deliveries or rates per unit. Each completed part earns its payment, regardless of whether later parts are finished.

Most modern commercial contracts are divisible in practice, because they provide for progress payments, milestone payments or payment by rates. That matters enormously when a job ends early. A contractor whose contract pays monthly on the value of work done has accrued rights to payment for each completed month. A contractor whose contract pays a single lump sum on completion is far more exposed.

Substantial performance

Real jobs rarely finish perfectly. There are usually defects, minor omissions or items to be completed. If payment on an entire obligation depended on absolute perfection, almost nobody would ever be paid. The law therefore recognises substantial performance: where the work is essentially complete and the shortfall is minor, the party who did the work can generally recover the price, less a deduction for the cost of fixing the defects or completing the omissions.

The line between substantial performance and a failure to perform is a matter of degree and depends on the nature of the work, the significance of the defects and the cost to remedy them compared with the price. Work that does not serve its essential purpose is unlikely to have been substantially performed, even if most of the labour has been done.

Contracts often deal with this directly through practical completion provisions, defects lists and retention, which define when the bulk of the price becomes payable and how remaining defects are handled. Those mechanisms are worth reading closely, because they usually decide when the bulk of the price is earned.

What quantum meruit means

Quantum meruit is a claim for a reasonable sum for work done or services provided. It is a restitutionary claim, meaning its purpose is to prevent one party from keeping the benefit of another’s work without paying for it in circumstances where that would be unjust, rather than to enforce a promise.

In general terms, a quantum meruit claim may be available where:

• work was done or services were provided;
• the other party requested them, or freely accepted them when it had the opportunity to reject them;
• the work was not intended to be free; and
• there is no valid and applicable contract that governs payment for that work.

The last point is critical. Quantum meruit generally cannot be used to escape the terms of a valid contract that covers the work. If the contract sets a price, that price governs, even if the work turned out to be worth more. Quantum meruit fills gaps where the contract does not apply or no enforceable contract exists. It is not a way to reprice a bad bargain.

Figure 2When a quantum meruit claim may be available

• Do: Work was doneor services provided
• Do: The other party requested itor freely accepted it
• Do: It was not meant to be free
• Avoid: A valid contract governs payment for it

When the contract still governs

A common argument after a contract ends is that the business should now be paid the reasonable value of its work rather than the contract price, especially when the contract price was low. Australian law has narrowed this argument.

In 2019, in Mann v Paterson Constructions Pty Ltd, the High Court considered a builder that had terminated a domestic building contract after the owners repudiated it. The Court held that the builder could not claim a reasonable sum instead of the contract price for stages of work where a right to payment had already accrued under the contract; for those stages, the builder’s entitlement was the contract price, plus any damages. For work where no right to payment had yet accrued, a reasonable sum might be claimed, but the Court indicated that the contract price would ordinarily limit what could be recovered. The decision makes the contract’s payment structure even more important. Whatever the contract says about when payment accrues will usually shape what can be recovered after it ends.

The practical message is that a business cannot rely on quantum meruit to recover more than it bargained for. If a price is too low, the time to fix it is during negotiation or through the variation process, not after termination.

Extra work and the variation clause

Extra work is the most common source of payment disputes. A site manager asks for an additional handrail, a customer requests a modified design or an engineer instructs a change. If the contract has a variation clause, it will usually say who may direct changes, how they must be directed (often in writing), how they are priced and what happens if the contractor does not give notice within a set time.

Where the contract’s variation procedure applies, it generally governs. Failing to follow it, for example by doing the work without a written direction when one was required, or by missing a notice deadline, can cost the business its entitlement. Courts sometimes find ways around strict procedures, for example where the owner’s conduct made it unfair to insist on them, but relying on that is risky.

Where the extra work is genuinely outside the contract altogether, or the contract has no mechanism for it, a reasonable sum may be recoverable if the work was requested or accepted and not intended to be free. Even then, the business must prove the request and the value. The variations: where job economics change article explains how to manage variations so that payment is not left to argument.

Work done before a contract is signed

Businesses often start work before the paperwork is complete: ordering long-lead materials, preparing drawings or mobilising a crew while the contract is “being finalised”. If the contract is then signed, it usually covers that work. If it is never signed, the position is less certain.

Work done at the other party’s request, in the shared expectation that it would be paid for, may support a claim for a reasonable sum. Work done speculatively, for example preparing a tender or proposal, generally will not, because each party bears its own costs of trying to win business unless something more is agreed. The boundary depends on what was requested, what was said about payment and who was intended to benefit.

The safest course is to avoid the problem. If work must start early, get a written instruction that says what work is authorised, what it will be paid at and what happens if the main contract is not concluded. The when a conversation becomes a commitment article explains how informal exchanges can create, or fail to create, binding arrangements.

When the contract is unenforceable

Sometimes a contract exists in fact but cannot be enforced, for example because legislation requires it to be in writing and it was not, or because a licensing requirement was not met. Domestic building legislation in each state imposes requirements of this kind. In Pavey & Matthews Pty Ltd v Paul (1987), the High Court held that a builder whose oral contract was unenforceable under New South Wales legislation could still recover a reasonable sum for work done, because the claim did not depend on enforcing the contract itself.

Statutes vary, however, and some deliberately restrict recovery where licensing or contract-formality requirements are breached. A business working in a regulated area, particularly residential building, should check the requirements in its state before starting work, not after a dispute arises.

Security of payment for construction work

For construction work and related goods and services, every Australian state and territory has security of payment legislation. These statutes give a person who carries out construction work under a contract a right to progress payments and a fast adjudication process to resolve disputed payment claims. They exist because cash flow problems, rather than legal entitlement, often decide whether subcontractors survive.

The details differ by jurisdiction, but the schemes share some features:

• a right to make payment claims at defined times, regardless of what the contract says about some matters;
• strict requirements for the form and timing of payment claims and payment schedules;
• consequences, which can be serious, if a party fails to respond to a payment claim within the required time;
• rapid adjudication by an independent adjudicator; and
• the ability to enforce an adjudication decision quickly, with final rights still able to be determined later.

These schemes are powerful but unforgiving. Missing a deadline or using the wrong form can lose a claim or a defence. If your business does construction work, learn the requirements in each state where you operate, or get advice before you rely on them. State regulators and building commissions publish guidance.

Figure 3How security of payment schemes work

1. 1Payment claimat defined times
2. 2Payment schedulestrict form and timing
3. 3No response in timeconsequences can be serious
4. 4Adjudicationrapid and independent
5. 5Enforcementquick, final rights decided later

Valuing the work

Whatever the legal route, a claim for payment eventually becomes a question of evidence. What work was done? When? At whose request? What did it cost, and what is it reasonably worth?

A reasonable sum is usually assessed by reference to factors such as the time and materials used, market rates for similar work and, where relevant, any agreed rates or the contract price. A business that keeps good records can prove its claim. One that cannot is left estimating, and estimates are easy to attack.

Useful records include:

• written instructions and approvals, even brief ones by email or text message;
• daily diaries or site records showing who was on site and what was done;
• timesheets coded to the job and, ideally, to the variation;
• delivery dockets and supplier invoices for materials;
• photographs before, during and after the work; and
• correspondence about price, scope and changes.

The timesheet and labour data for job costing article explains how to capture labour data in a way that supports both job costing and claims.

A worked example

This is an illustrative example. The business, figures and events are hypothetical.

A small electrical contractor agrees in writing to rewire a commercial tenancy for a lump sum of $62,000, payable in three milestones: $20,000 at completion of rough-in, $25,000 at fit-off and $17,000 at practical completion. During rough-in, the tenant’s project manager asks verbally for additional circuits for a server room. The contractor does the extra work, costing $4,800 in labour and materials, without obtaining a written variation, although the contract requires one.

After rough-in is complete and invoiced, the tenant’s business fails and the project stops. The tenant has paid nothing. The contractor has also completed about half of the fit-off work, worth roughly $12,000 at contract rates.

How might the contractor’s position look? The rough-in milestone was reached, so the $20,000 is a debt under the contract. The partly completed fit-off stage had not yet earned its milestone payment; whether the contractor can recover anything for it depends on why the contract ended. If the tenant repudiated the contract and the contractor terminated, the contractor may claim damages, or possibly a reasonable sum for the unfinished stage, limited in practice by the contract price. The server-room circuits are harder. The contract’s variation clause required a written direction. The contractor might argue the work was requested and accepted, but its failure to follow the procedure weakens the claim, and it must prove the verbal request.

Figure 4The rewiring job when the tenant failed

Rough-in milestone reached: a contract debt$20,000

Half the fit-off done: milestone not yet earned$12,000depends on why the contract ended

Server-room circuits, no written variation$4,800requested verbally

Because the tenant is in financial trouble, the legal entitlement may matter less than speed. Security of payment legislation may allow the contractor to pursue the rough-in amount quickly, if it complies with the statutory requirements. The broader lessons are familiar. Milestone payments protected the first $20,000. A written variation, even a one-line email confirmation, would have protected the $4,800. Shorter payment intervals would have reduced the exposure on fit-off.

How this applies to a small Australian business

• Structure payment to match the work. Progress or milestone payments convert entire obligations into divisible ones and limit the value at risk if a job ends early.
• Confirm every change in writing. A short email confirming who asked for the extra work, what it is and how it will be priced is often enough to protect the claim.
• Follow your own contract’s procedures. Notice periods and written-direction requirements in variation clauses are enforced more often than businesses expect.
• Do not start without authority. If work must begin before the contract is signed, get a written authorisation that covers payment.
• Keep job records as if they will be evidence. Diaries, photographs and coded timesheets turn a disputed claim into a provable one.
• Know your security of payment rights. If you do construction work, understand the claim and response deadlines in each state where you operate.
• Watch the customer’s financial health. Legal rights are of limited value against an insolvent customer, so monitor payment behaviour and act early when invoices start to age.

Common mistakes

• Doing extra work on a verbal request. It feels cooperative at the time and is often the hardest work to get paid for.
• Assuming a reasonable sum will beat the contract price. Where the contract governs, the contract price usually sets the limit.
• Lump-sum pricing on long jobs. A single payment on completion leaves the whole value exposed until the end.
• Missing statutory deadlines. Security of payment schemes are fast and strict, and late or defective claims or responses can be fatal.
• Thin records. Without evidence of what was done and who requested it, even a strong legal claim becomes weak.
• Waiting too long to act. Delay makes evidence harder to gather and allows a struggling customer’s position to worsen.

Questions to ask

• If this job stopped today, how much would we have earned under the contract, and how much would be at risk?
• Does our payment structure match the way value is created on this job?
• Who is authorised to request changes, and how must they be recorded under this contract?
• Have we started any work without a written instruction that covers payment?
• Could we prove, from our records, what we did, when and at whose request?
• Do we know the security of payment requirements in the state where this work is done?
• Is the customer’s financial position strong enough for the exposure we are carrying?

Bringing it together

Getting paid for work done is usually a question of contract structure and evidence, not legal ingenuity. Entire obligations leave a business exposed if a job ends early; divisible payments limit that exposure. Substantial performance protects those who finish essentially everything. Quantum meruit allows a reasonable sum where no applicable contract governs the work, but Australian law does not allow it to override the price in a valid contract, and the 2019 High Court decision makes the contract’s payment structure even more decisive. For construction work, security of payment legislation offers a fast but strict path to progress payments.

The most effective protection is ordinary discipline: milestone payments, written variations, written authority before early work, complete job records and prompt action when a customer stops paying.

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Source: KEVOS editorial notes. Examples and figures in this article are illustrations. This article provides general information and does not constitute legal advice.