In defective construction cases in Arkansas, the measure of damages is generally the cost of repair: the amount needed to bring the work up to the quality the owner bargained for. In Keathley v. Halijan, 2025 Ark. App. 531 (Nov. 5, 2025), the Court of Appeals confirmed that this measure applies regardless of how the parties structured the contractor’s fee, including on a cost-plus contract, and it rejected a contractor’s argument that he owed only the “incremental” cost his defective work added. Perhaps a more useful part of the decision, though, is the argument the court did not reach, because the contractor never made it below.
How does Arkansas measure damages for defective construction?
Arkansas recognizes two methods for measuring damages in a construction-defect case: the cost of repair, or the difference in the property’s fair market value. Carter v. Quick, 263 Ark. 202, 563 S.W.2d 461 (1978). The cost-of-repair measure is the preferred one “because it gives the landowner a money equivalent of what he bargained for by giving him the cost of getting the work properly done.” Bowman v. McFarlin, 1 Ark. App. 235, 615 S.W.2d 383 (1981).
Under Carter, cost of repair “should be applied in every case, except where the actual curing of the defects would cause unreasonable economic waste.” It applies even when the value of a newly built but defective house exceeds the contract price, because the owner’s interest is in having defective construction corrected so the family can enjoy a properly built home, not in offsetting a loss on a possible resale. Pennington v. Rhodes, 55 Ark. App. 42, 929 S.W.2d 169 (1996).
How long has cost of repair been the Arkansas measure?
Under Arkansas law, cost of repair is a settled measure, not a recent one. The Supreme Court fixed its modern form in Carter v. Quick in 1978, holding that for a residence the owner will occupy, the cost of correction is the proper measure “even though substantial,” and that a court turns to the change-in-value test only where the cost of correction is “grossly and unfairly disproportionate to the good to be attained.” As Professor Brill frames the operative question, the cost of correction governs where the defect can be cured “without great expense and without material injury to the building as a whole.” Brill, Arkansas Law of Damages § 17:3 (6th ed.). Pennington applied that rule in 1996, eighteen years after Carter, holding a defective-house plaintiff to the cost of repairs rather than the price of a new home. What Keathley adds to this settled line is narrow and specific, and it turns on how the parties structured the contractor’s fee.
What did Keathley v. Halijan decide?
The owners hired a contractor to build a custom home. The two-page agreement set a flat builder’s fee and required the owner to pay the construction costs as the project progressed, a cost-plus arrangement rather than a fixed price for the finished house. A retaining wall collapsed during construction, the owners terminated the contract, and they hired a replacement builder to repair and complete the work. After a bench trial, the circuit court measured the owners’ damages by the cost of repairing the defective construction, and the Court of Appeals affirmed.
The contractor’s main argument was that the preferred cost-of-repair cases, Carter and Pennington, applied only to fixed-price contracts, where the builder had accepted the risk of delivering a properly built home for a sum certain. On a cost-plus job, he contended, that logic broke down. The court disagreed. It held that “the cost-of-repair standard is the proper measure of damages in this construction-defect case irrespective of the nature of the underlying Contract and fee arrangement between the parties,” noting that cost-plus contracts have been recognized in Arkansas for at least a century and that the court had never limited the cost-of-repair measure to fixed-price work.
Can a contractor limit damages to the “incremental” cost of the defect?
This is the part worth reading closely. The contractor’s fallback position was that he should owe only the increase in cost caused by his breach, the otherwise-avoidable expense, rather than the full cost of repair. The court rejected that on the record before it, but the reasoning appears narrow: “the Keathleys neither allege[d] nor argued below that their initial cost estimates were low or that the work contemplated under the Contract was not possible to complete at the estimated price. This is not a situation in which the Keathleys undervalued the cost to build, and their deficient performance necessitated that items be fixed, supplemented, or wholly redone.”
In other words, the incremental-cost theory failed because the contractor did not preserve or prove it, not because Arkansas law forecloses it. The practical reading runs both ways:
- For an owner’s counsel, a cost-plus structure is not an escape hatch from cost-of-repair, and “the owner was always going to pay to build the house” is not, by itself, an answer.
- For a contractor’s counsel, if the defense is that the estimate was genuinely low, so that part of the repair cost is cost the owner would have borne regardless, that argument has to be pleaded, supported with evidence, and put to the trial court. Keathley shows what happens when it is not.
What about betterment and economic waste?
Two limits on cost-of-repair survive and are worth keeping in view. First, the measure does not include betterment. The Keathley court emphasized that the owners “took care not to seek damages for additions or upgrades,” consistent with Pennington’s rule that the award restores the bargained-for quality rather than an improvement on it. Second, cost of repair still yields to the economic-waste exception from Carter, which applies the measure “in every case, except where the actual curing of the defects would cause unreasonable economic waste.” The principle is an old and practical one: damages should make economic sense, so it would be “foolish to rebuild a house because a different type of pipe, equally adequate, had been used in construction.” Brill, Arkansas Law of Damages § 4:9 (6th ed.). That exception is the contractor’s to establish: the burden of proving unreasonable cost or economic waste falls on the contractor, and whether repair costs cross that line is a question of fact. Brill, Arkansas Law of Damages § 17:3 (6th ed.) (collecting Carter and Pennington). Keathley disturbed neither limit; it held only that the fee structure, and an unpreserved incremental-cost theory, did not displace cost of repair on the facts before the court.
The takeaway
Keathley is a bench-trial affirmance reviewed for clear error, so its damages discussion is as much about preserving and proving the right theory as about the rule itself. For lawyers handling Arkansas construction-defect matters, the decision is a useful reminder that cost of repair is the default measure and that cost-plus billing does not change it. The room to argue for a narrower measure lies in the record a party builds at trial, not in the label on the contract.
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