G.R. No. 71557 - Cruz vs. Commission on Audit

Pablo S. Cruz, a duly licensed architect, entered into a “Contract of Services” with the Government Service Insurance System (GSIS) on 27 September 1960 for the construction of the GSIS Hospital (Hospital ng Bagong Lipunan).
Under the contract, petitioner was to render preliminary, contract documents, and supervision services, for which GSIS agreed to pay a fee of 3.65% of Ten Million Pesos (P10,000,000.00), with the fee subject to adjustment in the event of any increase or decrease in the construction cost.

After commencement of services, the total project cost was finalized at Fifteen Million Pesos (P15,000,000.00), with P13,000,000.00 allocated for the building and P2,000,000.00 for equipment.
Petitioner submitted a claim for an increase in architect’s fees corresponding to the rise in construction cost. The original claim (P232,091.96) covered all built-in equipment items, specifically Items “A” to “H” of Group I – Built-in equipment, Phase “C.”
During the pre-audit, the claim was reduced to P140,737.49, limited to Items “A” to “E”. The difference of P91,354.47, pertaining to Items “F”, “G”, and “H”, was disallowed.

The Commission on Audit (COA) denied the additional fees on the ground that the cost of equipment – specifically Items “F” (laundry equipment), “G” (x-ray equipment), and “H” (stills, sterilizers, and special lighting equipment) – should not be considered part of the “total construction cost” in computing the architect’s fees.
COA relied on its prior Decision No. 155 (dated 6 January 1977) and a U.S. case (Alabama Great Southern Railroad Company v. Davenport and Co.), which emphasized that equipment is distinct from construction.
The COA’s rationale was that the inclusion of these equipment items, deemed additional features, did not require the exercise of the architect’s professional skill or expertise in the same manner as the other building components.

Petitioner argued that the equipment items in question were integral to the hospital building because:

They were necessary for the hospital to function properly (e.g., laundry and x-ray equipment for patient services).
They were not sold as package units; instead, they were subjected to public bidding based on specifications prepared by him, indicating the use of his technical skills.

He supported his position by citing a clarificatory letter from the Chairman of the Board of Architecture and excerpts from the Board of Examiners for Architects’ opinion, which, under certain conditions, recognized that non-package equipment should be considered part of the construction cost.
Petitioner also referred to Republic Act No. 545, Section 14(c), emphasizing that the practice of architecture involves comprehensive planning which includes the integration and specification of equipment as part of a “complete building.”

The contract itself was ambiguous regarding the term “total construction cost.”
Evidence in the form of affidavits from former members of the GSIS Hospital Committee indicated that the architect’s fees were based on the total construction cost, inclusive of built-in equipment.
The principle allowing parol evidence in case of ambiguities was invoked to establish the true intent of the contracting parties.

Whether the cost of equipment items “F”, “G”, and “H” should be considered as part of the total construction cost for the purpose of computing the additional architect’s fees.
How to interpret the ambiguous contractual term “total construction cost” in light of the evidence and industry practice.
Whether the reliance on the U.S. case (Alabama Great Southern Railroad Company v. Davenport and Co.) is applicable or determinative in the context of hospital constructions in the Philippines.