LAW: The Contractor's Side

By: Cordell Parvin

Many courts decide contract claims based on what costs the contractor is entitled to recover under the terms of the contract and on whether the contractor has proven those costs. Paliotta v. Department of Transportation, 750 A.2d 388 (Pa. Commw. 1999) provides a textbook study.

By letter dated June 27, 1991, the Pennsylvania Department of Transportation (PennDOT) declared Carmen Paliotta Contracting Co. the lowest responsive bidder on a contract to improve a section of State Route 30 in Beaver County. Paliotta was to begin work on July 29, 1991, and was to complete the project 92 calendar days later on Oct. 28. Paliotta was delayed starting the project because the state budget was not signed into law until Aug. 4. On Sept. 4, PennDOT issued a revised schedule, increasing the duration to 268 calendar days because of the "winter shutdown." When Paliotta began site work, he encountered a design defect. PennDOT modified the design to correct the defect, which caused Paliotta to incur additional costs.

Upon completion of the project, Paliotta filed a complaint seeking damages from PennDOT for increased construction costs caused by the delays and design flaws. The board held hearings and, based on the evidence presented, awarded Paliotta damages in the amount of $144,105.86 with 6% interest from May 10, 1993. Both Paliotta and PennDOT appealed the decision.

On appeal, Paliotta first argued that, based on the Eichleay formula, he was entitled to additional damages for extended home office overhead for the period of time beyond the original 92 days duration of the project. As readers may be aware, the Eichleay formula computes extended home office overhead on time basis. The court, relying on Section 111.02 of PennDOT’s Standard Specifications, held that home office overhead is limited to 10% of the extra direct costs.

Next, Paliotta argued that he was entitled to additional damages in the amount of $56,636.61 for equipment "standby" costs based on an estimate for the period of time beyond the original 92-day duration of the project. The court disagreed, quoting from the final paragraph of section 111.04(d) of PennDOT’s Standard Specifications, which prohibits use of the Blue Book or any other rental rate book and requires actual records kept in the usual course of business and increased ownership expenses measured pursuant to generally accepted accounting principles. The estimate did not meet the requirement.

Paliotta also argued that he was entitled to additional damages in the amount of $32,949.53 for PennDOT’s interference with his construction of the curb and gutters in the fall of 1991. The board held that Paliotta was entitled to compensation, but did not award damages to Paliotta. The board explained that Paliotta failed to present sufficient evidence to show that his "original plan for the curb gutter construction could have been achieved at the initial desired rate using the planned equipment." The court disagreed with the board, relying on the testimony of Paliotta’s expert. He testified that using a "slipform machine" Paliottta could have produced much more than 225 linear ft of curb gutter per day. On that basis, the court decided that the evidence and facts supported the $32,949.53 estimate for curb gutter damages.

In its appeal, PennDOT argued that the board erred in awarding damages for extended "maintenance and protection of traffic" costs from 92 to 368 days based on a pro rata formula instead of Paliotta’s actual costs. The court disagreed based on PennDOT’s agreement to pay for extended maintenance on a pro rata basis.

At the conclusion of the project, PennDOT agreed to compensate Paliotta for extended maintenance and protection of traffic on a pro rata basis in accordance with the terms of the contract. In November, the traffic maintenance subcontractor settled its claim against Paliotta for $22,958.47. Paliotta, however, sought $41,238.00 from PennDOT, a figure calculated on a pro rata basis.

PennDOT argued that, under the original contract, it was liable only for the actual costs incurred by the contractor, and, here, Paliotta’s actual costs were only $22,958.47. However, the court found PennDOT had modified the original contract when it agreed to compensate Paliotta for extended traffic control on a pro rata basis.

This case is important to contractors because it demonstrates courts will focus on the contract and standard specifications language. Contractors must instruct their field personnel to give notice when required and keep the appropriate documentation, or risk not being fairly compensated.