Total Cost Method of Calculating Damages

Article December 28, 2000
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I find increasingly that the claims we prepare or analyze are based on many small events or problems rather than one or two major events. In those cases, there is no way to isolate the time impact or productivity loss of each event. Thus, contractors are forced to use a Òtotal costÓ approach or Òmodified total costÓ approach to quantify their damages.

Many contractors mistakenly believe that it is easy to use the Òtotal costÓ approach. As explained below, that belief can lead to no recovery. When is the total cost approach acceptable? In order to successfully prove damages by the total cost approach, the contractor must prove each of the following elements:

-- The impracticality of proving actual losses directly;

-- The reasonableness of its bid;

-- The reasonableness of its actual costs; and

-- The lack of responsibility for the added costs.

Failure to prove any element may result in a denial of recovery. As further pointed out by the Federal Circuit Court in Servidone Construction v. United States, 931 F.2d 860 (Fed. Cir. 1991), a trial court must use the total cost method Òwith caution and as a last resort.Ó Bidding inaccuracies can unjustifiably reduce a contractor's estimated costs and production inefficiencies can inflate a contractor's cost.

Approval under modified total cost

In Servidone, the Federal Circuit Court actually approved the award of damages based on the Òmodified total cost method.Ó Under that method, the total cost was only used as a starting point. Adjustments in the damage calculation were made thereafter as allowances for Òvarious factorsÓ in order to finally reach an Òultimate, reduced figureÓ that fairly represented the increased costs the contractor Òdirectly suffered from the particular actionsÓ of the government. In Servidone, among other things, reductions were made to substitute a Òreasonable amountÓ for the contractor's bid (the bid was too low) and the contractor's Òlack of experienceÓ in dealing with the soils encountered on the project.

Huber, Hunt & Nichols Inc. v. Moore, 67 Cal. App. 3d 278, 136 Rptr. 603 (Cal. App. 1977) is a well-known construction case where the contractor failed to prove the required entitlement. There the court found the contractor failed to prove an actual tie between the total cost damages claimed and the extra costs incurred as a direct result of the architect's actions. Furthermore, the court noted its dissatisfaction with the contractor's failure to keep a separate accounting of its damages. According to the court, it was obvious the contractor could have maintained a proper accounting system to establish its damages, if it had desired to do so. Though the contractor demonstrated several plan errors and some 25 changes, it simply laid its costs on the table without linking the costs to causes or demonstrating why such a linkage was impossible.

Approval under total cost

On the other hand, the validity of a claim where there are multiple, interacting problems was recognized in State v. Guy F. Atkinson, 187 Cal. App. 3d 25, 231 Cal. Rptr. 382 (1986). In that case, the court considered an application to vacate an arbitration award in favor of Atkinson against the state, made in part based on use of a total cost type damage calculation. The court confirmed the award as follows: Testimony of Atkinson supervisors established that the changes ordered by the state were major, on-going and seriously impacted the entire project in terms of efficient use of labor and machinery and planning ability. The entire project was delayed and disrupted due to the embankment changes. Even the state's own engineer admitted its responsibility. Thus, the state was responsible for a material change in the contract, for which Atkinson clearly had the bargained right to additional or adjusted compensation.

The accounting expert presented by Atkinson testified that only the impact of certain change orders was considered in assessing which specific items were changed in character, and based his final increased cost estimates on those changes alone. Other losses or cost overruns directly attributable to Atkinson were not included in the amount of damages claimed.

The state criticizes Atkinson's total cost method of calculation (subtracting payments received from total cost) as disfavored. But this method of proving damages is properly permitted in cases such as this, where accurate assessments of costs Òas plannedÓ are difficult, if not impossible, to ascertain. (See, e.g., Boyajian v. United States (Ct.Cl. 1970) 423 F 2d 1231, 1244.) Nor has the state offered or suggested other reasonable means to measure the actual cost of a project before any changes occur. Even a state claims evaluator conceded that such calculations were difficult at best and that using prechange costs derived from bid estimates represented the only feasible method.

Comment

Contractors should be aware that the number of events giving rise to a claim and their overlapping nature have a direct relationship with the likelihood of successfully using the total cost or modified total cost approach. Contractors should also keep in mind the importance of proving that the owner's actions or inactions caused the increased costs. As stated above, courts will use the total cost method Òwith caution and as a last resort.Ó

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