As a construction contractor, you might possibly recognize yourself here. You’ve just discovered that your contract performance costs have gone through the job trailer roof. Hopes of a decent profit have tanked. Your owner has been increasingly dismissive and indifferent to the culprit problems causing this, namely, actions and inaction of your owner’s agents.
Should you engage a construction claims expert to address this serious issue, it will be no surprise that the cost recovery calculations – money damages – is the section in the Expert Claims Report you want to see first.
Just as failure to adequately prove the “causal connection” spells failure of the entire construction claim, lack of proper attention to identification of damages – and the same for proof of damages and their accurate and professional calculation thus identified – also spells sure defeat of the contract claims.
Every contractor-bidder must firmly accept that a contractor is always responsible for the cost of contract performance within reasonably strict accordance to the contract bid documents. The same applies to performance sequence either specified and/or in accord with the construction schedule agreed upon by the parties. On the other hand, contract damages – unanticipated costs the responsibility of others giving rise to contractor claims – occur more frequently than not. These costs can be broadly categorized into two classes, namely:
- Unanticipated quantity or quality changes in the specified work
- Unanticipated changes in the method or sequence of the specified work
The first is easy for the contractor to recognize. For example, the amount of unsuitable excavation as indicated in the contract documents turns out to be vastly more than represented in the bid documents. To stretch the point, the owner views the bid documents, and administers contract performance, as specifying a Cadillac result while actually the documents describe a mere Ford-like outcome.
Here if possible, the contractor must seize the moment; segregate and record the extra costs as they occur. In recovery of construction damages, the Segregated Cost Method, also called the Actual Cost Method, is by far the most acceptable.
The second category of damages is more difficult to anticipate and therefore sometimes less likely for the contractor to timely recognize, or at least to recognize fully enough to appreciate the potential ultimate negative impact thereof. Moreover, the contractor’s normal job records more often than not will furnish little support for the amount of money damages ultimately sought; often omitting even the mere existence of performance interruptions caused by others. Examples of this class of damages are:
- Schedule disruption (from a confusing array of small and not-so-small individual instances)
- Performance acceleration…promoting loss of efficiency
- Loss of efficiency; for example, caused by trade stacking (often as a result of honoring owners’ constructive orders to accelerate performance)
- Loss of use of earned funds (withheld/delayed progress payments, causing delayed payment to subs and suppliers)
- Extended jobsite overhead (run-on of variable jobsite costs…. as opposed to fixed job costs)
- Extended home office overhead; always present in extended performance claims.
- Extra interest costs; for example, extended working capital loan cost
All these issues fall under the overarching category of one or the other of the following:
- Extra work ordered by the owner; normally change order work.
- A constructive change; extra work the result of the action or inaction of the owner or of agents under the exclusive control of the owner (or the prime contractor if you are a subcontractor).
Obviously, change order work and any resulting reimbursable costs are clearly more readily identifiable as to scope, and more easily dealt with by the owner and the construction contractor. However, constructive changes, scope changes which are the result of owner action or inaction (not a written order), are sometimes initially quite subtle.
The devil is in the details – as the contractor will discover once the details and the potential impact can be identified. They require the contractor’s timely, specific, formal notice to the owner. This is where the contractor needs a watchdog, a construction claims expert – even if it has to be later rather than sooner!
Calculation of Damages. The accepted methods of damage calculation of contractor claims fall into five (5) distinct categories:
- Actual Cost Method (sometimes called the Segregated Cost Method)
- Estimated Cost Method
- Total Cost Method
- Modified Total Cost Method
- The Measured Mile
Actual Cost Method. If the contractor has a cost accounting system, the ideal situation, but still rare for the modestly sized business, with the cooperation of the job site manager the office staff can trap the change order work costs daily as they occur. Note carefully that this is by no means entirely, sometimes even remotely, possible for constructive change costs, delay damages, disruption damages, efficiency loss and the like.
Estimated Cost Method. In situations of disruption, delay and constructive change where contemporaneous trapping of contract damages is impossible (more often the situation than not), the construction claims expert must employ estimates by contractor personnel, expert estimators, expert witnesses, as well as contractor cost data and accounting records – perhaps all of the above.
Total Cost Method. This is the least favored of all methods. Applying the reasoning that the contract as performed was so disrupted no other method can identify the entire recoverable extra cost, the total cost of performance is compared to the same as originally estimated for the bid. This is far more often than not unsuccessful, especially in the courts and at the boards of appeals.
Modified Total Cost Method. After first roughing out the damages more or less according to the Total Cost Method, the claims consultant takes it several steps further, namely he:
- Analyzes the bid estimate for errors and omissions and makes appropriate adjustments,
- Checks the record for contractor performance failures if any and makes adjustments accordingly, and
- Adjusts for any contractor costs which are the result of events not within the owner’s control.
This method, done carefully and professionally, is modestly to generally successful. Of course this methodology borrows heavily from the Estimated Cost Method, itself more a stone-cold bid reconstruction done by an expert estimator.
The Measured Mile. Sometimes, even in a grossly disrupted contract performance, a time span of uninterrupted performance can be identified and analyzed. If contract performance is designed to be essentially repetitious (embankment placement for example), complete undisrupted performance can usually be replicated. In other words, the actual undisrupted performance element is extended as a template for the performance of a completely undisrupted project. Oftentimes, this is quite powerful and persuasive.
As you can tell, the science and art of successfully pursuing recovery of construction damages has many complicated facets and, as a general statement, is no simple task. It will be infinitely more persuasive if accomplished by a professional construction claims expert using a method favored by the courts and boards. Success is even further enhanced if that consultant has expert witness testimony experience in such matters.
You may be reading this because you are a contractor or a subcontractor and you either actually now have, or can foresee, serious financial losses on the horizon due to contract performance issues not of your own making or responsibility.
If so, I respectfully offer my record as a construction claims expert for your review.
Call me at 205-349-3516. I’d like to hear your claims issues – directly from you. It will cost you nothing and I may be able to contribute something to help you immediately. It’s happened before!