Methods for Calculating and Presenting Damages in a Construction Claim

When a contractor’s costs exceed its contract amount on a construction project due to owner-caused impacts, the contractor can choose from several damages methods in seeking equitable compensation. Several variables factor into deciding which method to use, including:

1. The detail and reliability of the contractor’s quantity, cost, and man-hour records. Were actual installed quantities, costs, and man-hours accurately allocated and collected by day, week, or month in accordance with the project’s Work Breakdown Structure (WBS)? Did the contractor capture actual change order man-hours in separate cost accounts? Certain methods can be utilized only if this detail exists, and this type of information is usually considered to be fundamental to the quantification and proof of compensable damages.

2. The detail captured in contemporaneous project documentation. Were detailed daily reports kept? Do they indicate the effects of owner-caused impacts? Does project correspondence adequately document owner-caused impacts? These records, demonstrating the cause of the problems and the effect on the contractor’s productivity, are important to all methods. Still, to support detailed quantum calculations, contemporaneous documentation must be detailed as well.

3. The stage of the claim’s process. Is the claim for negotiating purposes only, or will it be submitted as part of an expert report to a court? Certain methods are useful in negotiations but ineffective in court.

4. The size of the contractor’s cost overrun. From a business perspective, the costs of preparing the damages analysis must be weighed against the size of the potential recovery.

5. The extent of contractor-caused problems and the ability to separate those costs. It is problematic in most methods if contractor-caused problems cannot be identified, segregated, and accurately priced.

If the claimant can show 1) entitlement to recover for the other party’s wrongful conduct, and 2) damage incurred because of that wrongful conduct, the claimant may recover even though the amount of the damage is uncertain or is based on estimates. There are several methods currently in use for the calculation of recoverable damages, which are summarized below:

• Total Cost Method. The Total Cost method involves a simple claim calculation based on the assumption that all cost overruns result from the owner’s actions. The contractor claims the difference between the costs it expended and the costs it was paid and adds applicable overhead and profit.

• Modified Total Cost Method. The Modified Total Cost approach is a damages analysis method whereby the claim amount is produced by calculating the difference between an adjusted in-place value and an adjusted bid amount. The adjusted in-place value is determined by taking the project’s in-place value (total field costs plus overhead, profit, and bond) and adjusting it downward for identified contractor-caused performance errors and other noncompensable costs. The adjusted bid amount is determined by adjusting the original bid (contract) amount for executed change orders and identified bid errors.

• Jury Verdict Method. The Jury Verdict method provides the courts another way to calculate damages when the contractor or owner does not present discrete damages. The term “Jury Verdict” is misleading in that most cases that have received damages awards on a Jury Verdict basis involve decisions by courts or Boards of Contract Appeals, not juries. In these cases, judges and board panel members serve the role of a jury and as triers of fact, hearing testimony and weighing evidence, and awarding damages based on an approximation of damages suffered.

• Quantum Meruit. For various reasons, the contractor may be unable to recover damages under the original contract. When this occurs, recovery may be pursued under a quasi-contractual remedy known as Quantum Meruit, which simply means “as much as one deserves.” Such situations may occur when the contract is found to be unenforceable or when the contractor performs extra work that the original contract does not cover. Where Quantum Meruit recovery is sought, the contractor will set forth its determination of the reasonable value of the benefit conferred upon the owner. The court will usually consider all competent evidence of actual contractor expenditures in determining that reasonable value.

• A/B Estimate Method. The A/B Estimate method is generally utilized in cases where additional work and the cause of the delay or disruption are fairly straightforward. For example, a lump sum contractor bids on a chemical plant expansion assuming that a large pressure vessel is to be located at grade with its own foundation. After the job begins, the contractor discovers that the engineer has relocated the vessel in the structure above grade because of other process changes made by the owner. The contractor in such a case can prove its damages by subtracting an independent estimate of the work as-planned (the “A estimate”) from the new estimate of the work with the vessel relocated (the “B estimate”). The B estimate is a fair and reasonable estimate of the value of the work at the time of the bid—if the contract documents had contained an adequate description of the problems and changes that actually occurred during the course of the work.

• Delta Estimate Method. For each of several distinct problems that occur on a project, specific cause-effect relationships and estimates of damages or actual costs can be established using the Delta Estimate method. Simply said, the Delta Estimate method is no different than adding several individual change order requests. The Delta Estimate becomes difficult to apply if several problems and their effects are interrelated. Also, the Delta Estimate method is often criticized because the sum of the parts may exceed the whole cost overrun.

• Discrete Damages/Cost Variance Analysis Method. By applying a variation of the Delta Estimate and Modified Total Cost methods, the claimant can go one step further to provide convincing proof of the damages incurred using an approach known as the Discrete Damages/Cost Variance Analysis method. The method involves the specific distribution of all costs incurred on the project rather than quantifying only the claimed costs, as may be done with the other methods.

Future blog posts will discuss in greater detail each of these methods for quantifying damages.

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