Total Cost Method for Calculating and Presenting Damages in a Construction Claim: Part 2

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.

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.

Total Cost Method for Calculating and Presenting Damages in a Construction Claim: Part 1 discusses the elements of proof, theoretical bases, and prerequisites for the Total Cost method of calculating damages. This blog post addresses other topics related to the Total Cost method, including the owner’s failure to provide an alternate method, and the Total Cost cumulative impact claim.

Future blog posts will discuss the Modified Total Cost method, the Jury Verdict Method, Quantum Meruit, the A/B Estimate Method, the Delta Estimate Method, and the Discrete Damages/Cost Variance Analysis method.

As described in Total Cost Method for Calculating and Presenting Damages in a Construction Claim: Part 1, the Total Cost method involves a simple claim calculation based on the assumption that all cost overruns are the result of 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.

Owner’s Failure to Provide an Alternate Method
Owners should consider the risk of a decision in favor of the contractor when the contractor uses a Total Cost method to calculate its damages. An owner could present evidence that damages can be calculated on a discrete basis and that Total Cost should not be used. As a matter of law, if the owner takes the position that Total Cost should not properly be used but does not offer an alternative discrete method of calculating damages, the court may rule that it has no other method to determine damages and accept the contractor’s claim as calculated using the Total Cost method. If entitlement and cause-effect evidence has been persuasive, and because courts could be unsophisticated regarding construction cost accounting methods, failure to provide an alternative damages method could make it easy for the courts to simply decide that no other method but Total Cost was put forth in evidence to determine the damages. While it may be counterintuitive for owners to use an expert to calculate an alternate version of the contractor’s damages, such testimony may be prudent to preclude the court’s acceptance of the contractor’s use of the Total Cost method.

An example of this concept is the 1987 case Pennzoil Co. v. Texaco, Inc., although this was not a case of a Total Cost construction claim.¹ Pennzoil and Texaco had a dispute over the value of Getty Oil, which each wanted to purchase. Pennzoil sued Texaco for the tort of intentionally interfering with the Getty Oil-Pennzoil handshake deal prior to Texaco extending an offer to buy Getty Oil. Pennzoil made its argument for damages as follows: Getty Oil owned a billion barrels of oil reserves. If Texaco had not interfered, Pennzoil would have purchased Getty Oil (and its oil reserves) for $3.4 billion. The average cost of finding new oil reserves in the United States at the time was $10.87 per barrel. Thus, to find a billion dollars’ worth of new oil would have cost Pennzoil $10.87 billion. Pennzoil should, therefore, be entitled to the difference between the price it would have had to pay to find a billion barrels of oil and the price it would have had to pay for Getty Oil.² However, the value of Getty Oil was very close to the price that Texaco paid for it.³ Nevertheless, Texaco’s attorney decided not to put on witnesses to rebut Pennzoil’s damages evidence. The jury returned a verdict awarding Pennzoil $7.53 billion in compensatory damages plus $3 billion in punitive damages. Had Texaco offered expert testimony as to an alternative value of damages, the jury may have considered it and awarded Pennzoil a lower amount.

The Total Cost Cumulative Impact Claim
Like a Total Cost claim, the cumulative impact claim is often viewed with judicial circumspection because numerous contractor-caused or noncompensable events can affect productivity:

The “cumulative impact” claim is viewed with circumspection because productivity can be affected by numerous impacting events other than compensable events. The “cumulative impact” claim, essentially a “total labor cost” claim, requires proof that:

1. Impact attributable to changes was unforeseeable or was expressly excluded from change order settlements;
2. The changes were the sole cause of disruption for which the claim is made;
3. The “cumulative impact” was excessive and unreasonable in relation to what the contractor might have expected;
4. Impact costs cannot be segregated; and
5. Cumulative impact costs can be reasonably proven as to amount.⁴

Therefore, a contractor can recover damages under the Total Cost method only if it can show that: 1) it was impracticable to prove actual losses directly, 2) its bid was reasonable, 3) its actual costs incurred were reasonable, and 4) it was not responsible for any of the additional costs that it incurred.

This finding requires that the contractor’s pre-contract productivity estimate was accurate, the contractor did not cause the loss of productivity, and the contractor could not have foreseen and addressed cumulative impact in the pricing of its negotiated Change Orders. Owners may argue successfully that changes, in cumulative effect, must fundamentally change the work to constitute a “Cardinal Change” to provide entitlement to a cumulative impact claim outside of the Changes clause as a breach of contract.⁵

Constructive changes can occur when the owner has the right to make changes under the terms of the contract but has not followed the procedures of the Changes clause contained in the contract. Thus, the contractor may argue that its contract was constructively changed. A Cardinal Change is a change that fundamentally alters the contemplated scope of work and is a breach of contract that alters the work so drastically that the contractor is required to perform duties materially different from those for which it contracted. The contractor generally bears a heavier burden of proof to recover under a Cardinal Change claim than when proceeding under a constructive change theory. The contractor must prove that the excessive Change Orders materially or fundamentally altered the scope of the work or nature of the bargain such that the work no longer resembles the original contract.⁶ For example, one court determined that the contractor did not prove that 65 Change Orders materially altered the nature of the bargain and was, therefore, not entitled to costs that allegedly resulted from the effect of those changes.⁷

However, certain courts have found entitlement to a contractor’s cumulative impact claim under the Cardinal Change doctrine.⁸ In such cases, “a cardinal change constitutes a breach of the contract and exposes the owner or construction manager to breach of contract damages, which can include anticipated profits and other remedies not traditionally provided for in contractual remedy granting provisions.”⁹

¹     Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 4 (1987).

²     See Lloyd, Robert M., “Pennzoil V. Texaco, Twenty Years After: Lessons For Business Lawyers,” Transactions: The Tennessee Journal of Business Law, Vol. 6, 2005, at 346.

³     Id. at p. 347.

⁴     See Servidone, 931 F.2d at 861-62. See also Youngdale & Sons Constr. Co. v. United States, 27 Fed Cl. 516 (1993) at p. 16 Westlaw (disallowing recovery under Total Cost method); also see John E. Green Plumbing & Heating Co., Inc. v. Turner Constr. Co., 742 F.2d 965, 968 (6th Cir. 1984) cert denied 471 U.S. 1102 (affirming denial of unsegregated disruption claim).

⁵     See L. K. Comstock & Co., Inc. v. Becon Const. Co., Inc., 932 F. Supp. 906 (E.D. Ky. 1993) for a more thorough discussion of the Cardinal Change doctrine.

⁶     See Jones, Reginald M., “Lost Productivity: Claims for the Cumulative Impact of Multiple Change Orders,” Public Contract Law Journal, Volume 31, Number 1, Fall 2001, p. 17, published by the Section of Public Contract Law, The American Bar Association.

⁷     See Aragona Constr. Co., Inc v. United States, 165 Ct. Cl. 382, 390, 391 (1964).

⁸     See, e.g., Southwest Marine, Inc., DOTCAB No. 1663, BCA ¶ 27,102); Dyson & Co., ASBCA No. 21,673, 78-2 BCA ¶ 13,482, on reconsid., 7901 BCA (CCH) ¶ 13,661 (1979).

⁹     Sgarlata, Barnes & Brasco, “Successful Project Management through an Understanding of the Risks and Benefits of Early Claims Resolution,” (CMAA 2004 National Conference), p.7.

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