February 24, 2017

Total Costs Claims: How the Least Preferred Became Preferred

Brendan Carter

A group of lawyers and construction personnel are huddled around a conference room table reviewing a subcontractor’s claim for a project gone bad. A discussion ensues dissecting the claim’s components, and at some point, someone comments, “Oh, so this is just a total cost claim.”  Calm washes over the room as everyone relaxes with the knowledge that the subcontractor has selected the courts’ “least preferred” method of recovery.  The total cost methodology may not be a preferred means of recovery, but that does not mean that it is always fully discounted by the courts.  The least preferred can become preferred to individual courts when a thoughtful and careful presentation of contemporaneous facts and site conditions led to a claim submission.

The total cost method is a simple means of presenting damages on a construction project because the calculation is the difference between the actual costs incurred (plus overhead and profit) and the bid amount.  Contractors use the method because of the ease of damage formulation and straightforward presentation of ‘this is what I bid, this is what I spent.’  Because of this, “the total cost method often is used for impact or disruption claims when the segregation of costs may be more difficult.” That simplicity is why courts are remiss to accept it as a means of recovery.

Four Part Test Must Be Met

The Federal Courts have established a high bar for recovery with a four part test that must be met for a successful use of the total cost method.  The court in Servidone Constr. Corp v. United States presented the test as follows:

  1. The nature of the particular losses makes it impossible or highly impractical to determine them with a reasonable degree of accuracy.
  2. The contractor’s bid or estimate was realistic.
  3. The contractor’s actual costs were reasonable.
  4. The contractor was not responsible for the cost overrun.

The first part of the test is why the total cost methodology is most often used for disruption claims.  Due to the nature of a disruption claim, one change order or work sequence generally cannot be identified as the cause of a claim; it is the totality of project conditions that effect overall production.  The proof necessary for the second part can be difficult to prove and will generally require that a claimant’s base bid be compared against other bids for quantity comparison purposes or against existing industry cost data.  The third requirement of reasonable actual costs can more easily be demonstrated through reliable contemporaneous documentation and record keeping per industry accepted accounting standards.  “Ironically [though], the more detailed and well documented the claimant’s costs are, the more vulnerable the claimant is to an argument that it can use another method for calculating damages and, therefore, fails to satisfy the first requirement for use of the total cost method.”  Finally, and probably the most difficult of the requirements, is the claimant was not responsible for any cost overruns.  If it can be proved that the claimant was responsible for costs within the total cost claim, the legitimacy of the entire claim might be called into question.

As a means to illustrate how one jurisdiction took differing views on the four part test, the Massachusetts’ cases of Certified Power Systems, Inc. v. Dominion Energy Brayton Point et al, and Central Ceilings, Inc. v. Suffolk Construction Company, Inc. et al  can be examined.  Certified was a project at a power station in Somerset, Massachusetts where Certified Power Systems (CPS) was subcontracted to perform piping installations for an emission scrubber project. CPS submitted a total cost claim for damages for lost productivity, additional supervision, and extended general conditions due to excessive change orders, a faulty design requiring over 200 RFIs, winter conditions for re-sequenced temperature sensitive work (which resulted in defective installations), misfabricated owner furnished materials and excessive mandatory overtime.

Contractor Fails to Meet Burden of Proof that Discreet Project

Cost-Based Methodology is Impracticable

CPS claimed that as the productivity issues compiled, it was not practical to track actual costs related to specific issues such as RFIs and winter conditions.  The Court was not persuaded by that proposition when it agreed with the defendant’s expert witness that CPS’s lack of record keeping would be the reason for meeting the first part of the test, but it was self-caused, and not as a result of any action of the defendant.   Even though CPS was awarded damages based upon other pieces of its claim, the total cost portion was denied with the Court stating, “CPS has not met its burden of proof that a discreet project cost-based methodology is impracticable.” As stated above, a lack of project records can sometimes be beneficial to a total cost claim, but CPS’s dearth was self-caused and probably was not a benefit and may have been the basis of denial.  Next is a case where the court found detailed record keeping to be beneficial to a total cost claim.

Central is another Massachusetts case where a subcontractor presented a total cost claim but unlike Certified, the Court found Central Ceilings, Inc.’s (CCI) claim met the four part test.  Central was subcontracted by the defendant for interior and exterior metal framing with drywall and finishes for a new dormitory at Westfield State College.  Like Certified, CCI claimed that it was the totality of multiple defendant driven issues that resulted in its loss of productivity.  Also like Certified, winter weather conditions and design issues contributed to the claimed loss of productivity. When CCI was performing its temperature sensitive interior work activities, parts of the building were open to the winter elements, which resulted in rework and damage resulting from burst pipes.  CCI also generated in excess of 200 RFIs for the project. The Court found that the defendant breached its contract with CCI through its failure to coordinate steel erection, failure to coordinate furnished materials, failure to provide a climate controlled environment and design errors resulting in rework.

Court Found Contractor Satisfied Requirements through Detailed Recordkeeping and Expert Witness Analysis

The Court started its analysis by reviewing the Defendant’s argument that a measured mile analysis is the proper approach for productivity claims.  The Court concluded that the Defendant’s own “misconduct throughout the Project impacted all of CCI’s performance, thereby precluding [CCI’s expert witness] from identifying a baseline and, consequently, from applying the measure mile method.” This satisfied the test’s first requirement.   The Court then found that CCI satisfied the remaining requirements through detailed recordkeeping it provided and the analysis of its expert witness.  The Court specifically referred to cost transaction reports, certified payrolls, and labor cost reports as the basis for establishing its estimate was realistic, the actual costs presented were reasonable, and that CCI was not responsible for its cost overruns.  The Court then found for CCI’s total cost claim full amount.

The similar project conditions experienced by two subcontractors in Certified and Central yielded opposite results when total cost claims were submitted and analyzed by the same court. The approach in analyzing the total cost claim in Certified held that its lack of documentation was of its own doing, thus denying it the ability to discretely identify activities for a more preferred methodology, and in turn not allowing it to meet the first requirement of the test. The Court found in Central that its detailed record keeping was of great benefit to satisfy all four requirements of the test.  These results might be somewhat counter intuitive, but they show when similar facts are presented how difficult it can be to meet all requirements of the ‘least preferred’ methodology, but it can be accomplished.

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Brendan Carter

Navigant Consulting, Inc., Boston, MA, Division 1 (Litigation and Dispute Resolution)