EXTRA COST ANALYSIS – THE TOTAL COST METHOD

It is frequently easier for a contractor to prove entitlement to a claim than it is to quantify the damages. And without proof of damages, the claim is worthless.

Ideally, a contractor should have itemized records of increased costs and be able to link those costs, through job site journals and other contemporaneous documents, to the occurrence complained of. But that is frequently not the case. For a variety of reasons, a contractor may lack itemized cost records and may be forced to resort to the “total cost” method of quantifying cost increases.

The total cost method is very simple. The contractor compares its pre-bid estimate for the cost of an item of work with the actual cost of performing that item of work and attributes the overrun to some act, omission or occurrence which was the responsibility of the project owner. This could include a delay, a differing site condition or a constructive change.

The simplicity of the total cost method is not a virtue, as it runs afoul of some of the basic principles of proof of damages. Damages need not be proved with mathematical certainty, but they must be established with reasonable specificity. Causation must be established as well. A loss is not recoverable unless it was caused by a legally culpable act or omission. The total cost method is suspect in both regards and is therefore viewed with skepticism by the courts and administrative boards. But the total cost method is allowed under limited circumstances.

The total cost method may be used when: (1) actual losses are impracticable to prove; (2) the contractor’s pre-bid cost estimate was reasonable; (3) the contractor’s actual costs of performance were reasonable; and (4) the contractor was not responsible for any of the added costs. Servidone Construction Corp. v. United States, 931 F.2d 860 (Fed. Cir. 1991); CCM September 1991, p. 3.

This article reviews cases in which the use of the total cost method was, and was not, allowed. In the cases where the method was allowed, it was usually modified to address underlying concerns with the adequacy of the proof of damages. In the cases where the method was disallowed, the contractor usually failed to establish one or more of the criteria stated above.

TOTAL COST METHOD ALLOWED

The appropriate use of the total cost method was illustrated in the case of Neal and Company, Inc. v. United States, 945 F.2d 385 (Fed.Cir. 1991); CCM January 1992, p. 6. A defective government design caused the steel linings of fuel storage tanks to bond to precast concrete panels, causing them to bow. In order to avoid the delay of redesigning and refabricating the panels, the government directed the contractor to measure and match the bowed panels. This necessitated a specific sequence of work which increased the contractor’s labor costs. The contractor was allowed to use the total cost method of measuring this increase because it would have been impracticable to maintain records which segregated the additional labor costs. The Court of Appeals said the record-keeping burden on the contractor would have been unreasonable, particularly in light of the fact the problem was caused by the government’s defective specifications.

A modification of the true total cost method frequently makes the contractor’s damage computation more persuasive. In the Servidone Construction case, cited above, the plastic-like properties of the soils constituted a differing site condition. But the contractor’s original excavation estimate had been unreasonably low for the conditions it had anticipated. That estimate was therefore adjusted upward before it was comp;µ-ed with actual performance costs to determine the contractor’s damages.

The Court of Appeals stated: “A trial court must use the total cost method with caution and as a last resort. Under this method, bidding inaccuracies can unjustifiably reduce the contractors estimated costs….The Claims court modified the total cost method to account for Servidone’s bid inaccuracies. The Claims Court took extensive testimony to determine a reasonable bid amount. This court discerns no clear error in the trial court’s substitution of a reasonable amount for Servidone’s bid under the total cost method.”

To the extent the estimated and actual costs can be isolated to the discrete portion of the project which was affected, the total cost method becomes more persuasive. For instance, the removal of debris in one section of an existing 2000-ft. flood control tunnel increased the contractor’s labor costs. The contractor was allowed to recover using the total cost method to the extent it could segregate actual labor costs with regard to the affected portion of the tunnel and the time period when that work was performed. Appeal of Akeon,Inc.·, ENG BCA No. 5593 (August 17, 1990); CCM November1990, p. 4;

On federal claims, the allowability of the total cost method also arises in the context of claim certification. Under the Contract Disputes Act, a contractor must certify that a claim is “accurate.” In one case, it was ruled that a delay claim computed by the total cost method was sufficiently accurate to be certified. But a dissenting opinion argued that any method which lacked itemized documentation and failed to allocate causation was inherently inaccurate.  of Regan/Nager Construction Co., PSBCA No. 1070 (December 13, 1984); CCM February 1985, p. 5.

THE TOTAL COST METHOD DISALLOWED

As stated earlier, the refusal to allow the use of the total cost method usually results from the contractor’s failure to satisfy one or more of the four prerequisites. A contractor will not be allowed to use the total cost method if it would have been practicable to itemize and document its increased costs. Appeal of Goodwin Contractors, Inc., AGBCA No. 89-1_48-1 (March 27, 1992); CCM June 1992, p. 4.Fortunately for the contractor in the Goodwin case, it was possible to compare the actual labor and equipment hours in affected areas of the project with the actual hours in unaffected areas, thereby avoiding the need to use the total cost method.

If there is nothing to support the accuracy of the contractor’s original pre-bid estimate, the contractor will not be allowed to use the total cost method. Appeal of Western Roads, Inc., AGBCA No. 86-156-1 (January 22, 1988); CCM May 1988, p. 5.

The failure to segregate or allocate causation can also be a problem. When alleged inaccuracies in the contract drawings resulted in extra dredging, the contractor was denied use of the total cost method because the contractor failed to show that the cost overrun resulted solely from the inaccuracies. It appeared that the contractor’s own inefficiencies may have contributed to the problem. “We can find no valid purpose in Appellant’s use of the total cost method of computing and “proving” his costs as was done here. Rather than enabling anyone to make an informed investigation of the books and records which do exist, it appears to serve the purpose of creating an enlarged or increased total claim.” Appeal of Griffin and Dickson, AGBCA No. 74-104-4 (December 4, 1985); CCM February 1986, p. 7.

There is a final issue relating to claims administration which is worth noting. In one case, a contractor brought a total cost claim for a constructive change against the North Dakota Department of Transportation. The claim was dismissed with prejudice. The contractor then brought a smaller claim for a well documented portion of its increased costs. The North Dakota Supreme Court ruled that the claim was barred because it was part of the earlier claim which had already been subject to a final disposition. Byron’s Construction Co. v. North Dakota Department of Transportation, 463 N.W.2d 660 (N.D. 1990); CCM April 1991, p. 6.

EXTRA COST ANALYSIS – CONCLUSION

The use of the total cost method of quantifying a claim should be a last resort for contractors. It is preferable to itemize and document increased costs and establish that they were caused by a specific occurrence.

If the total cost method must be used, it is advisable to modify it in order to compensate for unreasonably low pre-bid estimates or the contractor’s own contribution to the cost overrun. And contractors should never submit a total cost claim with the assumption that if the claim is denied, they can come back and document smaller, individual portions of the claim.