CHALLENGES USING THE TOTAL COST OR MODIFIED TOTAL COST METHODS TO PROVE DELAY / LOST PRODUCTIVITY DAMAGES

imagesSubcontractor delay claims are oftentimes in the form of lost productivity / inefficiency claims.  These claims are premised in large part on additional, unanticipated field labor / manpower or equipment usage that was incurred due to an event that impacted the subcontractor’s performance. 

 

One way a subcontractor proves these damages is through a total cost or modified total cost method comparing its actual costs to its bid, with a portion of the cost overrun forming the subcontractor’s damages. This methodology, however, is not always a favored methodology because it is not the most reliable way to prove cost overruns.  Courts typically prefer parties to itemize the direct costs incurred by an impact, but this is not always practical on a complex construction project.

 

The opinion in Hill York Service Corp. v. Critchfield Mechanical, Inc., 2015 WL 410009 (S.D.Fla. 2015) illustrates the challenges in proving lost productivity / inefficiency with the total cost or modified total cost methodology.  In this case, a mechanical subcontractor subcontracted a portion of its scope of mechanical work to another subcontractor (the “Sub-subcontractor”).   The Sub-subcontractor sued the mechanical subcontractor for delays causing it to incur, among other damages, additional, unanticipated manpower. The mechanical subcontractor moved for a summary judgment to preclude the Sub-subcontractor from using the total cost or modified total cost method to prove its delay / inefficiency damages.

 

The opinion provides a good discussion on the total cost and modified total cost methodology:

 

The modified total cost approach is a variation of the total cost approach. Under the total cost approach,  the original bid cost is subtracted from the actual cost of the entire project. Essentially, the difference between the two amounts, after various modifications and adjustments, is the amount of damages incurred as a result of the owner or construction manager’s breach. The modified total cost approach allows for the adjustment of the amount calculated under the total cost approach to compensate for bid errors, specific costs arising from the subcontractor’s actions, and specific costs arising from actions of parties other than the party against whom damages are sought.

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A jury may consider the total-cost approach when [1] the nature of the excess costs is such that there is no other practicable means of measuring damages, [2] the original bid was realistic, [3] the actual costs were reasonable, and [4] the plaintiff is not responsible for any of the additional expense. The modified-total-cost approach imposes the same requirements, except that it subtracts any identifiable costs for which the plaintiff contractor is responsible. Thus, to establish the fourth element above, the plaintiff must show that it is not responsible for any of the additional expenses, or has otherwise reasonably accounted for that portion of the total costs for which it is responsible.

 

Hill York Service Corp., supra, at *4 (internal quotations and citation omitted).

 

Here, the Sub-subcontractor wanted to use the modified total cost methodology to capture is additional manpower but failed to account for additional manpower and expenses it was responsible for (the fourth factor in establishing the reliability of this methodology).  The mechanical subcontractor was able to establish that there were items caused by the Sub-subcontractor that contributed to the delay and would have increased the Sub-subcontrator’s costs, but were never quantified and subcontracted from the Sub-subcontractor’s damages.  For this reason, the trial court granted the mechanical contractor’s motion for summary judgment preventing the Sub-subcontractor from proving its damages based on this methodology.

 

If you experienced cost overruns associated with delaying events, it is important to discuss with a lawyer and, depending on the quantum of the damages, a construction consultant in order to best calculate, present, and prove your damages.   Typically, you will want a construction consultant to serve as an expert witness to assist in proving these damages.  Lost productivity / inefficiency claims are challenging damages to prove based on the reliability factors discussed in the case. But, this methodology is used in many instances because it is not always practical to track the direct costs incurred for each event that impacted performance.  Before exploring the total cost / modified total cost methodology, a different methodology known as the measured mile approach should be explored.  Under this approach, the party compares its labor production for a scope of work that was not impacted with its labor production for that scope when it was impacted, with the delta forming the party’s inefficient manpower.  Basically, the objective is to compare productive periods of work (which forms the baseline or measured mile) with impacted, unproductive periods of work to determine the cost overrun for the delaying event.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.