ConstructionPro Week, Volume: 1 - Issue: 22 - 10/01/2012

Is the ‘Total Cost Method’ for Quantifying Construction Claims Fair?

By Bruce Jervis

The “total cost method” for quantifying construction claims has long been controversial. In situations where it is allegedly impractical to itemize increased direct costs, a contractor is allowed to total its actual costs, subtract its bid price, and impute the overrun to the project owner. The contractor need only show that its bid was reasonable, its actual costs were reasonable, and it was not at fault for the situation causing the cost increase. It is no wonder claim defendants and their representatives loathe the total cost method.

A recent federal appeals case should cause more consternation. A dredging subcontractor was allowed to price a claim against the prime contractor using the total cost method. The sub presented no independent evidence that it had been impractical to track its actual increased direct costs. Instead, the subcontractor’s technical witness, a bucket-dredging expert, told the jury it would have been impractical to itemize direct costs. The jury awarded the subcontractor more than $2.9 million. The Sixth Circuit allowed this to stand. It had been the jury’s role to evaluate the credibility of the expert witness’ testimony.

It should be noted that many courts are skeptical regarding the use of the total cost method. Some courts recognize only the “modified” total cost approach, requiring the claimant to break out any actual costs for which it may be responsible. But despite relentless criticism, the total cost method lives on.

Is this a fair method for quantifying construction claims? Shouldn’t any competent contractor be able to track and itemize direct costs? Is the total cost method simply a tool for the shoddy and the overreaching? Or are there situations where increased direct costs cannot be tracked and total costs are an equitable last resort? I welcome your comments.

COMMENTS

Total Cost Method is acceptable but should be last resort and used only if other accepted claim adjustments are found to be impractical to use.
Posted by: Frank D. Renda, P.E. - Wednesday, October 3, 2012 2:35 PM

I guess it depends if you are the Owner, the GC or a Subcontractor.

If a situation developed where the volume of multiple changes or modifications combined with other events to the point where the only practical way to price the request for equitable adjustment was the total cost method (TCM)it would be appropriate. TCM would preclude identifying which costs flowed out of which actions or modifications or changed conditions and eliminate a lot of financial machinations and legal costs. I would not want to be exposed to a TCM claim based on a single event, it should only be used as a LAST RESORT for the "Nightmare" jobs that were very poorly managed or projects that were impacted by a number of consecutive or concurrent events.
Posted by: Paul F. de Vos - Wednesday, October 3, 2012 2:58 PM

Our firm provided expert testimony in the case of Grace Industries v. New York State Department of Transportation for a 9/30/11 ruling that allowed Grace to calculate its claim damages using the Total Cost Method. Case No. 04-27013-CEC, et al, US Bankruptcy Court, Eastern District of New York.
Posted by: Gary Greenberg - Wednesday, October 3, 2012 3:47 PM

TCM is a fair method when the job goes south through no fault of the subcontractor because the subcontractor cannot predict or control the upstream causes, and the Subcontractor should not be punished for a job with multiple causes out of their control. Courts can test the validity of the bid data of the subcontractor used as the discount as a control on the validity of the TCM claim, and inefficiency often provides historical datat for a particular company.
Posted by: James P. Laurie III, Construction Attorney - Wednesday, October 3, 2012 3:51 PM

Paul F. de Vos has hit the nail on the head precisely! Just adding that using the Modified TCM shows fairness in not trying to lump the entire problem onto the Owner and recognising that he may not be liable for the entire cost overrun
Posted by: Mike Higgins - Thursday, October 4, 2012 4:03 AM

The TCM method is simply fairy dust. It is the method of last resort that has been promoted to first place because it is "easier" to look at total costs versus real damages. It is appealing to contractors because it wipes the slate clean of any and all productivity-loss and mismanagement throughout the project up that point. Most contractors have a devilishly hard time capturing and quantifying actual job costs using anything other than a total cost method so accurately capturing separate costs for claims or changes is beyond the ability most contractors and their subs. So what is the alternative? They know they have been damaged but by whom and how badly? TCM is their only chance at quantification. As a former contractor I "get it" when it comes to TCM but as an AAA arbitrator of 28 years I have seen how badly TCM is used and mis-used. And the so-called "experts" that are trotted in to hearings to swear to the costs are usually just there for obfuscation. Shame on the courts and arbitrators for not seeing through this popular scam.
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