If a contractor is unable to perform its work as efficiently as expected due to the actions of other project participants, the contractor may incur loss of productivity damages. There are many ways to price those types of damages. Some methods are better than others, but the least accepted method is the total cost method.
Under the total cost method, the contractor shows the amount it cost to complete its work and subtracts the contract amount. For example, if the contract amount was $10 million, but it cost the contractor $15 million to complete its work, the contractor might claim that it is owed $5 million.
Courts frequently reject the use of the total cost method because it does not take into account damages that are the result of the contractor’s unrealistic bid or the contractor’s own improper performance of its work.
A federal court recently considered whether a subcontractor with a loss of productivity claim would be allowed to present its claim to the jury using a modified total cost claim. The modified total cost method takes into account unreasonable contractor costs or other costs that were caused by the contractor’s own errors or omissions.
In JH Kelly, LLC v. AECOM Technical Services, Inc., a subcontractor sued a prime contractor for breach of contract. The subcontractor argued that the project had been changed significantly from what it had originally bid and as a result, the changes created more work and more difficult working conditions.
The prime contractor filed a motion for partial summary judgment as to, among other things, the subcontractor’s loss of productivity damages, which were based on a modified total cost method of calculating those damages. The prime contractor argued that the subcontractor could not use that method for quantifying its damages because the subcontractor could not sastisfy the four-part test for using the total cost method.
The court noted that under California law, the party seeking damages through the use of the total cost method must show that:
(1) it would be impractical to prove its actual losses directly; (2) its bid was reasonable; (3) its actual costs were reasonable; and (4) it was not responsible for the added costs.
The court also stated that “[i]f some of the contractor’s costs were unreasonable or caused by its own errors or omissions, then those costs are subtracted from the damages to arrive at a ‘modified total cost.’”
The prime contractor contended that the subcontractor could not satisfy the first element–that is, the subcontractor could not show that it would be impractical to prove its actual losses from the prime contractor’s alleged breach.
The subcontractor presented testimony from its executive vice president/chief operating officer and one of its senior project managers. Those individuals collectively testified, in essence, that the subcontractor experienced “multiple, overlapping impacts” that were attributable to the prime contractor, including “design changes, delayed permitting, delayed procurement, acceleration, fatigue from working excessive overtime, and winter work conditions.” And as such, the subcontractor’s employees further testified that the subcontractor could not individually track the cost of each of those impacts.
Ultimately, based on the above testimony, the court denied the prime contractor’s summary-judgment motion because there was a genuine issue of material fact as to “whether the multiple, overlapping delays and disruption [the subcontractor] experienced (1) were caused by [the prime contractor] and (2) made it impractical or impossible for [the subcontractor] to track its productivity losses directly.”
The court concluded that the above issue would have to be resolved at trial. It appears that the case was set for a jury trial, so it would be up to the jury to determine whether it was impractical for the subcontractor to prove its actual losses directly. Thus, the subcontractor would be allowed to assert its modified total cost claim at trial.
Bottom Line: This is an uncommon example of a contractor being allowed to use the modified total cost method. It’s anyone’s guess as to whether the jury will agree that it was impractical to prove its losses directly. But in this case, the subcontractor’s claim survived to live another day. Regardless, contractors and subcontractors should not expect to be allowed to use total cost claims and if at all possible, contractors and subcontractors should try and track their increased costs individually by impact in real time.