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Damage Calculations / Analysis
The ultimate end sought by the parties to a dispute is to prevail - but to prevail in two equally important ways. First, the party must succeed in convincing the trier-of-fact (judge, jury or arbitrator) that it has established a convincing entitlement. Second, it must establish a clear connection between the entitlement and the damages sought.
Damages are of two types, Direct Damages and Consequential Damages:
- Direct Damages are those damages which are directly attributable to a specific event. For example, a contractor uncovered an unknown utility during earth moving operations. As a result the contractor had to dismantle the pipe and relay it to avoid the excavated area. The costs incurred by the contractor relocating of the pipe would be deemed Direct Damages. These would include the cost of the crew, equipment and material that might be required. Direct Damages also include extended jobsite overhead, home office overhead, engineering, storage, and related costs.
- Consequential Damages include damages that do not flow directly from the event but rather are the consequences of the event. Examples of consequential damages include interest of the contractor's capital investment and lost profits if the contractor was not able to bid additional work until the claim was resolved because of limitations imposed by the contractor's bonding company.
There are various damages calculation methods, Total Cost Method, Modified Total Cost Method, Quantum Meruit Method, Jury Verdict Method, and Discrete Cost method:
- The Total Cost Method is a simplistic approach to damage calculation. It presents the total cost of the work incurred by the claimant and then subtracts the estimated cost of the work (the claimant's estimate used to develop the claimant's bid). The net is identified as the damages. This approach assumes that the claimant's cost are reasonable, that there were no errors in the claimant's estimate, that all the responsibility for the overage was the result of the other party's actions, and that the claimant made no errors in execution tha resulted in increased cost. Under this approach no linkage is demonstrated between the impacting event(s) and the damage calculation.
- The Modified Total Cost Method improves on the Total Cost Method by adjusting the calculation to reflect any errors in the original estimate and adjusting the calculation to reflect the costs which were the responsibility of the claimant. The Modified Total Cost Method offers a more reasonable damage calculation but still does not link the impacting event(s) and the damage calculation.
- The Quantum Meruit Method is much like the Total Cost Method but is usually applied to a situation where the impacting event(s) so grossly change the project that the work is completely different that the work originally bid. This condition is sometimes referred to as a "Cardinal Change". To understand what it takes to have a cardinal change (and use a Quantum Meruit damage calculation) it may be useful to relate an example offered by a distinguished construction claims attorney during a seminar. He said if a contractor had been awarded a contract for the construction of a factory and after beginning work was issued a unilateral change order adding a railroad spur to the factory, that would be a regular change. If the same contractor had been awarded a contract to build a railroad spur and after beginning work was issued a unilateral change order adding a factory to the end of the railroad spur, that might be a cardinal change.
- The Jury Verdict Method is used when that claimant had incurred actual damages but there is no way to reasonably calculate those damages. Under this method, the determination of the amount is left to the trier-of-fact (judge, arbitrator or jury).
- The Discrete Cost Method relates the damage calculation directly to the various impacting events. One of the best ways is for the claimant to keep separate accounts for the additional costs rather than to lump the changed work's costs in with the costs of the original work. This requires the use of a fairly detailed cost accounting system employing time sheet codes for the various work items and similar coding for equipment and material costs. Other ways to identify discrete costs is to use published cost manuals adjusted for the location of the work, work-hour analysis, comparison of impacted costs versus un-impacted costs, etc.
The Discrete Cost Method is the approach most universally accepted by triers-of-fact. It generally requires more effort to prepare and often results in a lesser amount of damages, but that is more than offset by its acceptance by courts. Your Legis damages expert can assist you in preparing (or defending) a claim. Using the most appropriate technique.