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Using Cost Accounting Documents in Construction Claims and Litigation

Using Cost Accounting Documents in Construction Claims and Litigation. By William Schwartzkopf Sage Consulting Group. Goal of Most Construction Disputes:. Receive Additional Compensation OR Avoid Paying Additional Amounts. Reason For Dispute. One or More Parties Incurred Cost Overrun.

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Using Cost Accounting Documents in Construction Claims and Litigation

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  1. Using Cost Accounting Documents in Construction Claims and Litigation By William Schwartzkopf Sage Consulting Group

  2. Goal of Most Construction Disputes: • Receive Additional Compensation OR • Avoid Paying Additional Amounts

  3. Reason For Dispute • One or More Parties Incurred Cost Overrun

  4. How Does A Party Know It Has Been Damaged? • Cost Report Shows Overrun • Expended More Funds

  5. What is the Purpose of A Damage Award? • “To place the nonbreaching party in the same position it would have been absent the breach by the other party.”

  6. Preliminary Damage Analysis • Cost Accounting Records • Original Estimate • Where Are the Overruns? • When Did the Overruns Occur? • Linking Causation to Overruns

  7. Causation • What Caused the Overrun? • Who is Responsible for the Cause? • How is the Cause Linked to the Overrun? Merely Having Overruns (i.e. Actual Damages) Is Not Enough to Allow Recovery

  8. Damage Calculation Goal: To Arrive At the Most Accurate Determination of Actual Damages Suffered as a Direct Result of the Other Party’s Breach

  9. Methods of Damage Calculation • Actual Cost Method • Estimated Cost Method • Total Cost Method • Modified Total Cost Method • Quantum Meruit

  10. Actual Cost Method Formula: Actual Extra Equipment Costs Caused by Breach + Actual Extra Material Costs Caused by Breach + Actual Extra Labor Costs Caused by Breach + Overhead and Profit Total Actual Damages • Preferred Method • Analysis of Overruns and Underruns • Determine Linkages • Application to Some, but Not All, Elements of a Claim • Law or Contract May Require Use of Actual Cost Method

  11. Estimated Cost Method Formula:Estimated Extra Equipment Cost Caused by Breach + Estimated Extra Material Cost Caused by Breach + Estimated Extra Labor Cost Caused by Breach + Overhead and Profit Total Costs Recoverable • Variety of Supporting Data • Examination of Underlying Assumption • Analysis of Other Projects Performed by the Contractor

  12. Total Cost Method Formula: Total Actual Costs + Overhead and Profit - Contract AmountTotal Costs Recoverable • Generally Disfavored Method – Courts vs. Board of Contract Appeals • Four-Part Test: • Impossible or highly impractical to determine the losses with a reasonable degree of accuracy • Contractor’s bid or estimate was realistic • Contractor’s actual costs were reasonable • Contractor was not responsible for the cost overrun

  13. Modified Total Cost Method Formula: Total Actual Costs - Bid Errors - Costs caused by Contractor - Costs caused by other Non-Owner parties + Overhead and Profit - Contract Amount Total Costs Recoverable • Adjust Cost for Contractor Problems • Estimate Errors • Construction Errors • Weather and other Natural Causes • Subcontractor and Supplier Problems • Must Meet Same Four-Part Test as Total Cost

  14. Quantum Meruit • A Theory of Recovery, not a Method of Calculation • Allows Recovery of Actual Value of Goods or Services; Not their Contract Price. Actual value Not Necessarily cost • Recovery of Costs Incurred in Completing Work that Is outside the Scope of the Original Contract • Changes Can Be a basis for Quantum Meruit Recovery • Recovery of Damages Resulting from Owner’s Breach of a Contract Terminated Before Job Completion • Contractor Cannot Be in Breach and Must Have Substantially Performed

  15. Causal Link:Connecting Responsibility to Damages • Damages presented with best approximation using as much actual cost data as possible with each separate item of cost examined by the judge/arbitrator to arrive at a fair result. • The total cost method and its variations are disfavored and generally permitted only when contractor clearly proves injury and no other method is more reliable in estimating the losses. • Sufficient evidence must be presented to make a fair and reasonable approximation of damages.

  16. Types of Claims • Added Work • Changed Work • Disrupted Work • Extended Duration

  17. Added Work • Additional Units • Force Account • Estimated Cost

  18. Changed Work • Causes • Directed Changes • Defective Specifications • Differing Site Conditions • Results in: • Added Work • Deleted Work • Change in Quantity • Types of Damages • Direct Costs • Indirect Costs – e.g., Overhead • Lost Productivity • Additional Profit

  19. Disrupted Work • Causes • Excessive Changes • Late Changes • Sequencing • Weather • Access • Stop Work Orders • Results in • Lost Productivity– More Manhours • Types of Damages • Added Labor • Added Equipment Costs • Added Small Tools and Supplies • Profit and Overhead

  20. Extended DurationTypes of Extended Duration • Project Is Longer • Working Days vs Calendar Days • Fixed Completion Date • Causes • Access • Added Work • Changes • Weather • Damages • Time-Related Clauses • Escalations

  21. Types of Damage • Labor Cost Overrun • Equipment Cost Overrun • Material Cost Overrun • Subcontractor Cost Overrun • General Conditions Costs • Home Office Overhead

  22. Types of Labor Cost Damage • Direct Labor Overrun • More hours to perform more work • Discretely accounted for through time tickets • Wage Escalation (higher rate per hour) • Premium Time Costs • Loss of Productivity • More hours to perform same amount of work

  23. Factors Affecting Labor Productivity • Overtime • Disruptions • Weather • Lack of Capable Laborers • Change in Sequence • Trade Stacking • Restricted Site Access • Shift Work • Shop Drawing Review • Learning and Experience Curves • Effect of Changes on Labor Productivity

  24. Calculation of Loss of Productivity • Measured Mile Calculations • Comparison with Similar Projects • Industry Standards • Experts and Consultants • Total Cost Method • Modified Total Cost Calculations • Productivity Analysis

  25. Cost Accounting Data is KEY • Good Cost Accounting Helps Determine the Amount of Overrun and Pinpoint the Causes

  26. Cost Report Entry Cost Code Description Est. Cost Cost to Date 3300 PCC Paving $70,000 $50,000

  27. Cost Report With Independent Variable

  28. Cost Report With Unit Cost

  29. Cost Report With Unit Cost

  30. Cost Report Modified for Change Orders

  31. Cost Report Incorporating Manhours

  32. Cross Checks on Labor Cost • Quantity Overruns • Material Cost Overruns • Change in Equipment/Labor Ratio • Change in Subcontracts

  33. Cross Check on Labor Cost–Case Study • Building Inc alleged labor productivity losses resulting from excessive owner changes. The cost reports showed: Labor Budget as Adjusted for Changes Actual Overrun Concrete $125,000 $393,000 $268,000 Finish Carpentry $ 23,795 $303,348 $279,553 TOTAL $148,795 $696,348 $547,553 Material Budget as Adjusted for Changes Actual Overrun Concrete $217,527 $359,876 $142,349 Finish Carpentry $137,894 $407,863 $269,969 TOTAL $355,421 $767,739 $412,318 33

  34. Measured Mile –Exhibit 1 122,452 manhours were spent by a contractor paving two similar stretches of roadway, Road A and Road B. The owner’s changes were limited to Road B, and required a more labor-intensive method of construction. The contractor used the same labor force and equipment, and encountered the same weather conditions on both roads. Measured Mile = Road A Impacted Area = Road B Manhours 55,000 Manhours 67,452 SY Produced 170,000 SY Produced 154,322 Hours/SY 0.324 Hours/SY 0.437 Increase in Unit Labor Rate = 0.437 – 0.324 = 0.114 Quantity Affected by Changes 154,322 Manhours Increase Due to Changes = 0.114 x 154,322 = 17,524 Labor Cost Per Manhours$23.40 Total Additional Labor Cost17,524 x $23.40= $410,068.48

  35. Measured Mile –Exhibit 2 In this hypothetical, the contractor segregated the equipment costs expended on each of the two roadways that were being paved, Road A and Road B. The owner’s changes were limited to Road B, and required a more equipment method of construction. The contractor used the same labor force and types of equipment, and encountered the same weather conditions on both roads. Measured Mile = Road A Impacted Area = Road B Manhours 55,000 Manhours 67,452 SY Produced 170,000 SY Produced 154,322 Hours/SY 0.324 Hours/SY 0.437 Increase in Unit Labor Rate = 0.437 – 0.324 = 0.114 Quantity Affected by Changes 154,322 Manhours Increase Due to Changes = 0.114 x 154,322 = 17,524 Labor Cost Per Manhours$23.40 Total Additional Labor Cost17,524 x $23.40= $410,068.48

  36. Additional Equipment Cost Using Total Time on Project 36

  37. Additional Equipment Cost Using Daily Equipment Rates 37

  38. Additional Equipment Costs Using Differential Costs (Method 1) 38

  39. Additional Equipment Costs Using Differential Costs (Method 2) 39

  40. Home Office Overhead • Extended Overhead vs. Unabsorbed Overhead • Fixed Costs vs. Variable Costs • The Eichleay Formula

  41. The Eichleay Formula

  42. Variations in Quantity • Unit price contracts often allow for adjustment in the unit price if the quantity of work is increased or decreased to a certain degree: • “Substantial inequity” • Increase or decrease of more than 25% • Adjustments allowed only if the increased or decreased costs were caused by the quantity difference itself.

  43. Example of a Contract or Claim

  44. Summary of Amounts Due Contractor

  45. Exhibit 1Calculation of Remaining Contract Balance Due

  46. Exhibit 2Increase in Labor Burden Due to Extended Project Duration Because of increases in state and federal UCF, FICA, and workers’ compensation, on labor expended after November 30, 2010, the labor burden was 27.94%, an increase of 10.26%. This is calculated as follows. Total 11/30/2010 Labor Net of Burden Total Burden Cost – Burden as of 11/30/2010 17.68% Total Labor – Total 11/30/2010 Labor 46

  47. Exhibit 3Labor Escalation – Part 1 This project was delayed as shown on the Schedule Analysis. As a result, much of the labor was expended during higher wage rate periods. The original labor distribution was taken from the estimate, as shown below. Using the original distribution, the actual manhours of 122,452 are distributed using the estimated percentage distribution. This compared with the actual distribution. 2008 2009 2010 2011 2008 2009 2010 2011 18,367 73,471 30,163 0 47

  48. Exhibit 3Labor Escalation – Part 2 The labor escalation for this project is calculated as follows: 48

  49. Exhibit 4Acceleration Costs – Premium Time Summary of Costs: Premium Portion $66,566.24 Burden at 17.68% $11,768.91 Total Premium Time Cost Claim $78,335.15

  50. Exhibit 5Productivity Loss - Measured Mile – Part 1 Total Actual Manhours 122,452 Change Order Hours Added to Contractor Work Change Order No. 1 451 Change Order No. 2 1,451 Change Order No. 3 6,790 Change Order No. 4 9,417 Change Order No. 5 6,157 Change Order No. 6 6,941 Subtotal 31,206 Additional Manhours Pending Change 3,455 Additional Manhour Unit Price Adjustment 479 Total Change Order Hours (35,140) Actual Hours for Base Contract Work 87,312 Estimated Hours Base Contract Work (63,200) Unproductive Hours 24,112 Hourly Billing Rate – Original Contract $23.40 Lost Productivity Cost Claim $564,220.80 Predicted Productivity Loss-Measured Mile 25% Actual Productivity Loss 27.6%

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