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 2

Reason For Dispute One or More Parties Incurred Cost Overrun 3

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

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.” 5

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

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 7

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

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

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 10

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 11

Total Cost Method Formula: Total Actual Costs + Overhead and Profit - Contract Amount Total 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 12

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 13

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 14

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. 15

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

Added Work Additional Units Force Account Estimated Cost 17

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 18

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 19

Extended Duration Types 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 20

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

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 22

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 23

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 24

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

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

Cost Report With Independent Variable Cost CodeDescriptionCostUnits 3300PCC PavingEst.$70,00035,000 To Date$50,00020,000 27

Cost Report With Unit Cost Cost CodeDescriptionCostUnitsUnit Cost 3300PCC PavingEst.$70,00035,000$2.00 To Date$50,00020,000$

Cost Report With Unit Cost Cost CodeDescriptionCostUnitsUnit Cost 3301PCC PavingEst.$70,00035,000$2.00 To Date$90,00055,000$

Cost Report Modified for Change Orders Cost CodeDescriptionCostUnitsUnit Cost 3302PCC PavingOriginal$70,00035,000$2.00 Current$110,00070,000$1.57 To Date$90,00055,000$

Cost Report Incorporating Manhours Cost Code DescriptionCostManhoursUnitsManhours / Unit Unit Costs 3303PCC PavingEst.$70,0004,00035, $2.00 Current$110,0008,00070, $1.57 To Date$90,0005,50055, $

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

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 ActualOverrun 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 ActualOverrun Concrete$217,527$359,876$142,349 Finish Carpentry$137,894$407,863$269,969 TOTAL$355,421$767,739$412,318 33

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 Hours/SY Increase in Unit Labor Rate = – = Quantity Affected by Changes 154,322 Manhours Increase Due to Changes = x 154,322 = 17,524 Labor Cost Per Manhours $23.40 Total Additional Labor Cost 17,524 x $23.40 = $410,

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 Hours/SY Increase in Unit Labor Rate = – = Quantity Affected by Changes 154,322 Manhours Increase Due to Changes = x 154,322 = 17,524 Labor Cost Per Manhours $23.40 Total Additional Labor Cost 17,524 x $23.40 = $410,068.48

Additional Equipment Cost Using Total Time on Project Equipment Monthly Ownership Rate Months On ProjectTotal Ownership Cost CAT 2258, ,000 CAT 63318, ,200 CAT 95012, ,600 Dump truck5, ,600 Total Ownership CostWorkdays On ProjectTotal Per Workday (Total ¸ Days) 88, , , , Cost Per WorkdayDelay Days Extended Equipment Ownership Costs (Cost × Days) $ , $ , $ , $ , TOTAL$40,

Additional Equipment Cost Using Daily Equipment Rates Equipment Idle/Unproductive Hours Hourly Standby Ownership Rate Extended Equipment Ownership Cost (Hour × Rate) CAT 22585$43.00$ 3,655 CAT $88.00$12,408 CAT $60.00$11,760 Dump truck208$27.00$ 5,616 TOTAL$33,439 37

Additional Equipment Costs Using Differential Costs (Method 1) EquipmentMonths On ProjectUnits Of Work Equipment Costs Per Unit Ownership Costs Recovered (Months × Units × Cost/Unit) CAT ,0002.5$ 75,000 CAT 63384,5003.5$126,000 CAT ,0001.5$126,000 Dump truck127, $ 63,000 Total Ownership CostOwnership Costs RecoveredExtended Equipment Cost $ 88,000$ 75,000$13,000 $147,200$126,000$21,200 $147,600$126,000$21,600 $ 63,600$ 63,000$ 600 TOTAL$56,400 38

Additional Equipment Costs Using Differential Costs (Method 2) Equipment Hourly Ownership Rate Productive Hours Ownership Costs Recovered CAT ,651$ 82,550 CAT ,243$130,515 CAT ,884$131,880 Dump truck301,872$ 56,160 EquipmentActual Costs Incurred Ownership Costs Recovered Ownership Costs Not Recovered CAT 225$ 88,000$ 82,550$ 5,450 CAT 633$147,200$130,515$16,685 CAT 950$147,600$131,880$15,720 Dump truck$ 63,600$ 56,160$ 7,440 TOTAL$45,295 39

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

The Eichleay Formula 41

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. 42

Example of a Contract or Claim 43

Summary of Amounts Due Contractor 44

Exhibit 1 Calculation of Remaining Contract Balance Due 45

Exhibit 2 Increase 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 Labor – Total 11/30/2010 Labor Total Burden Cost – Burden as of 11/30/2010

Exhibit 3 Labor Escalation – Part 1 Using the original distribution, the actual manhours of 122,452 are distributed using the estimated percentage distribution. This compared with the actual distribution. 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 ,367 73,471 30,

Exhibit 3 Labor Escalation – Part 2 The labor escalation for this project is calculated as follows: Anticipated hours based on original schedule 18,36773,47130,6140 Labor hours actually expended 010,36068,7360 Hours escalated from prior period 8,00715,09566,00033,350 Total hours to be escalated to next period rate 10,36068,73633,350 Period differential Escalated wages 5,18051,52233,350 Total Escalated Wages $ 90,052 Labor Burden (at Original Rate) 17.68% $ 15,926 Total Wage Escalation Claim $ 105,978

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

Exhibit 5 Productivity Loss - Measured Mile – Part 1 Total Actual Manhours122,452 Change Order Hours Added to Contractor Work Change Order No Change Order No. 21,451 Change Order No. 36,790 Change Order No. 49,417 Change Order No. 56,157 Change Order No. 66,941 Subtotal 31,206 Additional Manhours Pending Change3,455 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, Predicted Productivity Loss-Measured Mile 25% Actual Productivity Loss27.6% 50

Exhibit 5 Productivity Loss - Measured Mile – Part 2 Measured Mile Determination Unit Productivity - Unit Productivity x Number of Units = Impact (Impacted Period) (Unimpacted period) (During Impacted Period) Productivity = cost in $ or manhours ÷ units produced Productivity of concrete work in Impacted Area A was $2.50/unit Productivity of concrete work in Unimpacted Area B was $2.00/unit Measured mile predicts 25% loss 51

Small Tools Costs Small Tools Costs are a function of labor. Therefore, if a contractor is entitled to compensation for extra labor, it is also entitled to compensation for extra small tools: 52

Small Tools Costs Small tools rate: Actual Small Tools Cost Actual Productive Labor = $99,106 $1,484,825 =6.67% Additional labor due to lost productivity totaled $591,205 Impact to small tools: $591,205 x = $39,433 53

Exhibit 6 Calculation of Extended Overhead Costs Using Eichleay Method

Exhibit 6 Calculation of Extended Overhead Costs Using Eichleay Method 55