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 Code
3300
Description
PCC Paving
Est. Cost
$70,000
Cost to Date
$50,000
26
Cost Report With Independent Variable
Cost Code
Description
3300
PCC Paving
Cost
Units
Est.
$70,000
35,000
To Date
$50,000
20,000
27
Cost Report With Unit Cost
Cost Code
Description
3300
PCC Paving
Cost
Units
Unit Cost
Est.
$70,000
35,000
$2.00
To Date
$50,000
20,000
$2.50
28
Cost Report With Unit Cost
Cost Code
Description
3301
PCC Paving
Cost
Units
Unit Cost
Est.
$70,000
35,000
$2.00
To Date
$90,000
55,000
$1.64
29
Cost Report Modified for Change Orders
Cost Code
Description
3302
PCC Paving
Cost
Units
Unit Cost
Original
$70,000
35,000
$2.00
Current
$110,000
70,000
$1.57
To Date
$90,000
55,000
$1.64
30
Cost Report Incorporating Manhours
Cost Description
Code
3303 PCC Paving
Cost
Manhours
Units
Manhours
/ Unit
Unit
Costs
$70,000
4,000
35,000
.1143
$2.00
Current $110,000 8,000
70,000
.1143
$1.57
To Date $90,000
55,000
0.10
$1.64
Est.
5,500
31
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:
Concrete
Finish Carpentry
TOTAL
Labor Budget as
Adjusted for Changes
$125,000
$ 23,795
$148,795
Actual
$393,000
$303,348
$696,348
Overrun
$268,000
$279,553
$547,553
Concrete
Finish Carpentry
TOTAL
Material Budget as
Adjusted for Changes
$217,527
$137,894
$355,421
Actual
$359,876
$407,863
$767,739
Overrun
$142,349
$269,969
$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 laborintensive 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
Manhours
55,000
SY Produced
170,000
Hours/SY
0.324
Increase in Unit Labor Rate =
Quantity Affected by Changes
Impacted Area = Road B
Manhours
67,452
SY Produced
154,322
Hours/SY
0.437
0.437 – 0.324 = 0.114
154,322
Manhours Increase Due to Changes =
0.114 x 154,322 = 17,524
Labor Cost Per Manhours
$23.40
Total Additional Labor Cost
17,524 x $23.40 = $410,068.48
34
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
Manhours
55,000
SY Produced
170,000
Hours/SY
0.324
Increase in Unit Labor Rate =
Quantity Affected by Changes
Impacted Area = Road B
Manhours
67,452
SY Produced
154,322
Hours/SY
0.437
0.437 – 0.324 = 0.114
154,322
Manhours Increase Due to Changes =
0.114 x 154,322 = 17,524
Labor Cost Per Manhours
$23.40
Total Additional Labor Cost
17,524 x $23.40 = $410,068.48
35
Additional Equipment Cost Using Total
Time on Project
Equipment
Monthly Ownership
Rate
Months On Project
Total Ownership Cost
CAT 225
8,800
10
88,000
CAT 633
18,400
8
147,200
CAT 950
12,300
12
147,600
Dump truck
5,300
12
63,600
Total Ownership Cost
Workdays On Project
Total Per Workday (Total ¸ Days)
88,000
217
405.53
147,200
173
850.87
147,600
260
567.69
63,600
260
244.62
Cost Per Workday
Delay Days
Extended Equipment Ownership Costs
(Cost × Days)
$405.53
11
4,460.83
$850.87
18
15,315.61
$567.69
26
14,760.00
$244.62
26
6,360.00
TOTAL
$40,896.44
36
Additional Equipment Cost Using Daily
Equipment Rates
Idle/Unproductive
Hours
Hourly Standby
Ownership Rate
Extended
Equipment
Ownership Cost
(Hour × Rate)
CAT 225
85
$43.00
$ 3,655
CAT 633
141
$88.00
$12,408
CAT 950
196
$60.00
$11,760
Dump truck
208
$27.00
$ 5,616
Equipment
TOTAL
$33,439
37
Additional Equipment Costs Using Differential
Costs (Method 1)
Equipment
Months On Project
Units Of Work
Equipment Costs
Per Unit
CAT 225
CAT 633
CAT 950
Dump truck
10
8
12
12
3,000
4,500
7,000
7,000
2.5
3.5
1.5
0.75
Total Ownership Cost
Ownership Costs
Recovered
(Months × Units ×
Cost/Unit)
$ 75,000
$126,000
$126,000
$ 63,000
Ownership Costs Recovered
Extended 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 225
CAT 633
CAT 950
Dump truck
50
105
70
30
1,651
1,243
1,884
1,872
$ 82,550
$130,515
$131,880
$ 56,160
Equipment
Actual Costs Incurred
Ownership Costs
Recovered
Ownership Costs Not
Recovered
CAT 225
CAT 633
CAT 950
Dump truck
TOTAL
$ 88,000
$147,200
$147,600
$ 63,600
$ 82,550
$130,515
$131,880
$ 56,160
$ 5,450
$16,685
$15,720
$ 7,440
$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
Total 11/30/2010 Labor Net of Burden
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 Burden Cost – Burden as of 11/30/2010
17.68%
Total Labor – Total 11/30/2010 Labor
46
Exhibit 3
Labor 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.
2008
2009
2010
2011
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
18,367
73,471
30,163
2011
0
47
Exhibit 3
Labor Escalation – Part 2
The labor escalation for this project is calculated as follows:
Anticipated hours
based on original
schedule
2008
2009
2010
2011
18,367
73,471
30,614
0
0
10,360
68,736
0
8,007
15,095
66,000
33,350
10,360
68,736
33,350
0.50
0.75
1.00
5,180
51,522
33,350
Labor hours
actually expended
Hours escalated
from prior period
Total hours to be
escalated to next
period rate
Period differential
Escalated wages
Total Escalated Wages
Labor Burden (at Original Rate) 17.68%
$
$
Total Wage Escalation Claim
$ 105,978
90,052
15,926
48
Exhibit 4
Acceleration Costs – Premium Time
Summary of Costs:
Premium Portion
Burden at 17.68%
$66,566.24
$11,768.91
Total Premium Time
Cost Claim
$78,335.15
49
Exhibit 5
Productivity Loss - Measured Mile – Part 1
Total Actual Manhours
Change Order Hours Added to Contractor Work
Change Order No. 1
Change Order No. 2
Change Order No. 3
Change Order No. 4
Change Order No. 5
Change Order No. 6
Subtotal
Additional Manhours Pending Change
Additional Manhour Unit Price Adjustment
Total Change Order Hours
Actual Hours for Base Contract Work
Estimated Hours Base Contract Work
Unproductive Hours
Hourly Billing Rate – Original Contract
Lost Productivity Cost Claim
Predicted Productivity Loss-Measured Mile
Actual Productivity Loss
122,452
451
1,451
6,790
9,417
6,157
6,941
31,206
3,455
479
(35,140)
87,312
(63,200)
24,112
$23.40
$564,220.80
25%
27.6%
50
Exhibit 5
Productivity Loss - Measured Mile – Part 2
Measured Mile Determination
Unit Productivity (Impacted Period)
Unit Productivity
(Unimpacted period)
x
Number of Units
= Impact
(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 0.067 = $39,433
53
Exhibit 6
Calculation of Extended Overhead Costs Using Eichleay Method
2009
2010
2011
2009
2010
2011
54
Exhibit 6
Calculation of Extended Overhead Costs Using Eichleay Method
55