§15.3 Methods of Measuring Damages
| Jurisdiction | Washington |
Prior to preparing damages calculations on construction matters and presenting a measurement of those damages to an owner for payment, it is always important to refer to the contract to determine whether a specific method is required. Some contracts require damage calculations, in whole or in part, to be calculated using a specific method. Failure to meet contract requirements can be fatal to a damages claim.
For example, in Corban Industries, Inc. v. United States, 24 Cl. Ct. 284, 285 (1991), the contractor was awarded a contract for work on a Veterans Administration hospital in Tacoma, Washington. The contractor was terminated for convenience when the project was 92 percent complete. Id. When the contractor submitted its claim, it computed its damages simply by taking the total cost of the contract and multiplying it by 0.92. Id. The court denied recovery because the contract required claims to be supported by actual labor and material costs, which the contractor did not or could not provide. Id. The court's discussion of its conclusion is instructive.
Plaintiff has not accounted for the lack of records supporting its costs for materials, nor has plaintiff put forth any factual predicate that would allow the court to make a fair and reasonable approximation of the amount of termination costs that plaintiff sustained for materials. The VA admitted that it could verify approximately $84,000.00 of materials costs. Plaintiff could have sustained other materials costs and been paid for some or all of the actual total. The record only offers grist for speculation.... Plaintiff has forfeited its claim to recover for costs of materials.
Id. at 288.
There are four primary methods of measuring damages: (1) the actual cost method, (2) the total cost method, (3) the modified total cost method, and (4) the estimated cost method. In addition, parties often
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use (5) the measured mile analysis, when possible and appropriate. Each of these methods calculates damages with different levels of certainty, and they are accepted by the courts based on the level of certainty achieved. There are many subsets and variants to these primary methods.
In a perfect world, all extra costs incurred by a claimant would be tracked under a separate task code and would be easily identified and precisely measured. Karen L. Manos, Government Contract Costs and Pricing §87:26 (2d ed. 2009 & Supp. 2017) (hereinafter Manos, Government Contract Costs and Pricing). Unfortunately, such is generally not the case. Id. Even the federal government recognizes this factor: "Contractor's accounting systems are seldom designed to segregate the costs of performing changed work." Id. (citing 48 C.F.R. § 43.203(a)).
Often the quality of cost records kept by a contractor are a direct result of the size and expertise of the contractor. The complexities and intricacies of projects undertaken by large contractors, combined with the potential for costly disputes, mandate the keeping of accurate and detailed cost records. Nevertheless, the extent of the records and the complexities of a large project may itself prevent an exact damages calculation for the large contractor, and the cost of documenting all of the necessary information may be prohibitive. On the other hand, small contractors and subcontractors may be able to easily allocate and point to specific overruns, but these same contractors may not have similarly precise cost records that allow for line-item damage allocations.
When a situation does not allow for precise calculation of damages, such as damages caused by multiple affecting factors that converge to cause inseparable delays, the courts typically will not mandate that damages be proven with exact certainty. See Wunderlich Contracting Co. v. United States, 173 Ct. Cl. 180, 192-94, 351 F.2d 956 (1965). Instead, damages need only be proven with reasonable certainty, given the circumstances and the nature of the event.
(1) Actual cost method
The actual cost method of measuring damages is based on an item-by-item analysis of cost overrun. Manos, Government Contract Costs and Pricing §87.29.
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The United States Supreme Court has stated that damages intended to compensate an injured party redress the "concrete loss" suffered. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416, 123 S. Ct. 1513, 155 L. Ed. 2d 585 (2003). As such, a contractor must use known costs incurred whenever possible. See James F. Nagle et al., Washington Building Contracts and Construction Law 18-13 (1994). This practice provides the most concrete calculation of damages. This damage analysis is known as the actual cost method.
The courts prefer the actual cost method for damage analysis because this method uses itemized costs specifically attributable to a contract breach. State Highway Comm'n of Wyo. v. Brasel & Sims Constr. Co., 688 P.2d 871, 877 (Wyo. 1984). This method and its subsets are considered the most precise and most accurate. If a contractor knows that a claim on a project is imminent, or the contractor can identify the existence of a claim during a project, every effort should be undertaken to allow for documentation of damages as part of the normal record-keeping process. Admittedly, this is not possible in all situations.
When actual costs can be proven, courts generally presume that those costs are reasonable. Oliver-Finnie Co. v. United States, 150 Ct. Cl. 189, 279 F.2d 498, 504 (1960). Additionally, if only certain categories of damages can be priced using the actual cost method, it is preferable to use actual costs to calculate those damages and then use another method to calculate the remaining damages. State Highway Comm'n, 688 P.2d at 878. This practice will also increase the likelihood of recovery of the specific damages being calculated using the actual cost method. Being able to demonstrate actual costs based on a line-by-line analysis is not only more persuasive but also makes tying entitlement to such damages easier. Schwartzkopf, Calculating Construction Damages §1.03.
If detailed cost records are available, specific reported line items can be used to determine where the cost overruns occurred. However, close scrutiny is required to determine whether entitlement can also be
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proven as to the overruns. Moreover, it is important to keep the context of the event that caused the damages in mind when analyzing actual cost records to ensure thoughtful consideration is given to whether a breach or, perhaps, another factor caused the damages.
The court displayed its favor for the actual cost method in Appeal of J.A. Jones Construction Company, IBCA 3280, 94-3 BCA (CCH) ¶27,103 (Aug. 16, 1994). In that case, a change order was issued to the contractor for the deletion of over half of the designed rock bolts. The contractor proposed a credit to the government for $89,512.00, while the government sought a credit of $388,573.97. The Interior Board of Contract Appeals determined that the deletion of the materials and work was amply supported by the contractor's line-item analysis. The court held that the substitution of amounts into the actual cost records used and maintained by the contractor throughout the project substantially proved that the government was only entitled to a $89,512.00 credit. The actual cost was preferred over the government's damages calculation, which consisted of the bid price per linear foot multiplied by the linear feet of rock bolts deleted by the change order.
Although there is little case law in Washington that specifically approves or requires the actual cost method as a preferred or sole method of calculation, courts have been willing to grant relief based on reasonable or proven costs incurred at the time of breach. See, e.g., Eastlake Constr. Co. v. Hess, 102 Wn.2d 30, 68 P.2d 465 (1984); Fuller v. Rosinski, 79 Wn.2d 719, 488 P.2d 1061 (1971). But see Allen v. Anderson, 16 Wn. App. 446, 557 P.2d 24 (1976) (holding that damages for breach of warranty for a four-unit residence must be measured by the "cost of repair" rather than the difference in value).
(2) Total cost method
The simplest way of thinking of the total cost method is through the equation in the example below.
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The total cost method measures damages based on the difference between the contractor's actual incurred costs and its original bid's
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as-planned costs. Manos, Government Contract Costs and Pricing §87:27. Although the total cost method generally is disfavored, it may be accepted in the absence of a more precise damage calculation's being available. Id. The court's disfavor is based on the method's failure to account for contractor mistakes, errors...
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