§15.4 Contractor's Damages Components

• Jurisdiction: Washington

§15.4 CONTRACTOR'S DAMAGES COMPONENTS

There are many types of damages available to a contactor when an owner is in default or the contract is terminated. Some examples of these damages are set forth below.

(1) Labor overrun

Labor overrun is the quantity and cost of man-hours expended by the contractor on the performance of the contract that exceed those originally estimated in the bid. Schwartzkopf, Calculating Construction Damages §2.02.

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Labor overrun usually is a direct cost and includes the basic wages paid to trade workers and working foremen in performance of field operations, plus the labor burden (fringe benefits, such as pension plan payments, health and welfare insurance coverage, sick pay, vacation and holiday pay, shift differential, and payroll taxes for Social Security and unemployment compensation).

If precise records are available, actual hours must be included in the claim. Id. As well, the actual rates must be included. Id. at 39. The concept is to identify the employees who performed the claimed work, compute the number of hours they performed that work, determine the hourly rate paid to those employees by payroll, determine the rate for the applicable labor burden for each hour, and then multiply the number of hours times the cost per hour to arrive at a total labor overrun cost.

Schwartzkopf, Calculating Construction Damages §2.02, at 42-43, provides a sample method for calculating basic labor overruns, shown in the example below.

Example: Labor Overrun Additional Labor Hours x Applicable Wage Rate =
Direct Labor Overrun Cost;
then
Direct Labor Overrun Cost x Labor Burden Percent =
Labor Burden;
then
Direct Labor Overrun Cost+Labor Burden =
Total Labor Overrun Cost

(2) Equipment cost overrun

Equipment cost overrun is the amount that the equipment used to construct the project cost the contractor in excess of what was planned for in the bid. Id. at 78.

Calculation of costs associated with equipment rented for use on a project generally are very straightforward. The cost of rented equipment typically will be evidenced by an invoice from an outside vendor that charges a contractor a specific rate for a particular piece of equipment. Lawrence G. Rosenthal & Patrick A. McGeehin, Equipment Costs in Construction Contract Disputes, 17 Pub. Cont. L.J. 443, 459 (1987). The cost of unplanned equipment hours in that scenario will be simply the hourly rental rate times the quantity of unplanned hours.

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However, equipment costs are more complex relative to contractor-owned equipment. Actual equipment ownership and operating costs generally must be used. Id. These actual costs consist primarily of two components: (1) directly identifiable costs and (2) allocated costs. Id. at 457. Identifiable costs are those specifically attributable to an individual piece of equipment, such as personal property tax billed for a specific machine or repair parts purchased for a particular piece of equipment, whereas allocated costs are those spread across a contractor's entire fleet, such as insurance or fuel purchased in bulk and delivered to a storage tank. Id. at 457-58. When calculating actual costs for construction equipment, it may also be helpful to categorize the costs as either ownership or operating costs. Id. at 459.

Ownership costs include depreciation, property taxes, equipment insurance, and the cost of money. Id. at 461-62. The cost of money can be a difficult concept for many, as it is often viewed simply as interest, which is generally an unallowable cost under the Federal Acquisition Regulations (FAR), Title 48 C.F.R., and many state procurement codes. Id. at 462-63. However, the more appropriate view of this cost, as evidenced by amendments to federal procurement policy, is the contractor's reasonable return on its investment in the equipment. Id. at 462. The cost of money, however, is not an actual cost in the traditional sense and, therefore, will not be readily available within the contractor's books and records. Id. at 463.

Operating costs include major and minor repairs, gasoline, diesel, oil, lubrication, and miscellaneous supplies. The ability to segregate such costs will depend on the sophistication of the contractor's accounting system. Id. One common issue that arises with these types of costs relates to major repairs. The generally accepted accounting principles (GAAP) require capitalization and depreciation of major repairs, whereas most contractors expense all repairs at the time incurred. Id. at 464. Care must be taken to determine if repair costs are properly assignable to a particular project and to a certain machine or class of equipment. Id.

The owner, in some instances, may specify in the construction contract the use of a particular equipment reimbursement rate schedule or reasonable market rates in lieu of actual costs. See, for example, the Associated General Contractors (AGC) of America's Contractor's Equipment Manual and the Rental Rate Blue Book. Courts have also allowed for the use of equipment schedules or rate manuals as a guide or estimate when actual cost datais not available. Rosenthal & McGeehin, 17 Pub. Cont. L.J. at 454. Various industry guides are published that may be used in determining appropriate equipment costs. Schwartzkopf,

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Calculating Construction Damages §3.04. Commonly used industry guides include those produced by Kelley Blue Book, the AGC, and the Associated Equipment Distributors, for example.

It is worth noting that the manuals discussed above sometimes provide a uniform rate for rented or owned equipment for all contractors throughout the country, and as a result, may result in over- or under-recovery with regard to a specific contractor. As a result, equipment rates derived from schedules or manuals may need to be adjusted upward or downward as appropriate to a particular contractor.

(3) Material cost overrun

Material is "any substance specified for the use in the construction of the project and its appurtenances," such as bricks, steel, concrete, paint, and the like, that constitute the final structure. Id. §4.02 A distinction must be made between materials and supplies. Supplies are not incorporated into the final project but, instead, are simply needed to perform some element of the work involved. Id. Material cost overrun is the amount that the project materials cost in excess of what was planned for in the bid. Id.

Common causes of material cost overruns include defective specifications, owner-directed changes, and owner-caused delays. Id. §4.03. Calculating these costs typically is a simple process, because the original quantities often are identifiable from project records or project drawings, and invoices are available to show the cost of the added purchases. Id. at 107. When the costs incurred are supported by the contractor's books and records, the burden falls to the owner to prove the costs incurred were unreasonable. Appeal of Cont'l Drilling Co., ENGBCA No. 3455, 77-1 BCA (CCH) ¶12,280 (Nov. 3, 1976).

It is also important to be mindful that there are other costs associated with material claims beyond the direct cost of the materials. These additional costs may include material handling, storage, transportation, and taxes. Schwartzkopf, Calculating Construction Damages §4.04.

(4) Cost escalation factors

Escalation encompasses the costs due to delays, changes, or other actions caused by the respondent that push performance into a higher-than-anticipated cost period. Id. at 45-47, 107. The two most common areas in which escalation damages occur are labor and material. Id. When an owner-caused delay or change, for example, pushes a contractor to work into a period in which labor wage rates or material costs are elevated beyond those anticipated in the bid, a contractor is entitled

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to recover those elevated costs. U.S. Steel Corp. v. Mo. Pac. R.R.,668 F.2d 435, 441 (8th Cir. 1982); Appeal of Paccon, Inc., ASBCA No. 7890, 65-2 BCA(CCH) ¶4,996 (July 22, 1965).

Labor escalation is calculated based on man-loading schedules. Schwartzkopf, Calculating Construction Damages 45-47. When a contractor's performance is pushed beyond its anticipated date, the actual wage rate is subtracted from the anticipated wage rate to find the incremental escalation amount. Appeal of Sydney Constr. Co., ASBCA No. 21377, 77-2 BCA (CCH) ¶12,719 (Aug 11, 1977). The escalation amount is then multiplied by the number of hours worked after the wage increase to determine labor escalation costs. Id. The initial period when labor overruns occurred must be determined, and then escalation for that period must be calculated. Next, the escalation must be factored into the new wage rate to determine the labor overruns applicable for all subsequent wage rate periods. This creates a compounding effect, and the calculations must be completed carefully to avoid overstatement. These calculations may warrant the engagement of an expert.

Material escalation is calculated in the same manner, but there is no cumulative effect for multiple cost periods. The material escalation costs are calculated by subtracting the actual costs from the anticipated or bid costs. Appeal of George Hyman Constr. Co., ENGBCA No. 4541, 85-1 BCA (CCH) ¶17,847 (Jan. 10, 1985). Material escalation damages also should include additional handling, storage, and transportation costs when applicable. See John B. Tieder et al., Calculating and Proving Construction Damages,Construction Briefings, Mar. 1982.

(5) Small tools cost overrun

Events such as acceleration or extended duration may result in increased small tool costs such that the bid allowance is exceeded. Schwartzkopf, Calculating Construction Damages 91-96. Small tool costs are typically those costs associated with small items consumed during the course of a project. Id.

(6) Insurance cost...