At Bradley, we regularly assist clients entangled in disputes over lost productivity within construction projects.
Whether we are defending against or advocating for such claims, it’s important to understand the complexities involved.
Lost productivity claims arise when unforeseen circumstances disrupt a project’s efficiency, leading to higher costs.
These circumstances can range from unexpected site conditions and ambiguous directives to wider crises, such as a global pandemic.
In essence, these claims seek to transfer the financial burden of increased costs from the affected party to the party held responsible according to the contractual agreements.
Understanding the Modified Total Cost Method
Identifying the cause of lost productivity often presents a clearer picture than determining its financial impact, which can be quite intricate.
This complexity frequently necessitates insights from expert witnesses.
A recent case in a federal court in Montana, Exxon Mobil Corporation v. AECOM Energy, underscored the critical nature of expert testimony regarding the quantification of lost productivity damages.
The Role of Expert Testimony
The litigation stemmed from a contractor involved in turnaround operations at an oil refinery in Billings, Montana.
What was initially planned to be a seven-week turnaround stretched into 17 weeks, prompting both sides to seek compensation for their increased costs.
The contractor claims $33 million in lost productivity costs, attributing these figures to inadequate planning by the owner and the unforeseen deterioration of essential refinery equipment.
To bolster their case, the contractor brought in two expert witnesses who have employed the Modified Total Cost Method to calculate lost productivity damages—a method we’ve explored in prior discussions.
The court elaborated on this approach while contrasting it with the unmodified Total Cost Method.
This traditional method operates on a formula, asserting that a contractor is entitled to the difference between their actual costs and the initial bid they proposed.
However, to effectively employ this method, a contractor must meet four conditions: first, demonstrating that direct proof of actual losses is impractical; second, establishing that their original bid was reasonable; third, proving that the actual costs incurred are also reasonable; and fourth, showing that they bear no blame for the additional costs.
Critics have historically viewed this approach with skepticism due to concerns about potential inaccuracies in bidding and inefficiencies that could inflate costs.
In response, the Modified Total Cost Method introduces adjustments to address these shortcomings.
Safeguarding Against Excess Costs
When courts assess claims based on either the Total Cost or the Modified Total Cost Method, they enforce essential safeguards to ensure that excess costs are charged to the party at fault.
While a contractor using the Modified Total Cost Method must still prove the same four elements required for the Total Cost Method, the burden of evidence is somewhat less demanding.
This method serves as a starting framework, and adjustments can be made to consider various factors, ultimately giving the court confidence that the adjusted figure reflects the true additional costs incurred by the contractor due to the defendant’s actions.
In this particular case, the owner sought to exclude the contractor’s expert witnesses.
They contended that these experts did not adequately demonstrate the reasonableness of the bid or the actual costs.
The experts countered this by relying heavily on the owner’s own analyses, establishing that the contractor’s bid was competitive when compared with alternative bids and aligned well with the owner’s initial estimates.
They also consulted with the contractor’s estimating team to clarify how the bid had been constructed.
To address the reasonableness of the reported costs, the experts made several adjustments aimed at isolating costs that should not be attributed to the owner.
This included excluding cost-reimbursable hours, eliminating time recorded by workers who logged under 72 hours of direct labor, and reducing total hours by 1.5% to account for perceived deficiencies in weld quality.
By meticulously analyzing these elements, the court aimed to ensure that the assessment of lost productivity damages rested on a solid and credible foundation.
This case illustrates the complexities involved in calculating lost productivity damages and highlights the importance of expert testimony in informing these assessments.
Source: Natlawreview