Is the ‘Total Cost Method’ for Quantifying Construction Claims Fair?
The “total cost method” for quantifying construction claims has long been controversial. In situations where it is allegedly impractical to itemize increased direct costs, a contractor is allowed to total its actual costs, subtract its bid price, and impute the overrun to the project owner. The contractor need only show that its bid was reasonable, its actual costs were reasonable, and it was not at fault for the situation causing the cost increase. It is no wonder claim defendants and their representatives loathe the total cost method.
A recent federal appeals case should cause more consternation. A dredging subcontractor was allowed to price a claim against the prime contractor using the total cost method. The sub presented no independent evidence that it had been impractical to track its actual increased direct costs. Instead, the subcontractor’s technical witness, a bucket-dredging expert, told the jury it would have been impractical to itemize direct costs. The jury awarded the subcontractor more than $2.9 million. The Sixth Circuit allowed this to stand. It had been the jury’s role to evaluate the credibility of the expert witness’ testimony.
It should be noted that many courts are skeptical regarding the use of the total cost method. Some courts recognize only the “modified” total cost approach, requiring the claimant to break out any actual costs for which it may be responsible. But despite relentless criticism, the total cost method lives on.
Is this a fair method for quantifying construction claims? Shouldn’t any competent contractor be able to track and itemize direct costs? Is the total cost method simply a tool for the shoddy and the overreaching? Or are there situations where increased direct costs cannot be tracked and total costs are an equitable last resort? I welcome your comments.