Pricing Construction Claims
This post is the fourth in McLaughlin & McLaughlin’s Project Professionals Subject Series Construction Claims and Disputes which are (will be) discussions regarding challenges in potential and actual construction claims and disputes situations. In this series, we focus on the key aspects of construction claims and disputes management. This discussion addresses the pricing of claims and disputes. The compulsion or question is – “How much is a potential claim worth?” In virtually all disputes, the central issue is the money. Since it is a win-lose situation, the outcome may be that someone (one party) will pay another party. Hence, the money is the ultimate issue (sometimes time is at issue, generally presenting itself in money or damages related to the time).
There is an old saying “win the battle, lose the war” which applies to damages in construction claims and disputes. With facts, logic and analyses on their side, one party (Party A) can prepare and present a very compelling argument regarding the claim (against Party B). However, winning the argument on the cause (or as it is called, entitlement) is relatively useless without winning the argument on the money related to the effect (or sometimes called damages, quantum, compensation).
Even more compelling, the decision to proceed with a claim (and potentially spend millions of dollars on expenses such as legal fees) should be heavily driven by the potential recovery (the money). Consequently, parties must have a reasonable assessment of the true value of the dispute and the ability to successfully demonstrate or prove these damages in the resolution process. Without the ability to prevail on a suitable and acceptable level of damages, pursuing a construction claim through a costly dispute resolution process could be an unwise decision.
In this discussion, we are guided by a highly useful and well grounded newly published book. It is published by the American Bar Association (ABA) and has been recently (2013) been updated. This publication is Construction Damages and Remedies, second edition, by Forum on the Construction Industry, American Bar Association. It is edited by W. Alexander Moseley of the law firm Hand Arendall LLC. There are nine authors.
While the reference book has a legal perspective, the advice and guidance is very useful to parties contemplating pursuit of a construction claim or dispute. Ultimately, legal action may be need for resolution.
The Forward to this reference is written by Andrew Ness, 2012-13 Chair, ABA Forum on the Construction Industry. The following excerpt contains an essential mindset on money or damages:
“The unwritten but seemingly inviolable rule when introducing any article or book on damages is to highlight that the subject of damages is one whose importance is frequently overlooked. True enough. Cases won on the merits can be effectively lost by failing to prove the associated damages; cases lost on the merits can be largely or completely salvaged by limiting or precluding damages recovery. These are truisms, but not too surprisingly, repeated exhortations of readers as to the importance of damages issues as a subject for enhanced attention seem to have had little effect. The interesting question to ponder, however, is why damages are not viewed as more central to the practice of construction law. Why are damages so often given short shrift by capable lawyers, both in actually trying cases and in assessing the strengths and weaknesses of a case for settlement purposes?”
Since most of us are not lawyers, rather project and construction professionals, what is the message regarding construction claims and disputes? The message is that you must have a reasonable understanding of value and path forward regarding the damages/money/quantum/pricing/money of the total dispute. Further, the damages must be a logical conclusion and be caused by the facts and entitlement discussion.
Referring back to the book cited above, there are several chapters that provide a framework for this damage discussion.
Chapter 2 Elements of Damages provides the typical categories and types of damages. These convenient headings are:
I. Allowable Costs
II. Direct Labor
III. Direct verses Indirect Costs
IV. Direct Materials
V. Direct Equipment
VI. Site Overhead
VII. Home Office General and Administrative Expenses
VIII. Markups for Bond Premiums, Insurance Premiums, and Taxes
IX. Profit
X. Attorney’s Fees and Costs
XI. Consultant Fees
XII. Interest
XIII. Federal Cost Accounting Standards
Chapter 5 Remedies and Damages Available to Owners discusses the categories of damages that could be asserted by the owner in disputes involving contractor verse owner. On page 128, the Introduction states “…rules that will fairly compensate owners when the contractor’s or designer’s performance is inadequate or defective, yet not provide the owner with an economic windfall.”
Chapter 6 Design Professional Liability to Clients discusses categories of damages that could be asserted in disputes involving design professionals (such as architects or engineers). On page 164, the Introduction states “This chapter examines design professionals’ contractual and professional responsibility to their clients and the damages that may be recovered by client/promissee for breach of a design professional’s standard of care or contractual undertaking.”
Chapter 7 Contractor and Subcontractor Remedies for Breach presents categories of damages that these parties could assert in possible disputes with other parties, typically somehow involving the owner. On page 181, the Introduction states “The general measure of a contractor’s damages as a result of an owner’s breach is the reasonable extra cost incurred in performing the contract plus the lost profit on the contract. This general measure of damages attempts to return the parties to the same position they would have been in if there had been no breach.”
In Part 2 McLaughlin & McLaughlin’s Project Professionals post of this Subject Series, Construction Claims Management Planning , we present the preventive measures for dealing with these sorts of risks. In thinking through the management plan and during preparation of the plan, a key input to understanding risks is the assessment (preliminary, of course) of the size (money) of the risk and how the damages might be calculated. Understanding the money side gives the planning a path to managerial options.
Regardless, understanding damages/money/quantum/pricing/money is a valid starting point. From the money, one must work backward (reverse engineer) to the cause and/or risk. This reverse process will put a clear perspective on potential construction claims and disputes. Further, to reverse the old saying, this understanding can help “win the war” if you have “lost (or will lose) the battle”.
We wish you happy reading and good luck in your construction claims and disputes challenges and endeavors. Enlightened understanding of quantum or damages is a fundamental key to success, however you define success. Develop a Construction Claims Management Plan [owners, prime contractors and subcontractors] and follow it.
It is important to note that McLaughlin and McLaughlin [M&M] is not a law firm and is not intending to provide legal advice. M&M is a consulting firm providing (among other services) non-legal expertise in construction claims, dispute resolution and litigation support. The Resource Center is for the convenience of blog visitors and M&M does not offer this for commercial purposes. For further information on M&M services, please see www.McLaughlinandMcLaughlin.com.