Much Maligned "Total Cost Method" Gets New Life

The “total cost method” of quantifying construction claims has always had a bad reputation. The technique compares the cost of the work as bid with the cost of the work as performed and attributes all the cost increase to the acts or omissions of the project owner. It has been considered a bad practice because it is imprecise and it lacks proof of causation by the owner. Now, however, the technique has been resurrected as the “modified total cost method.” And it is enjoying success.

The modified version of the claim quantification method addresses the concerns that led to the previous version’s ill repute – and lack of persuasive effect with courts, arbitrators and administrative boards. The modified method confronts both the imprecision and causation issues by segregating the aspects of the work affected by the project owner’s shortcomings. And the modified approach does not blindly accept the contractor’s pre-bid cost estimates or the contractor’s as-performed job cost records.

A recent Ohio case illustrated the effective use of the modified total cost method in the context of pricing an acceleration claim. The contractor’s expert segregated the aspects of the work where labor costs were affected by the accelerated pace. He examined the contractor’s pre-bid labor hour estimates and adjusted them upward in accordance with industry cost data publications, making the estimates more reasonable. He tested and confirmed the accuracy of the contractor’s job cost tracking system as it applied to labor hours. And he itemized and broke out labor hours incurred in the correction of defective work and other efforts unrelated to the acceleration.

As always, I invite your comments. Does the modified total cost method effectively address the weaknesses of the original method? Or is it merely a dressed up quantification method, subject to the same criticisms? Is the modified total price method appropriate for pricing all types of claims? Or should it be used only in limited circumstances?

Featured In next week's Construction Claims Advisor:

• Acceleration Labor Costs Proved Through Modified Total Cost Approach
• Anti-Indemnification Law Applied to Construction Equipment Rental Agreement
• Mechanic’s Lien Valid Despite Void Underlying Contract

Bruce Jervis, Editor
Construction Claims Advisor

Comments

[Moustaf I Abu Dief]

Sir, I consider TC method in my claim and It is effective.

Thanks

[John Gates]

Sounds like it has limited application where other methods are not available that are any more precise.

[J. Norman Stark]

Dear Editor: What is the case citation? Please. Thank you.
J. Norman Stark, Attorney & Registered Architect, Cleveland, OH.

[Howard I. Littman, AIA, Forensic Architect]

The described analysis reflects the kind of careful dissection that more experienced and respected expert witness have always pursued, not a 'new' approach. A credible forensic expert must, as a matter of course, consider all factors that reasonably affected the prosecution of the work and the resultant cost and time impacts (positive or negative).

One aspect of investigation not mentioned above is a foundational review of the contractor's pre-contract labor hour estimate, to determine whether it can be used as a valid benchmark. Not infrequently it turns out to be the case that the pre-bid allocation to labor was inaccurate (under-estimated), and so was never achievable in the field. When that happens, changes to work or time present an opportunity for the contractor to generate claims that are sometimes not really an accurate reflection of 'increased labor', but are better characterized as a contractor's attempt to recover from its unrealistic and unachievable initial work plan.

Actual hours must also be carefully examined to ensure the claim is not really an attempt to recover from a contractor's own low productivity rates (which are difficult to assess, are highly subjective depending on the specific nature of the work, and are not necessarily amenable to analysis using published productivity 'charts', etc.)

Where a contractor is legitimately impacted by changes, compensation is appropriate. However, ongoing job circumstances should not be capitalized on as an opportunity to make up for poor estimating or poor supervision or management of labor.

[S. Basuroy]

Normally TC method is analyzed in details as suggested by New method. It should be used only in limited circumstances and in absence of detail data available. This method is obviously more advantageous to the contractors.