Damages in Construction Claims: Are “Actual Costs” Actually Required?

The golden standard for the measure of damages in a construction case alleging defective or incomplete work are the actual costs of completion or repair. That is to say, if there is a breach (or multiple breaches) of quality or quantity promises in a construction contract, each dollar spent to correct or complete the work should be linked to the discrete breach. Failure to present reasonable evidence of a  link for the money spent to correct or complete work will typically result in reduced recovery and can in some circumstances prohibit recovery altogether. This usually is a simple enough rule for construction defects.

But what happens when there are multiple impacts that contribute to a loss of productivity or inefficiency in actually delivering the product (a building, a highway, a mechanical system)? In other words, a contractor may not be able to point to a specific action or actions that resulted in a specific increased cost, but the totality of various impacts may have resulted in drastically increased costs. In such circumstances, it is often difficult, or perhaps impossible, to link a discrete impact to a particular set of costs despite clear evidence of an adverse effect on the contractor. In these circumstances, are “actual costs” actually required? The answer is ‘yes,’ but that does not mean one must draw a bright line from an incident to a specific labor cost overrun.

The difficulty in proving damages for loss of productivity claims in the construction context has given rise to alternative measures of damages to quantify the loss. Some examples of alternative measures of damages for loss of productivity claims include: total cost analysis, modified total cost analysis, factor analysis and measured mile analysis (among others). While each of these damage measures has different respective burdens of proof, the general underpinning of these damage measures is that a contractor shows entitlement to cost overruns due to a loss of productivity. Further, these alternative measures of damages do not require that a contractor show its cost overruns were tied to and caused by a specific impact. Instead, these alternative measures of damages use the general loss in productivity to establish causation and entitlement to damages.

A recent example of a permissable use of one such alternative measure of damages, the measured mile analysis, can be found in Appeal of Lockheed Martin Aeronautics Co., which was a dispute decided before the Armed Services Board of Contract Appeals (“ASBCA”). There, the contractor, Lockheed Martin, had a $23,000,000 contract with the government to upgrade government-owned military aircrafts. The parties made several modifications to the contract resulting in additional upgrades to be completed under the contract. As Lockheed Martin proceeded with the work, the government impacted Lockheed Martin’s work by engaging in actions such as, over inspection, overly restrictive flight acceptance criteria, unnecessary flight repairs, and frequent stops and re-starts to the work. These impacts drastically increased Lockheed Martin’s costs, who in turn, submitted a claim of $143,529,290 (greater than 600% of the original contract price) for additional costs related to these impacts.

With respect to its damages claim, Lockheed Martin submitted a totality of its cost overruns related to all of the work under the contract and conceded that it could not state the specific quantity of hours spent due to government impacts. Stated another way, Lockheed Martin could not specifically prove how each impact directly translated to additional cost. However, Lockheed Martin instead used a measured mile analysis to provide a comparison of a production period that was impacted by a disruption with a production period that was not impacted, or that was less impacted. Lockheed Martin argued that the delta in the efficiency of impacted work and nonimpacted work was attributable to the government’s impacts and recoverable as damages.

On appeal, the government moved for summary judgment based on Lockheed Martin’s use of the measured mile analysis. The government argued that summary judgment was appropriate because Lockheed Martin did not put forth specific evidence for the disruptive impacts and what costs were linked to said impacts. Stated another way, because it was not possible for Lockheed Martin to separately track additional hours that resulted from the government’s work impacts, Lockheed Martin failed to show actual costs related to the impacts.

The ASBCA denied the government’s motion for summary judgment and noted that the measured mile approach compares the productivity of an impacted period with an unimpacted (or less impacted) period and is a well-established method of proving damages. The ASBCA further stated that “It is a rare case where loss of productivity can be proven by books and records; almost always it has to be proven by the opinions of expert witnesses.” The ASBCA further rejected the argument that Lockheed Martin was required to track each and every cost, noting that damages do not have to be proven to exact certainty and that there was sufficient evidence of damages to permit Lockheed Martin’s claims to move forward to trial.

The fact of damages is not hypothetical and must be shown, as well as persuasive evidence the damages resulted from the factors alleged. But the allocation of those damages to singular events may not be feasible, because of their number or because of the way one event (a change) may then affect a later event (another change).

As this case demonstrates, construction projects can have many impacts that may be hard to quantify but nonetheless result in lack of productivity and significant cost increases. Alternative measures of damages in construction can bridge the gap in these circumstances and provide contractors with meaningful avenues to recovery. However, direct causation  remains the preferred standard for damages in the construction context as these alternative measures of damages may not always be available for use and, if they are, typically have difficult evidentiary hurdles. It is critical for owners, developers, and contractors to understand when and how these alternative measures of damages apply, to properly manage construction projects and to preserve or defend claims for loss of productivity. Failure to do so may result in liability for or waiver of substantial claims.