So far, we have covered how to determine if completion costs are reasonable and which completion costs should be considered reasonable. As we conclude our series, we will discuss which completion costs should not be considered reasonable.
What Costs are Not Reasonable for Recovery?
Costs may have been incurred in the completion of the work that are unreasonable or would otherwise be unnecessary had the non-default party acted prudently. Even when acting prudently, some costs may not be considered reasonable and therefore would not be recoverable.
Examples of unreasonable costs
Betterments and changes to the scope of the original contract
Change orders issued after the termination, betterments to the project, and work performed that is not-in-scope should not be considered recoverable in a termination.
Rework of completing party’s deficiencies
Costs incurred by the completing contractor correcting its own deficiencies are not reasonable costs to be assigned to the default party. However, costs for remedial work for defects of the original contractor would be reasonable if performed prudently.
Additional costs resulting from the non-default party not promptly completing the work
Work, which remains dormant due the Owner inaction can be subject to escalation costs, repairs / rework, standby costs, warranty issues, liquidated or actual damages, winter conditions and more. If practical to progress the work meaningfully, these efforts must be considered, as costs resulting from abandonment or significant delay to the completion effort by the Owner may not be reasonable.
In one example, after re-commencing work, raw steel installed by the terminated principal was left exposed to oxidation. As priming of the steel was not promptly undertaken by the completing party, additional costs for blasting and wire brushing became necessary to allow for the painting work to proceed – these costs were not recoverable based on the work not being promptly resumed.
In another example, UV-sensitive materials that were staged for installation prior to termination were left exposed to sunlight and weather. While the duty to protect materials is often a contractual obligation of the principal, based on the timing of the termination and barring of the contractor from returning to the site, the material ended up remaining unprotected for longer than the manufacturer’s exposure limit, and new material needed to be re-ordered and the existing material needed to be disposed of. Protecting the material with tarpaulins would have been a reasonable action and compensable cost of the non-default party. By not acting promptly, the cost incurred in replacing the materials was not reasonable.
Costs resulting from inexperience or unfamiliarity with type of construction
Completion work should be performed by a capable party who can perform the work efficiently and per industry standards. If the work is performed by an inexperienced party, costs associated with inefficiencies from the inexperienced contractor may not be considered reasonable.
In one case, a completion contractor was retained to construct an elevated parking deck with a pre-engineered, factory-built, reusable concrete forming system. At the time of the termination, the elevated deck work had not begun. When the completion contractor started this work, they proceeded in an inefficient, circular sequence of deck placements that required concrete to cure and post-tension cables to be stressed before cables could be laid on the subsequent deck area to be poured. Had a more common checkerboard sequence been utilized, which was possible with the forming equipment that was onsite, concrete curing and cable stressing would not have been critical predecessors to the subsequent deck placement, and the overall completion time of the project could have been reduced. The additional delay damages, labor, and rental costs resulting from the inexperience of the completing party were not reasonable as an experienced contractor, acting prudently, would have mitigated these costs by performing the work in accordance with generally accepted practices.
Unnecessary costs of expediting
If completion of work is not constrained by a deadline, and costs are spent on overtime labor or winter heating, these costs may not be practical and efficient, and would be disputed as unnecessary and unreasonable.
Other costs incurred in completing the work following a termination may be deemed unreasonable. When disputes over completion costs arise, the adverse parties may look to retain damages and allocation experts to review the disputed costs. These experts will review the manner in which the work was completed, pore over the financial data and construction documents, and prepare their own estimates to affirm or contest the reasonableness of the costs.
Read the full article published in the American Bar Association Fidelity & Surety Law Committee Fall 2018 Newsletter.