What is the Total Cost Approach?
One method used to price a construction claim is the total cost approach, which determines the value of the disputed work by subtracting the claimant’s bid prices from the actual performance costs. In this method, a comparison is made using project financials or other performance indicators such as actual vs. bid labor-hours. Successfully applying the total cost method in pricing construction claims requires meeting certain criteria.
As mentioned before, the total cost method compares actual costs with bid prices. The total cost method makes the dubious representation that everything the claimant did was flawless and every dollar above its bid is the result of the defendant’s actions. One variation, the modified total cost approach, is similar but makes adjustments to account for certain issues such as,
- cost overruns due to contractor-caused problems
- bid errors
- change orders, and
- another event unrelated to the actions of the owner.
Using the modified total cost results in calculating a net cost overrun and therefore, adds credibility to the claim by addressing both the imprecision and causation issues that arise from using the total cost method.
When Can I use the Total Cost Method?
The use of total cost or modified total cost method is predicated on satisfying a set of criteria, often referred to as the four-part test. To pass the four-part test, the contractor must demonstrate the following:
- The nature of the claim makes it impossible for the damages to be quantified in any other manner;
- The contractor’s actual costs are reasonable;
- The contractor’s bid estimate was reasonable; and
- The contractor is not responsible for the added costs.
Satisfying the above-referenced criteria is difficult and so both the total cost and modified total cost methods are viewed with skepticism. In cases where a project suffered from a multitude of significant disruptions, the total cost approach might be justified because the contractor’s entire performance is significantly different from what was expected. Examples include projects with
- excessive and significant change orders
- excessive design issues
- work unique in nature or significantly different than the original contract work.
Is the Total Cost Method Right for My Situation?
Although using methods involving the maintenance of separated cost records for any impacted scope of work is recommended in claim quantification, the total cost approach may still be a viable alternative. In instances where keeping cost records separate was not possible, e.g. it was impractical to itemize increased direct costs, or when the cost has not been recorded separately, this method can be effective.
Ultimately, the total cost approach is most effective in achieving an equitable adjustment for construction disputes involving extra work claims, especially for complex types of construction claims. However, this method of claim pricing should be used with caution and an in-depth understanding of not only its capabilities but also its limitations.