Contractor Barred from Using the “Total Cost” or “Modified Total Cost” Approach to Establish Delay Claim

Construction and Procurement Law News, Q2 2015

Client Alert

In a recent ruling, Hill York Service Corporation v. Critchfield Mechanical, Inc., the U.S. District Court for the Southern District of Florida held that a contractor may not establish damages for delay under either the “total cost” approach or the “modified total cost” approach when there is evidence attributing some of the delay to the contractor, and no apportionment of the costs has been made for the contractor’s delays.

Critchfield Mechanical, Inc. (“CMI”) was a mechanical contractor on the Air Force Technical Applications Center project (“the Project”) at Patrick Air Force Base in Florida. The Project involved the design and construction of four separate facilities at the Base, including a headquarters building, a process support and laboratory building, a central utility plant, and an underground utility vault. CMI was responsible for creating and delivering to the Project certain major mechanical equipment, including air handling units that were to be set on the roofs and in the interiors of the headquarters building and the process support and laboratory building.

In May 2012, Hill York was awarded the piping subcontract by CMI. Hill York installed the pipe, valves, fittings, and appurtenances in the CMI equipment. Hill York claimed that it was forced to incur substantial extra labor and materials costs as a result of a number of delays caused by CMI. It alleged that CMI had delayed by several months the delivery of the air handling units for the headquarters building and the process support and laboratory building and that several of those late-delivered units were misfabricated, incomplete, and contained radical design changes. Hill York also claimed that its piping work on both the central utility plant and the underground vault was delayed for various reasons attributable to CMI, including late equipment deliveries, design changes, a premature storage of materials at the worksite, and a floor failure in the central utility plant.

Hill York sued CMI, claiming that CMI breached the parties’ contract, “in part by knowingly ‘failing to compensate Hill York for the impacts, inefficiencies of labor and extended performance due to changes in design, late equipment deliveries and limited access to work areas that Hill York encountered on the Project.’” Hill York sought to recover damages including labor costs and material/subcontract costs. CMI denied liability, asserting, among other things, that Hill York itself had caused significant delays on the Project.

CMI filed a motion for summary judgment, seeking to prevent Hill York from using either the total cost approach or the modified total cost approach to establish its delay damages at trial.

In analyzing CMI’s summary judgment motion, the Court noted that “[t]he best proof of [a] delay claim is actual cost information taken from the [plaintiff] company’s accounting books and records and accumulated in such a way that the damage calculation presents a direct cost for each item of delay.” The Court, however, recognized that, in certain limited situations, a contractor may prove delay damages through other methods that are less precise than establishing the specific increased costs. Two of these recognized methods are the total cost approach and the modified total cost approach. Under the total cost approach, the difference between actual cost of the entire project and the original bid cost, after various adjustments and modifications, is the amount of damage incurred by the contractor. The modified total cost approach is a variant of the total cost approach that allows for an adjustment of the damage amount to compensate for bid errors, costs resulting from the contractor’s own actions, and costs resulting from the actions of third parties.

The District Court noted that both the total cost approach and the modified total cost approach were available to prove delay damages only if the contractor could establish, as an initial matter, a number of specific elements. Among other things, in order to use the total cost approach, a contractor first has to show that it “is not responsible for any of the additional expense.” Similarly, under the modified total cost approach, the contractor initially has to establish that it has “reasonably accounted for” that portion of the total costs for which it is responsible.

The District Court granted summary judgment for CMI, holding that Hill York was precluded from using either the total cost or the modified total cost approach to present its claim for delay damages to the jury. In ruling for CMI, the Court noted that CMI had presented unrebutted evidence of several problems attributable to Hill York, including late and incomplete shop drawing submittals, failing to have the materials necessary to do the piping work, hiring unnecessary workers, and performing an exorbitant number of punch list items after its work was substantially finished. Because Hill York could not show that it was not responsible for any of the extra costs sought and could not reasonably account for the extra costs it had caused, the Court held that Hill York could not avail itself of either the total cost or the modified total cost approach to prove its claim for delay damages.

The ruling means that, if and when the case goes to trial, Hill York will be required to prove its delay claim by presenting a specific accounting of the direct cost for each claimed item of delay. This case reiterates the principle that a contractor can recover only those damages for delay that it did not cause. To sustain a total cost claim, the contractor usually must show that its bid was reasonable, that there is no feasible or practicable way to allocate delays to specific items (because of the pervasive and interwoven nature of the delays), and that critical delays are attributable to the other party. Even though often criticized, the total cost method is often accepted when the contractor makes this showing. If a contractor cannot show these elements, it will have difficulty recovering for such delay under a total cost or modified total cost approach.