June 26, 2023
In major project and construction claims, the calculation of quantum is a critical aspect, acting as a vital indicator of the damages suffered. While quantum experts are typically enlisted to delve into the intricacies of these calculations, it is equally important for solicitors to have a fundamental understanding of how quantum is calculated to equip themselves with the knowledge required to navigate this terrain. By having a working knowledge of the process, solicitors can effectively collaborate with experts and are better positioned to provide accurate advice to their clients.
This article series will specifically explore calculating quantum for major projects and construction claims.
Methods of Calculation
There is no one-size-fits-all approach to calculating quantum. Rather, it necessitates a case-by-case evaluation of individual circumstances of each claim. Factors such as the nature and scale of the project, the information available and the records maintained, play a pivotal role in determining the most appropriate method for quantifying the damages.
Throughout this series we will explore a number of commonly used methods for calculating quantum. These include:
Cost-Based Methods
1. Total Cost Method,
2. Modified Total Cost Method,
3. Delta Estimate Analysis,
4. Discrete Damages/Actual Cost Analysis,
Productivity Based Methods
5. Earned Value Analysis,
6. Measured Mile Analysis; and
7. Baseline Productivity Method.
A claimant may apply different approaches for comparison to obtain a more reliable and defendable result.
Total Cost Method
The Total Cost Method determines the equitable adjustment to a contract by subtracting the original bid amount from the total cost expended on the project (Equation 1).
Equation 1:
Equitable adjustment to the contract = Total cost expended on project – Original bid amount
The applicability of the method hinges on a four-part test. That is:
1. The nature of the particular losses makes it impossible or highly impractical to determine them with a reasonable degree of accuracy with alternative methods;
2. The initial bid or estimate is reasonable;
3. The actual costs incurred are reasonable; and
4. The claimant is not responsible for the additional expenses.
This test is not typically favoured and is generally limited to cases where causation can be established, but the exact amount of damages cannot be directly determined.
The Total Cost Method is often criticized for its oversimplified approach as it fails to account for additional costs related to the contractor and bid inaccuracies. To combat these shortcomings, the Modified Total Cost Method has been developed and has gained wider acceptance as a more comprehensive alternative.
Modified Total Cost Method
This modified version of adjustment quantification addresses the shortfalls of the Total Cost Method by adjusting both the original bid price and the actual costs of performance. This refinement aims to distinguish the work activities that were directly impacted by the claim from the costs that were unaffected.
The Modified Total Cost approach calculates the difference between an adjusted in-place value and an adjusted bid amount. The equitable adjustment to the contract takes into account the extra costs attributable to the contractor, the original bid amount and adjustments for inaccuracies in the bid (Equation 2). By applying this, the balance due can be calculated (Equation 3).
Equation 2:
Total Cost Expended on the Project
– Extra Cost Attributable to the Contractor
– Original Bid Amount
– Adjustments for inaccuracy in the bid
= Equitable Adjustment to the Contract
Equation 3:
Original Contract Amount
+ Equitable Adjustment to the Contract
– Amount paid under the Contract
= Balance Due
This approach is most effective where there have been concurrent or overlapping delays attributable to one contractor. However, where these delays are attributable to multiple parties, its applicability is limited.
Delta Estimates Damages Method
Like that of the Modified Total Cost Method, the applicability of the Delta Estimates Damages Method is limited in cases where there are multiple concurrent issues. This method aggregates individual change order requests to determine the total claim amount. This approach is often criticised because the ‘sum of the parts’, that is, the combined impact of various factors, may exceed the whole variance (cost overrun). This arises because the total labour increase is not compared to the actual labour man-hour variance. This actual labour man-hour variance represents the variance between the control budget and the actual hours expended.
The overall increases in labour costs are often calculated by using multiple causes of lost productivity. These include, inter alia:
1. Excessive and sustained overtime;
2. Stacking of trades;
3. Overcrowding;
4. Effect of multiple changes; and
5. Weather.
These factors are evaluated and the individual losses are totalled to determine the overall claim.
Although the Total Cost Method, Modified Total Cost Method and the Delta Estimates Damages Method have all faced criticism for their inherent simplicity, they serve as the foundation for more widely utilized approaches.
Next week, we will explore how these methods have been integrated into the Discrete Damages/Cost Variance Analysis Method.
Lamont Project & Construction Lawyers
If you have any questions about any matters raised in the above article or, more generally, about security as it relates to your specific circumstances, please contact Lamont Project and Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Kathryn Easton
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064