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Difficulty Calculating Delay Damages:  Total Cost Method & Liquidated Damages
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Difficulty Calculating Delay Damages: Total Cost Method & Liquidated Damages

April 24, 2014 Construction Industry Legal Blog

Reading Time: 8 minutes

You have successfully proven that a delay occurred and effectively addressed the common and most applicable defenses.  Now comes the part of the process for determining the amount of damages that resulted from the delay.  Calculating the amount of damages is rarely a simple task.  A common theme of this series so far is that there are numerous factors and methods used when dealing with delay damages.  Calculating the amount of damages is no exception.  This Blog post delves into two methods that are used when ascertaining the amount of damages is extremely difficult:  a liquidated damages clause and the Total Cost Method.

Liquidated Damages

It is often difficult to calculate, preemptively, damages that will result from a party failing to uphold their end of the contract.  Generally, a liquidated damages clause in the agreement can solve this problem, so long as the amount of damages is not a penalty.[1]  Whether the sum stipulated in the agreement is a penalty or enforceable is a question of law.[2]

In the absence of a general rule to determine whether a liquidated damages provision is a penalty, Florida courts look to three factors to ascertain whether the liquidated damages clause is enforceable.  Florida courts generally look to (1) the reasonableness of the provision, (2) the certainty of establishing actual damages and (3) the intent of the parties.[3]  If a delay did not impact the critical path or the functional use of the project, liquidated damages are not enforced.[4]  Extreme detail is necessary when a liquidated damages clause is involved.

If a contractor’s agreement has a liquidated damages clause, a similar provision should be included in the agreements with all subcontractors.  The First District Court of Appeal, in Commercial Mechanical Co. v. State for Use and Benefit of American Air Filter Co., held that where there was no liquidated damages clause in the subcontract, but the contractor’s agreement contained such a clause, the subcontractor could not be laibel for payment of the liquidated damages even if it was responsible for the delay.[5]  However, in this situation, the subcontractor may be held liable for actual damages for delay when it is responsible for the delay, and the measure of the actual damages may be the amount of the liquidated damages assessed against the contractor.[6]

Simply having a liquidated damages clause in an agreement does not guarantee or prevent recovery.  The clause will not be enforced if circumstances at the time of breach would make it unconscionable to do so.[7]  If liquidated damages are viewed as unreasonable—“grossly disproportionate to the damages reasonably expected to follow from the breach”—they will not be enforced.[8]  Additionally, the liquidated damages clause will not be enforced if, at the time the agreement was made, the actual amount of damages were readily ascertainable.[9]  If the validity of the clause is attacked, the defendant has the burden of affirmatively pleading and proving the necessary facts to avoid the court from awarding liquidated damages to the plaintiff.[10]  A tactic that contractors and subcontractors commonly use when agreeing to liquidated damage clauses is to only accept the clause if the other party agrees to a bonus for early completion.  The logic supporting this is that both parties should have the opportunity to benefit or pay the consequences.  For this method to be effective and successful, the wording imposing the rewards and consequences must be identical.  The Fourth District Court of Appeal, in J.M. Beeson Co. v. Sartori, refused to award a contractor’s bonus because the language differed.[11]  In the event that a liquidated damages clause is not enforced—because it is unreasonable, a penalty or not identically negotiated—the court may still award damages if the actual damages are successfully proven.[12]

Total Cost Method

The hurdles of proving a delay and defenses avoided, the next hurdle to clear is proving the amount of damages caused by each specific party.  In complex projects, and even in apparently simple projects, the link between the actions of the defendant(s) and the amount of damages resulting may be difficult, if not impossible, to prove.[13]  While recognizing the lack of precision, and acknowledging that this should not preclude recovery, Florida courts have expressly authorized the use of the Total Cost Method (“TCM”).[14]  Unlike other methods used to compute damages—addressed later in this series—the TCM does not attempt to tie specific costs to particular events or defendants.  Rather, the actual costs the contractor incurred in completing a project are subtracted from the costs that the contractor originally estimated it would incur with the project.  The difference represents the damages suffered by the contactor.

Florida courts have established a four-pronged test setting forth the requirements that the plaintiff must prove before evidence of the TCM is permitted.  While a test has been established for the use of the TCM, it is only used under limited circumstances and failure to successfully prove any of the four elements denies use of the TCM.  The claimant must prove:  (1) the original bid or estimate was reasonable; (2) the amounts expended by the claimant for performing the additional work were reasonable; (3) any excess amounts were due to the defendants; and (4) no alternative method of computing damages is possible.[15]

Despite courts generally authorizing the use of the TCM under the appropriate circumstances, it is viewed as less reliable and many courts were traditionally—and still are—critical of this approach.[16]  It is used when there is no alternative means to determine damages with a greater degree of accuracy. [17]  This “lack of a better method” mentality has been expressed by the United States Claims Court, “There are, however, certain situations where the total cost method is the best and only means of quantifying the impact of changes on a contractor.”[18]  A major factor supporting the skepticism around the TCM is the idea that it is out-of-touch with the real world.  Additionally, the TCM assumes the original contract price was proper and profitable and that any additional costs must have arose due to the defendant’s delay or interference, not because of an error in the estimate or a contractor-caused overrun of the costs.[19]  The TCM is a favored method to calculate damages by the claimant in light of the easily satisfied burden.  At a minimum, the claimant must provide some “reasonably accurate evidence of the various costs involved.”[20]

Although courts do not prefer the TCM, it remains a generally accepted and valid method to calculate damages—once all four necessary elements are met.  These two methods of determining damages—liquidated damages clauses and the TCM—are reserved for situations where there are no better options available.  Stay tuned for the next edition of this series; discussing a “slightly” different method to calculate delay damages.

[1] Resnick v. Uccello Immobilien GMBH, Inc., 227 F.3d 1347 (11th Cir. 2000); Osceola Cnty. v. Bumble Bee Constr., Inc., 479 So. 2d 310 (Fla. 5th DCA 1985).

[2] Public Health Trust of Dade Cnty. v. Romart Constr., Inc., 577 So. 2d 636 (Fla. 4th DCA 1989).

[3] Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954) (en banc); T.A.S. Heavy Equipment, Inc. v. Delint, Inc., 532 So. 2d 23, 24 (Fla. 5th DCA 1988).

[4] U.S. for Use and Benefit of Control Systems, Inc. v. Arundel Corp., 814 F.2d 193 (5th Cir. 1987), decision clarified on denial of reh’g, 826 F.2d 298 (5th Cir. 1987).

[6] Concrete Systems, Inc. v. Florida Electric Company of Orlando, 425 So. 2d 632, 633 (Fla. 2d DCA 1983).

[7] Multitech Corp. v. St. Johns Bluff Investment Corp., 518 So. 2d 427 (Fla. 1st DCA 1988).

[8] Resnick, 227 F.3d at 1350.

[9] Resnick, 227 F.3d at 1350.  But see § 672.718, Florida Statutes (2013) (liquidated damages are limited to the amount that is “[r]easonable in light of the anticipated or actual harm caused by the breach . . . .”).

[10] J.M. Beeson Co. v. Sartori, 553 So. 2d 180 (Fla. 4th DCA 1989)

[11] 181 (refusing to award the bonus where the bonus would apply upon completion and the liquidated damages clause would apply to the point of substantial completion).

[13] McDevitt & Street Co. v. Dep’t of General Services, 377 So. 2d 191, 193 (Fla. 1st DCA 1979).

[14] Id.

[15] McDevitt & Street Co., 377 So. 2d at 192.

[16] Delco Electronics Corp. v. United States, 17 Cl. Ct. 302, 327 (1989), aff’d 909 F.2d 1495 (“[T]he total cost approach has never been favored.  For good reason, courts and boards view the total cost method with a jaundiced eye.”) (citation omitted); see F.H. McGraw and Co. v. United States, 130 F. Supp. 394, 400 (Ct. Cl. 1955) (“This method of proving damages is by no means satisfactory . . . .”).

[17] McDevitt & Street Co., 377 So. 2d at 191.

[18] Delco Electronics Corp. v. United States, 17 Cl. Ct. 302, 327 (1989), aff’d 909 F.2d 1495.

[19] F.H. McGraw and Co., 130 F. Supp. at 400; Bramble & Callahan, Construction Delay Claims (Aspen Publishers, Inc. 4th ed. 2012).

[20] E.C. Ernst, Inc. v. Koppers Co., Inc., 626 F.2d 324, 328 (3d Cir. 1980).

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