When you see a claim coming, prepare

JUST AS FLORIDIANS learned to put up plywood to protect their properties in September, contractors have to learn to take steps to protect their rights when they see a potential claim coming toward them. In JTE Constructors of North Carolina Inc. v. United States Fidelity and Guaranty Co., 2003 WL 22937715 (Middle District North Carolina), the court had to deliver some bad news to a contractor because

JUST AS FLORIDIANS learned to put up plywood to protect their properties in September, contractors have to learn to take steps to protect their rights when they see a potential claim coming toward them.

In JTE Constructors of North Carolina Inc. v. United States Fidelity and Guaranty Co., 2003 WL 22937715 (Middle District North Carolina), the court had to deliver some bad news to a contractor because it didnt keep the records necessary to show its extra costs.

JTE was a subcontractor to Santaro on a highway project for the North Carolina Department of Transportation. JTE was delayed substantially in doing its work and submitted a claim to Santaro, which Santaro did not deny. When Santaro didnt pay the claim, JTE sued Santaro and its surety.

Although a lot of other issues were in the decision, the one that caught my attention was toward the end, where the court looked at some of the specific damages claimed for the delay. JTS wanted $200,215.82 for extended field overhead, extended home office overhead and lost profit. The reason it did not get this money was that the court didnt like how it computed its numbers.

For the field overhead, JTE took its estimate used for bidding purposes but provided no evidence supporting the specific amounts that comprised its additional field costs. For its office overhead, it took 10% of its field overhead. For its lost profit, it took 10% of the total of these numbers. Then, it multiplied the total of all these by 8.5, the number of months that NCDOT allowed Santaro as an extension of time.


Lost profits are always the hardest thing to recover.


"In short, not only is JTEs suggested calculation insufficient as a matter of law to support delay damages, but JTE has not provided evidence upon which a jury could perform any calculation of extended overhead and lost profit based on delay to a reasonable certainty." (Westlaw opinion, pg. 6-7).

The bonding company ended up not having to pay anything to a subcontractor who was clearly affected by a delay that wasnt its fault.

It didn't have to end up this way. By now, most contractors keep their costs electronically, in a job cost detail program. It should have been possible for the comptroller to show what actual jobsite expenses were being incurred: the cost of an office trailer, storage trailer, phone/fax lines, fax machine, temporary power, sanitation, cleanup, secretarial, jobsite personnel and their vehicle expenses and so on. The contractor should be able to produce at least his business records of all these expenses and, if necessary, the paperwork of invoices and canceled checks to back them up.

Similarly, the Eichleay formula, named after a decades' old government contract appeal case, gives a contractor a means of calculating how much of its home office overhead can be attributed to the delay on this one job. If the contractor has financial statements prepared by an accountant, it should have the basic information from which an Eichleay calculation can be performed.

This is not rocket science.

Lost profits are always the hardest thing to recover, although most boards and courts would absolutely agree that they are recoverable. The difficulty is proving how much you would have made "but for" this particular delay. Difficult, but not impossible, but you have to be prepared to open up your bid, and your records on other jobs, to examination and attack. It may be necessary to employ a construction accountant to assist you, but if the amount in dispute is great enough (in the JTE case, it was more than $200,000), it may make economic sense to do just that.

Long before litigation would require this, however, a contractor can do a lot to improve his chances of collecting what he is owed while the job is still going on.

At the first sign of a problem, the contractor should meet with his field forces and comptroller and identify all the potential costs that could be affected by the problem. A separate job number should be assigned to them, and the superintendent or foreman responsible for the job in the field should, on a daily basis, code which costs are part of the regular work and which ones are attributable to the problem. This includes coding all time sheets and jotting down what it was that the person was doing that is not part of the regular scope of work. This information can then be captured in the office in a neat little printout that is just the size to fit in a juror's hand or be blown up on a big screen in front of the jury box.

Of course, all these steps wont work in every situation, and they are just that many more balls for a busy contractor to have to juggle. But wouldnt a couple extra hundred thousand dollars in the bank be worth it?

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800 or e-mail to susan. [email protected]

TAGS: Law