The Court of Federal Claims, in Trafalgar House Construction v. United States, recently reiterated the criteria that a contractor must meet if it decides to use the total cost method to calculating damages for differing site conditions and delays. This method essentially involves subtracting the bid price from the total costs incurred and adding profit to the difference. In this way, a contractor takes the position that all of the costs it incurred above and beyond the bid price are the responsibility of the government. The courts disfavor this approach, as stated in the Trafalgar decision, because of “bidding inaccuracies” and “performance inefficiencies” that “skew” the accuracy of the damage calculation. The criteria that a contractor must meet to sustain a total cost method damage calculation are as follows:
1) That it was impractical to prove its actual losses directly
2) That its bid was reasonable
3) That the actual costs incurred were reasonable
4) That the contractor was not responsible for the added costs
In the Trafalgar case, the contractor failed to meet the first criteria and was unable to demonstrate why its costs could not be calculated directly. The criteria established by the Court are very stringent and difficult for a contractor to meet. As a result, the message is quite clear: contractors should find another, more accurate, more reliable method of proving damages. Contractors are well advised to segregate labor and material costs for work items in dispute that involve such things as differing site conditions, delays, and changes in the work. By segregating costs, contractors are in a better position to negotiate and resolve disputes, and they will be able to prove their costs in a way that will be accepted by government auditors, administrative boards, and the courts. The bottom line is that the courts are very reluctant to accept the total cost approach as a method to calculate damages.