The Modified Total Cost Method to Calculating Construction Damages

By John Mark Goodman of Bradley Arant Boult Cummings LLP

A Colorado federal court will allow a contractor to prove up more than $250 million in damages using the modified total cost method (see AECOM Technical Services v. Flatiron AECOM, LLC, Case No. 19-CV-2811, 2024 WL 22640 (D. Co. Jan. 2, 2024)). The AECOM v. Flatiron case involves a Colorado DOT project to add express lanes to Highway C-470 just south of Denver. The contractor, Flatiron, agreed to complete the project for $204 million. While change orders increased the contract price to $237 million, Flatiron’s expenditures were over $502 million, more than double the contract amount. Flatiron sued the designer AECOM to recover $263 million in cost overruns. In support of its damage claim, Flatiron plans to present expert testimony that uses the modified total cost method to calculate damages.

As the name implies, the modified total cost method is a variant of the total cost method. Under the total cost method, a contractor’s damages are assumed to be the difference between the total costs incurred by the contractor to complete a project and its bid amount. Many courts disfavor the total cost method because it assumes that all cost increases above the bid amount were caused by the defendant. The modified total cost method attempts to address this concern by subtracting such things as bid errors, unreasonable costs, and others costs that are not the defendant’s responsibility from the damages indicated by the total cost method, as explained by a leading treatise on construction law:

The modified total cost measure, a compromise between the total cost and segregated damage measures, deducts from the contractor’s total cost any losses incurred on segregated work activities for which the contractor, not the owner, was responsible. The modification of the contractor’s total cost claim thus enhances assurance that the necessary “safeguards” of the total cost measure are adhered to and that the contractor has taken into account its own failings in bidding or performing the contract. Use of the modified total cost measure, like the total cost measure itself, requires the contractor to prove that costs incurred in performing the original work and the extra work had become so co-mingled and “inextricably intertwined” that use of the segregated damage measure is impracticable. 6 Bruner & O’Connor Construction Law § 19:118 (“Modified total cost”).

In AECOM v. Flatiron, AECOM moved to exclude testimony from Flatiron’s damages expert because the expert allegedly used the total cost method, which AECOM argued is so disfavored by Colorado courts that it must be rejected entirely. The federal district court acknowledged that the total cost method is disfavored by Colorado courts and may someday be rejected, however, it refused to exclude Flatiron’s expert because it found that he did not in fact use the total cost method. Rather, he used the modified total cost method, which did not wholesale attribute damages to AECOM but factored in costs that were other parties’ responsibility. The court further noted that the modified total cost method had been accepted by several other courts and found that any challenges to the expert’s methodology are best suited to cross-examination during trial. The trial commenced on January 29, 2024 and is still ongoing.

 

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John Mark Goodman is a Partner with Bradley and a member of the firm’s Litigation and Construction practice groups. He has represented clients throughout the U.S. and abroad in a wide variety of litigation and arbitration matters, including construction disputes, products liability claims, tax appeals, breach of contract/warranty, patent disputes, trade secret theft, and general commercial litigation. He can be reached at [email protected] or 205.521.8231.

Republished with permission. The article, “The Modified Total Cost Method to Calculating Construction Damage” was originally published on BuildSmart on January 18, 2024 by Bradley Arant Boult Cummings LLP. Copyright 2023.