Lost Productivity Damages in Construction: The Modified Total Cost Method

Hanscomb Intercontinental experts appear before courts and tribunals across the globe to opine on quantum , delay and technical matters on oil and gas projects as well as more traditional building and construction projects.

?A Montana federal court recently addressed expert testimony requirements for quantifying a lost productivity claim in?Exxon Mobil Corporation v. AECOM Energy, 2024 WL 5137523 (D. Montana, Dec. 17, 2024).

The case involved a dispute over turnaround work that the contractor was hired to do at a brownfield oil refinery in Billings, Montana. The turnaround took 17 weeks instead of seven, an overrun of ten weeks. Litigation ensued with both sides seeking to recover cost from the other.?The contractor sought $33M in lost productivity costs allegedly caused by the owner’s failure to plan and prepare for the work and the unexpected deterioration of certain equipment at the refinery.?In support of that claim, the contractor offered the opinion of two experts witnesses who relied upon the Modified Total Cost Method of computing lost productivity damages.

The court described the method adopted and its relation to the unmodified Total Cost Method in the following terms:

The total cost method is based on a formula that assumes that a contractor is owed the difference between the actual cost of the contract and the contractor’s bid. Under the total cost method, a contractor must prove: (1) the impracticability of proving its actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs.?This method has always been viewed with disfavor, in part because of concerns about bidding inaccuracies, which can reduce the contractor’s estimated costs, and performance inefficiencies, resulting in inflated expenditures. The modified total-cost method addresses some of the objections to the total cost method by adjusting it for a contractor’s lack of proof as required in the total cost method.

In examining claims? based on a total cost or a modified total-cost methodology, courts require safeguards to ensure, to the extent possible, that the burden of excess expenditures falls on the party responsible for them. Under a modified total-cost approach, a contractor still has the burden of proving the four elements required for the total cost method, but the burden is not as stringent. The total cost method [is] used as ‘only a starting point’ with such adjustments thereafter made in such computations as allowances for various factors as to convince the court that the ultimate, reduced figure fairly represents the increased costs the contractor directly suffered from the particular action of defendant which was the subject of the complaint.

Exxon moved to exclude the contractor’s damage experts claiming they had not satisfied prongs 2 (reasonableness of bid) and 3 (reasonableness of cost).?As to prong 2, the experts relied heavily on the owner’s internal analyses showing that the contractor’s bid compared favorably with other bidders and with Exxon’s own estimates.?The expert had also consulted with the contractor’s estimator team to better understand the basis of the bid.?As to prong 3, the experts had made a number of adjustments to the contractor’s actual costs in an effort to carve out costs for which the owner was not responsible. For example, they subtracted hours submitted as cost-reimbursable, removed hours for workers who did not perform more than 72 hours of direct labor, and reduced the total hours by 1.5% to account for alleged deficiencies in weld quality.

The court found that the experts satisfied both disputed prongs of the modified total cost method and therefore offered reliable expert opinions under Federal Rule of Evidence 702 and denied Exxon's motion.?? The court held exclusion was unnecessary, and any challenges to the experts’ opinions could be explored by the owner during cross-examination at the trial.