The majority of Federal and State courts addressing the issue have rejected the total cost method for determining the apportionment of delay damages. Under the total cost method, the subcontractor is able to seek the difference between the total costs incurred in performance of the contract and its bid price. Most courts have rejected this method and have chosen to follow the approach articulated in Boyajian v. United States, 423 F.2d. 1231 (U.S. Ct. Claims, 1970), which requires that the damages claimed by the plaintiff result from and are directly caused by the specific breaches attributable to the defendant. In addition, Federal cases have held that in a situation where both parties contribute to the delay, neither party can recover damages, unless there is proof of clear apportionment of the delay and expense attributable to each party.
Boyajian is the landmark Federal case rejecting the use of a total cost method for determining alternative causes of delay and apportionment. The Boyajian case involved a contractor who sued the United States Air Force for breach of a contract for modulators and interval and dwell testers. The contractor claimed that it suffered delay damages as a result of testing procedures established by the Air force that were unreasonable. The contractor calculated its damages by deducting both its anticipated and actual costs from the entire project amount under the total cost method, but did not itemize these damages. The Court rejected the total cost method, finding that it was an unacceptable method for determining damages for breach of the contract.
The Boyajian Court gave numerous reasons for rejecting the total cost method of recovery. It found that recovery of damages for breach of contract is generally not allowed unless acceptable evidence demonstrates that the damages claimed resulted from and were caused by the breach. Id. at 1235. Furthermore, the proper measure of damages is the amount of the plaintiff’s extra costs which are directly attributable to the defendant’s actions. Id.
However, contrary to these basic causal-connection damage principles, no attempt is here made to relate any specific amount of increased costs to any particular alleged breach. Nor is any satisfactory explanation given as to why an attempt was not made or why it would not have produced reasonably accurate results.
Id. It held that, based on the record, it was impossible to conclude that the plaintiff’s contract loss, constituting the difference between the plaintiff’s contract expenditures and its contract receipts, was reasonably to be equated with the increased costs directly resulting from defendant’s alleged breaches. Id. at 1236.
Applying the total cost method, the subcontractor sought damages for labor, overhead, and material costs which were not covered by contract receipts even though these increases occurred during non-delay periods. Id. The court held that the subcontractor was barred from failing to differentiate between delay and non-delay periods and that it could not indiscriminately lump the damages together. Id.
In addition, the Court found that the record was replete with production interruptions and delays that were caused by events which were not attributable to the defendant, but for which the plaintiff made no adjustments whatsoever. Id. at 1238. The Court cited a line of cases rejecting damage claims seeking reimbursement for all contract expenditures of every nature made throughout the life of the contract. Id. at 1238-39. See, Urban Plumbing & Heating Co. v. United States, 408 F.2d. 382 (1969); Phillips Construction Co. v. United States, 394 F.2d. 834 (1968); WRB Corp. v. United States, 183 Ct. Cl. 249 (1968); Turnbull, Inc. v. United States, 389 F.2d 1007 (1967); Roberts v. United States, 357 F.2d 938 (1966); Wunderlich Contracting Co. et al. v. United States, 351 F.2d 956 (1965); Laburnum Construction Corp. v. United States, 325 F.2d 451 (1963); River Construction Corp. v. United States, 159 Ct. Cl. 254, 270 (1962); Snyder-Lynch Motors, Inc. v. United States, 292 F.2d 907, 910 (1961); Lilley-Ames Co., Inc. v. United States, 293 F.2d 630 (1961); F. H. McGraw & Co. v. United States, 130 F.Supp. 394 (1955); Christensen Construction Co. v. United States, 72 Ct.Cl. 500, 514 (1931).
It is important to point out that though the court rejected the total cost method according the factual circumstances in the Boyajian case and dismissed the subcontractor’s claims, it did not unilaterally reject such an approach altogether as long as there is reasonably satisfactory evidence of what the damages are, computed on an acceptable basis. Id. at 1244.
In Lichter v. Mellon Stuart Company, 305 F.2d. 216 (3d Cir. 1962), a subcontractor sued the prime contractor for the balance of a masonry subcontract for the balance due and breach of contract and the contractor filed a counterclaim. The subcontractor claimed that the breach occurred as a result of delays in the project, which resulted in the subcontractor being forced to speed up its work and perform inefficiently. The District Court found in favor of the contractor and the subcontractor appealed.
The subcontractor did not itemize its damages. In the lower Court, the subcontractor introduced testimony as to what it would have cost to perform all of the masonry work if the undertaking had proceeded without untoward occurrences in the manner contemplated at the time of the contracting. Id. at 219. It then introduced testimony as to the actual cost of the entire masonry job as delayed, interrupted and hindered by all causes. Id. At trial, the plaintiff’ss counsel conceded that there was no way to itemize the damages. Id. On appeal, the Court rejected the subcontractor’s total cost method, finding that:
In these circumstances [the subcontractor’s] inability to break down its lump sum proof of extra costs justifies the denial of any recovery if on the record any substantial part of the added cost of performance was chargeable to non-actionable causes rather than to a breach of contract by [the contractor].
Id. The Appellate Court affirmed the District Court’s findings, holding that:
On the whole record, we think the court was justified in concluding that a substantial amount of the lump sum which [the subcontractor] proved as extra cost of the masonry work was a consequence of factors other than a breach or breaches of contract by [the contractor]. Since the court could find no basis for allocation of this lump sum between those causes which were actionable and those which were not, it [was] proper to reject the entire claim.
Id. at 220.
Thereafter, in E. C. Ernst, Inc. v. Koppers Company, Inc., both parties blamed the other for delays, engineering failure, and inadequate supervision stemming from a purchase order for furnace construction at a steel mill. 476 F. Supp. 729 (W.D. Pa. 1979), 626 F.2d 324 (3d Cir. 1980), on remand, 520 F. Supp. 830 (W.D. Pa. 1981). The District Court ruled in favor of the contractor, finding that though the contractor was responsible for all of the delays, the subcontractor failed to link the delays to its damages. On appeal, the Third Circuit remanded the case to the District Court, finding on the outset that the District Court incorrectly rejected the total cost method, because, under Pennsylvania law, damages need not be proved with mathematical certainty, only reasonable certainty. Id. at 328. The court further held, however, that:
This is not to say… that a plaintiff merely may label damages evidence as being under the total cost method and leave the matter at that. Under the total cost method, at a minimum the plaintiff must provide some reasonably accurate evidence of the various costs involved.
Despite the court’s decision in Ernst, Pennsylvania Courts have subsequently applied the total cost method only in very limited circumstances. See, John F. Harkins Co. v. School District, 460 A.2d 260 (Pa. Super. 1983); Larry Armbruster & Sons, Inc. v. State Pub. Sch. Bldg. Auth., 505 A.2d 395 (Pa. Commw. 1986). In addition, the Third Circuit will only apply the total cost method if there are no other alternative and reliable measures of damages available. See, In Re Meyertech Corp., 831 F.2d 410 (3d Cir. 1987) (rejecting the total cost method under the holding in Boyajian).
In addition, Courts in the 4th Circuit have rejected the total cost method in favor of a modified approach. See, Biemann and Rowell Co. v. Donohoe Companies, Inc., 556 S.E.2d 1, 5 (N.C. Ct. App. 2001); Virginia Beach Mechanical Services, Inc. v. Samco Construction Company, supra, 39 F. Supp. at 672 . In Biemann, a ventilating subcontractor sued the general contractor for breach of contract in the construction of a hospital at the University of North Carolina. The Superior Court found that the ventilating subcontractor failed to establish the causation element by proving that the delays by the general contractor caused the ventilating subcontractor’s delays. On appeal, the North Carolina Court of Appeals affirmed. The Appeals Court reasoned that it is well settled that a plaintiff has an obligation to prove the facts that will create a good basis for the calculation of damages. Id. at 5 (citing Esteel Co. v. Goodman, 348 S.E.2d 153, 157 (N.C. Ct. App. 1986), disc. review denied, 351 S.E.2d 745 (1987)). For the breach of an executory contract, a plaintiff may recover only such damages as can be ascertained and measured with reasonable certainty. Id. [W]here both parties contribute to the delay, neither can recover damages, unless there is proof of clear apportionment of the delay and expense attributable to each party. Id. (citing Blinderman Constr. Co. v. United States, 695 F.2d 552, 559 (Fed.Cir.1982).
The ventilating subcontractor used a total cost method of calculating damages. The court rejected this method on the basis that the total cost method is condoned only where no other way to compute damages is feasible, because it assumes that every penny of the plaintiff’s costs are prima facie reasonable, that the bid was accurately and reasonably computed, and that the plaintiff is not responsible for any increases in cost. Id. See also, Youngdale & Sons Const. Co., Inc. v. United States, 27 Fed. Cl. 516, 541 (1993); Urban Plumbing & Heating Co. v. United States, 408 F.2d 382, 394 (1969), cert. denied 398 U.S. 958 (1970); F.H. McGraw & Co. v. United States, 130 F.Supp. 394, 400 (1955).
The court applied a four part test for recovery under the modified total cost method articulated in Servidone Constr. Corp. v. United States, 931 F.2d 860, 861 (Fed.Cir.1991)) and Boyajian, supra, 423 F.2d at 1243, looking at: (i) the impracticability of proving actual losses directly; (ii) the reasonableness of its bid; (iii) the reasonableness of its actual costs; and (iv) the lack of responsibility for the added costs. Id. It found:
The modified total cost method is the total cost method with adjustments for any deficiencies in plaintiff’s proof in satisfying the four requirements. The modified approach assumes the elements of a total cost claim have been established, but permits the court to modify the test so that the amount plaintiff would have received under the total cost method is only the starting point from which the court will adjust the amount downward to reflect the plaintiff’s inability to satisfy the test.
Id. (Citing Youngdale, supra, 27 Fed. Cl. at 541). The court found that the plaintiff failed to establish the first element of the four-part test because the plaintiff failed to prove that it sustained damages that could not be ascertained and measured with reasonable certainty. Id.
Accordingly, in order to succeed on a total cost delay claim, the subcontractor is responsible for providing itemized proof that the EPC contractor was the direct cause of the delay damages. In the event that the fact finder finds that both parties’ actions attributed to the delays, the EPC contractor will only liable for delay damages in the event that the subcontractor is able to properly eliminate or apportion any alternative causes of delay.