The total/global cost method of assessing damages and variations
A recent US case illustrates the type of circumstances in which the total (or ‘global') cost method might be the best method of assessing damages or of valuing changes/variations. The case, Amelco Electric v. City of Thousand Oaks (2000), 82 Cal.App.4th 373, can be accessed via http://caselaw.lp.findlaw.com/ca/index.html by entering "Amelco Electric" (without the quotation marks) in the Full-Text Search box.

In 1992 Amelco contracted to carry out the electrical installation to a new Civic Arts Plaza on behalf of City for $6,158,378. During the construction process there were a large number of changes in design, every part of the electrical work being changed at least once. As a result of the many changes and difficulty in reading the sketches, Amelco had to use workers with more experience than it had estimated. In addition, the work was carried out in a disorganised and uncoordinated manner. Amelco had to increase its labour force and, like other contractors, was often required to delay or accelerate particular tasks and to shift workers among tasks to accommodate work by other trades. Losses were incurred due to decreases in productivity and efficiency.

City agreed to and paid Amelco $1,009,728 above the contract price in respect of the changes. The additional payments were based on estimates submitted by Amelco. It was not until after completion (January 1995) that Amelco gave notice of an estimated $1,700,000 cost overrun. At trial the total/global cost claim amounted to $2,224,842. The jury awarded Amelco compensatory damages of $2,134,586 plus prejudgment interest of $495,340 and costs of $134,841.33. City appealed on a number of grounds including failure to give notice of the claim as required by the contract and on the ground that Amelco "did not prove that the total cost method of calculating damages should be applied..." The award was affirmed by the court of appeal which stated that the trial court had not erred in its instruction to the jury. The relevant instruction was (p394-395) that:
"If you find that the City breached or abandoned the contract, then Amelco is entitled to recover the reasonable value of the work performed by it less the payments made by the City, and less any costs incurred by Amelco which are not fairly attributable to the City."
The Court of Appeal said (p395) that the trial judge's instruction:
"....describes the ‘total cost' method of calculating damages, a method that is frequently used in cases involving the abandonment or breach of a construction contract....."
The instruction to the jury deals with 2 (concurrent) remedies namely additional payment based on variation/change (abandonment) and damages. "Reasonable value" means (reasonable) cost plus (reasonable) profit (p395).

In the UK, the total cost or ‘global' method of assessment was used in Crosby (J) & Sons Ltd v Portland Urban District Council (1967) 5 BLR 121, QBD and in London Borough of Merton v Stanley Hugh Leach (1985) 32 BLR 51. The method, which is analogous to pricing a composite item in a schedule of work, involves making a lump sum/composite assessment in respect of more than one/sometimes a large number of causative factors. The starting point will usually be to calculate the total actual loss incurred (for the entire project or relevant section as appropriate). Thereafter adjustment/apportionment of the total loss must be made in respect of any costs/losses which are not, in the words of the trial judge, "fairly attributable to," that is not caused by (grounds of appeal (2) and (4) p395 refer), the party in breach. This is necessary to avoid overcompensating the claimant/to give effect to the underlying (‘but for') principle that the claimant is entitled to be placed in the position he would have been in but for the breach (or in this case breaches) of duty and the rule that loss which is unreasonably incurred (only the reasonable value was recoverable) is unforeseeable and not recoverable (the duty to mitigate/ground of appeal (3)).

Assessment by the total loss/global method rather than by individual assessment was appropriate in Amelco because (a) there was insufficient evidence to assess factors on an individual basis and (b) even if there had been, a total loss/global award would still have been appropriate due to the difficulties and inaccuracies inherent in recording (Amelco p382, 3rd para), alternatively estimating many instances of reduced productivity or non-productive time (factors which also existed in the Crosby and Merton cases). An alternative approach, which may be used if, for example, actual cost data is unreliable or unavailable (interim valuation or lack of records), would be to estimate (even if it is a matter of guesswork) an appropriate increase in the unit rates or a lump sum adjustment: Penvidic Contracting Co v International Nickel Co of Canada (1975) 53 DLR (3d) 748 Can Sup Ct.

The overriding principle which applies when assessing damages (and when valuing variations) is that the court/person making the assessment "should make the best estimate which it can in the light of the evidence...:" Mustill J in Thompson and others v Smiths Shiprepairers (North Shields) Ltd [1984] 1 All ER 881, QBD at 909-910. The leading authority is Chaplin v Hicks [1911] 2 KB 786, at p 792. The principle has been applied in Australia (see The Commonwealth of Australia v Amann Aviation Pty Limited (1992) 174 CLR 64 at para 31), in Canada (Penvidic) and in Hong Kong (Attorney General v Shimizu Corporation [1996] HKCFI 171)

There is no rule to the effect that one method should be adopted rather than another (ground of appeal (1) at p 395). In theory, but not in practice, all methods should provide the same answer. It is for the court/person making the assessment to decide in each case (question of fact) which method (or combination of methods) to adopt in the light of the best estimate rule. If appropriate, a total loss/global assessment should be made even if the valuation/assessment rules in the contract require assessment on an individual basis: Merton (above) at 102-103.
Copyright Stewart Dunn except:
Extracts from US court judgments published by Findlaw