A contractor driving piles runs into limestone when the drawings and specifications indicated sand and gravel. The contract calls for an “equitable adjustment” when faced with such a differing site condition, but how is the adjustment determined?
Under Wisconsin law, a hierarchy of methods exist to answer this question. If a contractor does not follow this hierarchy, its claim for an adjustment may be rejected by the owner and ultimately a court as a matter of law.
Brian R. Smigelski, Marquette 1987, is a partner with DeWitt LLP, Brookfield, where he practices in civil litigation, with an emphasis in construction law.
Wisconsin courts recognize that equitable adjustment claims can be inherently imprecise, and therefore allow for multiple equitable adjustment methodologies.1
The Preferred Method
According to the Wisconsin Supreme Court in Metropolitan Sewerage Comm’n of Milwaukee County v. R.W. Construction, Inc.,2 the preferred method for calculating the equitable adjustment under a changed conditions clause is the “reasonable cost method.”
Under this analysis, the amount of an equitable adjustment is the
difference between what it reasonably cost to do the work under the actually encountered conditions and what it would have cost if the materially different conditions had not been encountered.
Pursuant to this method, the contractor is only permitted to recover reasonable excess cost. In other words, the contractor is not permitted to recover for its own deficient bidding or performance of the contract.
Unfortunately, the Wisconsin Supreme Court did not further expand on this analysis and it has apparently not been applied in any other published decision in Wisconsin.
Method 2: Jury-type Verdict
The next most preferred method for calculating damages is the “jury-type verdict.” This is permitted where “records are inadequate to assess specific damages, yet the plaintiff has been injured by the changed conditions and liability is clear.”3 Pursuant to this method, the jury may make a “fair and reasonable approximation” of a contractor’s damages.
Under this more liberal standard, the court has the discretion to consider the plaintiff’s damages based upon all of the facts, and reduce the claims as it sees fit based upon the evidence in a “fair and reasonable approximation of those damages.”4 “[I]t will be enough if the evidence shows the extent of the damages as a matter of just and reasonable inference, although the result be only approximate.”5
Method of Last Resort: Total Cost Method
The method of last resort is the “total cost method.” Pursuant to this method, a contractor calculates its equitable adjustment by demonstrating the difference between its reasonable estimated bid amount and the actual costs it incurred to perform the work at issue.6
This method is highly criticized because it assumes that the plaintiff’s costs were reasonable and that plaintiff was not responsible for any increases in costs. It also assumes the contractor’s bid was accurately computed.
The total cost method is therefore permitted only when no other method can be used, the plaintiff is clearly injured, and the defendant is clearly liable.
Given these limitations, this method may only be utilized where:
the nature of particular losses make it impossible or highly impracticable to determine them with a reasonable degree of accuracy;
the plaintiff’s bid or estimate was realistic;
its actual costs were reasonable; and
it was not responsible for the added expenses.7
Modified Total Cost Method
While it has not been clearly adopted in Wisconsin, other jurisdictions have also adopted the “modified total cost method.” Pursuant to this method, the contractor presents evidence setting forth the difference between the bid amount and its actual cost, but also subtracts any increases in cost that are the contractor’s own fault and adjusts its claim for bid errors.
Given these adjustments to its costs and bid amount, this method is generally viewed far more favorably in other jurisdictions than the total cost method.
The Measured Mile Analysis
Finally, another acceptable method in other jurisdictions for measuring lost productivity damages is the “measured mile analysis.”
Pursuant to this method, the contractor must quantify the time it took to complete work in areas that were impacted by conditions and compare that with the time it took to complete essentially identical work in an area that was unimpacted by the condition.8
How to Decide?
If the size of the claim justifies it, contractors should consult with a specialized construction claim expert, or a forensic accountant. The application of each of these methods can be fraught with issues, any one of which may cause a court to completely reject the analysis.9
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
1 See Metropolitan Sewerage Comm’n of Milwaukee County v. R.W. Construction, Inc., 78 Wis. 2d 451, 461-62, 255 N.W. 2d 293 (1977).
2 Metropolitan Sewerage Comm’n of Milwaukee County v. R.W. Construction, Inc., 72 Wis. 2d 365, 382, 241 N.W. 2d 371 (1976).
3 R.W. Construction, 78 Wis. 2d at 462.
4 R.W Construction, 78 Wis. 2d at 384.
5 Id. See also Fattore Co. v. Metropolitan Sewerage Comm’n of Milwaukee Co, 505 F. 2d 1 (7th Cir. 1974) (approving use of jury verdict method in underground tunnel changed conditions case).
6 R.W. Construction, 78 Wis. 2d at 464.
7 Id. at 465.
8 North American Mechanical, Inc. v. Walsh Const. Co. II, LLC, 132 F. Supp. 3d 1064, 1079 (E.D. Wis. 2015).
9 See, e.g., North American Mechanical, 132 F. Supp. 3d at 1078-80 (court rejected total cost and measured mile methods based upon flaws in expert’s opinion).