New York Bankruptcy Court Allows Total Cost Method to Calculate Contractor’s Inefficiency Damages Resulting from Restaging of Project

GII Industries, Inc. v. New York Dep’t of Transp.
2011 Bankr. LEXIS 3663 (Bankr. E.D.N.Y. Sept. 30, 2011)

The Bankruptcy Court for the Eastern District of New York considered the appropriate method for calculating a contractor’s inefficiency damages and whether the contractor was entitled to prejudgment interest in connection with a highway reconstruction project. The Court held that the total cost method was the appropriate manner by which to calculate damages and that the contractor was entitled to prejudgment interest running from the date final payment was due.

The New York State Department of Transportation (“DOT”) entered into a contract with plaintiff GII Industries, Inc. f/k/a Grace Industries, Inc. (“Grace”) pursuant to which Grace was to provide general contracting services in connection with the reconstruction of a portion Route 9A, the West Side Highway, in Manhattan. The contract called for the project to proceed in five stages.

During the first stage of construction, Grace encountered an elliptical pipe not depicted on the drawings provided by the DOT. Grace timely placed the DOT on notice of the pipe and impacts to the schedule as a result of the same. As a consequence, the DOT modified the staging from five stages to 14 stages. The DOT agreed to adjust the completion date by 579 calendar days to accommodate the need for restaging of the Project. The DOT also issued an amendment to the contract to compensate Grace for increased overhead costs resulting from the restaging. Grace completed the Project ahead of the adjusted scheduled completion date and received the contractually agreed upon bonus.

Despite an agreement on the adjusted schedule and increased overhead costs, the parties were unable to immediately reach an agreement with regard to Grace’s increased labor costs resulting from the inefficiencies resulting from the restaging. The parties met on numerous occasions starting in 2000 to attempt to reach an agreement with regard to the methodology to calculate such costs. Such meetings were unsuccessful. In late 2004, Grace filed a petition under Chapter 11 of the Bankruptcy Code. Thereafter, in 2007, Grace commenced an adversarial proceeding against the DOT for additional compensation resulting from the restaging. In its complaint, Grace sought $10.8 million in labor, equipment and related costs plus attorneys’ fees and interest. In its answer, the DOT claimed that Grace received payment in excess of its actual costs.

Following failed mediation efforts, the Court held a two-day bench trial in 2010 on the issues of what methodology should be used to calculate Grace’s additional compensation claim and whether Grace was entitled to interest.

The Court initially had to determine whether Grace was required to maintain certain types of records as a condition precedent to receiving additional compensation. In reviewing this issue, the Court first agreed with Grace that the restaging was a “Significant Change” as defined by the contract, entitling Grace to additional compensation because the methodology of construction changed drastically because of the restaging. The Court then examined the two approaches to compensation for Significant Changes under the contract: the “agreed price approach” and the “force account approach,” which approach required the contractor to maintain records in accordance with the DOT’s Manual for Uniform Record Keeping on Construction Contracts (“MURK records”). Although the Court agreed with the DOT that providing accurate records was a condition precedent to receiving additional compensation under either approach, it also concluded that MURK records were not required as a condition to recovering for additional compensation arising from restaging while the parties were pursuing the “agreed price approach” through negotiations which continued through Project completion.

Having determined that Grace satisfied the basic record keeping requirement because the parties has pursued the “agreed price approach,” the Court moved on to determine the appropriate method of calculating Grace’s additional compensation. The Court explained that in New York, the total cost method “measures damages by calculating the ‘difference between the contract price . . . and . . . total job costs.’” The Court emphasized that the New York courts require that the contract price rather than the bid estimates be the baseline for computation of damages under New York’s total cost method. The Court explained that the use of the total cost method avoids the need to match up each increase in cost with a particular item of breach. In allowing the total cost method, the Court rejected the DOT’s position that the contract did not provide for such method. Instead, the Court noted that the contract was silent on the issue of what method applied to calculating delay damages and therefore the Court was free to apply the method accepted in New York under similar factual circumstances. The Court concluded that the impact of the restaging on the Project was so pervasive that “it [was] impossible to identify with specificity the particular costs that Grace incurred due to the restaging” and such circumstances warranted the application of the total cost method under New York law. The Court further noted that the ability to trace increased costs to specific items was particularly difficult because the subject contract was a unit price contract.

After determining that New York law required the use of the total cost method for calculating Grace’s damages resulting from the restaging, the Court moved on to the issue of whether prejudgment interest was permitted and, if so, upon which date the interest should begin to accrue. The Court rejecting the DOT’s argument that the New York State Finance Law prohibited prejudgment interest because an audit conducted by the DOT found overpayments to Grace. Specifically, the Court held that the purported audit conducted pursuant to the Finance Law was deficient because the auditors were inexperienced and the methodologies used were not appropriate. Thus, the audit was an insufficient basis for the DOT to withhold final payment. The Court further rejected the DOT’s suggestion that the contract barred prejudgment interest. The Court explained that the contract neither provided that outstanding contractor claims or disputes warranted withholding of final payment nor tolled the accrual of prejudgment interest. Accordingly, the Court determined that interest began to accrue on the date final payment was due (i.e. the date of project completion plus thirty-day inspection period plus seventy-five day processing period).

Click here for full text of decision courtesy of LexisNexis.

Stephanie L. Jonaitis

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