How Reliable Is the Total Cost or Modified Total Cost Method?

Abstract

The total cost or modified total cost method is the most common contractor used method of quantifying contract damages, probably because of its simplicity. But the judiciary has placed limits on its use. In theory, before it can be used by a contractor in a court of law, the contractor must show that (1) all the damages were the result of actions by the owner; (2) the project was sufficiently complex that there is no other way to satisfactorily quantify the damages; (3) the contractor’s bid is correct; and (4) the costs are reasonable. This note focuses only on the correctness of the contractor’s bid. The writers recently completed a benchmarking study of union interior system (framing and drywall) specialty contractors. The study relied on the use of a reference project and an accompanying shopping list of 10 commonly constructed items. In theory, all contractors were developing a bid on the same thing. The study was distributed nationally. Based on an analysis of 57 responses (and subsequently cleansed to 42 responses) the range of workhours to construct the shopping list was 1,247–2,500 with an average of 1,805. There is a twofold increase from the low bid to the high bid. There are also significant differences between regions that are in close proximity to one another, for example, northern and southern California and San Diego, Pittsburgh and Philadelphia, Chicago and St. Louis. The range in the total database is 1,253, which is a surprisingly large amount. The standard deviation in some regions of the United States was as large as the standard deviation of the total database. Based on these results, it is concluded that a contractor could make a sizable mistake in his/her bid and still be within the range of “correct” estimates. Almost any bid could be argued as correct. This hardly seems to be a reasonable standard of proof.