| Use of the
Modified Total Cost Methodology
By
John S. Mrowiec
In the June 2002 issue of Midwest Construction,
we discussed a federal court's ruling on a municipal owner's termination of two
construction contracts for convenience at Chicago's Millennium Park.
In
G.M. Harston Construction Co. v. City of Chicago, 2002 U.S. Dist. LEXIS 7512 (N.D.
Ill. Apr. 26, 2002) ("G.M. Harston Construction I"), the court had held
that the owner could not set-off a contractor's alleged "material defaults"
against the amount otherwise owing in the context of a termination "for convenience."
The
G.M. Harston Construction I decision held that the owner could set-off costs not
constituting material defaults but the owner was obligated to advise the contractor
of the basis and amounts for those set-offs.
Thereafter, the contractor
contended that the owner failed to provide the set-off information in the following
two years. The contractor filed a "motion to clarify" the April 2002
Order. The contractor contended that the court's earlier opinion meant that the
contractor was entitled to be paid on a "total cost" basis less only
demonstrated set-offs not rising to the level of material default.
The
owner countered that, not only was it entitled to deduct set-offs, but also need
not pay any costs arising from changes not authorized by written change order
or costs arising from delays. Because the contractor had not segregated the base
work and authorized change order work from the allegedly unauthorized changes
and from delay costs, the owner contended it need pay nothing.
A
New Opinion Recently, the court clarified its earlier opinion by the new opinion
in G.M. Harston Construction Co. v. City of Chicago, No. 01 C 268 (March 8, 2005)
("G.M. Harston Construction II").
Agreeing with one of the owner's
propositions, the court said the starting point for compensation for this termination
for convenience was the contract.
But the owner's contention that it need
not pay for changes unsupported by written changes or for delays, even if caused
by owner, "for several reasons, overstates the strength of the City's position"
G.M. Harston Construction II at 3. The G.M. Harston Construction II court noted
that Illinois courts recognize exceptions to "no damages for delay"
clauses, G.M. Harston Construction II at 3-4 citing Mellon Stuart Construction
Co. v. Metropolitan Water Reclamation District, 1995 WL 239371, *10 (N.D. Ill.
1995).
Regardless, the court remarked that damages from "out of sequence"
work might be quite different from damages from extending the duration of the
work. Also, the court recognized that owners may waive a requirement of written
change orders by conduct, G.M. Harston Construction II at 4 citing Atlee Electric
Co. v. Johnson Construction Co., 14 Ill.App.3d 716, 303 N.E.2d 192, 197 (1st Dist.
1973).
Beyond that, the owner "cannot deny that it was well aware
of the countless revisions of plans that disrupted and increased the work"
and, by paying out millions of dollars to other claimants, "it is fair to
say that the City expected additional claims" G.M. Harston Construction II
at 4 citing E.R. Stone v. City of Arcola, 181 Ill.App.3d 513, 536 N.E.2d 1329
(4th Dist. 1989).
Having rejected the owner's "hard line position,"
the court proceeded to the more difficult question of "what methodology should
be used to determine what, if anything, is due."
A mere percentage
completion of construction method would be insufficient because of "the likelihood
that the work contemplated by these contracts was so altered by changes that it
may be difficult to measure how much of that contemplated work was actually done,"
G.M. Harston Construction II at 4.
The owner argued that it was the contractor's
obligation to segregate the base contract from changed work. The contractor argued
that task was impossible because the changes and delays "were so many and
so ongoing."
'Modified Total Cost' Method The court said the contractor's position was
"highly probable," G.M. Harston Construction II at 4. The solution to
the case, the court believed, was to use the "modified total cost" methodology.
Under
the modified total cost methodology, the contractor "must prove the reasonableness
of the assumptions" that the contractor accurately computed its bid, the
costs expended were reasonable and the contractor was not responsible for the
increases. The contractor must "vigorously exclude any costs it cannot justify."
The contractor's burden is "to convince the trier of fact that the amount
claimed fairly represents the increased costs the contractor directly suffered
from the defendant's actions," G.M. Harston Construction II at 5 citing Propollex
Corp. v. Brownlee, 342 F.3d 1335, 1339 (Fed. Cir. 2003).
The G.M. Harston
Construction II court summarized how the stalemate must be broken when use of
the modified total cost methodology is appropriate:
"It is not enough
for [the contractor] to say, 'These are our total costs. Pay them, together with
a reasonable profit.' Some proof of reasonableness is required. But it is not
enough for the [owner] to say, 'Tie each cost to a specific revision of plans
or schedule, or we will not pay.' It, too, must make its own analysis of what
increased costs are reasonably attributable by its own conduct," G.M. Harston
Construction II at 6.
The court concluded by ordering the parties to exchange
the information under the above guidelines and again encouraged mediation.
John
S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction
and public contracts law and litigation practice. He may be reached at (312) 658-1100.
For information, go to the firm's Web site at www.cmcontractors.com.
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