Unique Pricing And Estimating Challenges Faced In Change Orders, Requests For Equitable Adjustments, And Claims

2. Unique Pricing And Estimating Challenges Faced In Change Orders, Requests For Equitable Adjustments, And Claims Breakout Session # 408 Greg Bingham Date: July 20, 2010 Time: 11:15 am - 12:30 pm 1

3. Recognized Claim And Damages Theory “Three Column Approach” Would Have Been Actual Claim Equals Less

4. Reasons For Increased Costs Scope Increases Unit Rate Changes Labor And Material Unit Rates Inefficiencies (Disruption) Delays Time Related Costs Inflation Cost Of Capital (e.g., Interest)

5. Time-Related Cost $1,000 Direct Labor $500 $0

6. Activity-Related Cost $1,000 Direct Labor $500 $0

7. “Joint” Cost $1,000 Direct Labor $500 Activity- Related Time- Related $0

8. Claim Methods Actual Costs Contractor Inefficiencies Total Cost Claim (Entire Overrun) Not Claimed Build Up Claims Modified Total Cost Claim Change Orders Change Orders Change Orders Contractor Original Cost Estimate Contractor Original Cost Estimate Contractor Original Cost Estimate Contractor Original Cost Estimate

9. “Sanity Check” Overrun Claimed Claimed (More Than Entire Overrun) Claimed (Entire Overrun) Not Claimed Contractor Cost Estimate (with Changes)

10. How Do The Methods Compare? High Modified Total Cost Detailed Cost Build-Up Total Cost Low

11. How Do The Methods Compare?(continued) High Total Cost Detailed Cost Build-Up Modified Total Cost Low

12. ObservationsOn The Detailed Cost Build-Up Method • Customers And Courts Strongly Prefer Detailed Cost Build-Up Method • Significant Up Front Preparation Effort, But Often The Least Costly Method In The Long Run • Faster Settlement (Less Customer Resistance) • Generally Higher Recovery Percentage Than Total Cost Or Modified Total Cost Methods

13. Observations On The Modified Total Cost Method • Modified Total Cost Claims Can Be An Effective Tool For Getting A “Quick And Dirty” Claim On The Table For Customer Consideration • Vulnerable To Customer “Slow Roll” • Should Be Supported By Detailed Cost Build-Ups Or “Benchmark” Support Where And As Soon As Possible • Properly Done, A Modified Total Cost Claim Requires Much More Effort Than Perceived

14. Improving Modified Total Cost Claims • Combine The Modified Total Cost Claim With Some Detailed Cost Build-Up Claims • Example Constructive Changes • Delay Impacts • Labor Disruption Examples • Contractors Can Present Both Types Of Claims And Argue In The Alternative • Different Pricing For Different Legal Arguments • Early Settlement Discussions Or ADR

15. Labor Claims

16. Reasons For Increased Costs –Labor Claims Scope Increases Unit Rate Changes Labor And Material Unit Rates Inefficiencies (Disruption) Delays Time Related Costs Inflation Cost Of Capital (e.g., Interest)

17. $30 Wage Variance $25,000 Quantity Productivity Variance Variance $120,000 $30,000 Budget $125,000 9,000 Hours 5,000 10,000 Hours Hours Labor Overrun Components $25 $ Time

18. $30 Wage Variance $50,000 Productivity Variance $25,000 Quantity Budget Variance $125,000 $100,000 9,000 10,000 Hours 5,000 Hours Hours Labor Overrun Components $25 $ Time

19. Labor Claims, Generally Should • Be Based On Actual Project Experience. • Be Based Upon Concurrent, Objective Evidence. • Reflect A Reasonable Attempt By The Contractor To Capture Costs Expended Outside Of Its Control. • Reflect Actual Productivity Information, If Available. • Consider Actual Labor Rates Vs. Change Order Rates. The Contractor Advances Its Position By These Methods

20. Labor Claims – Approaches • Total Cost / Modified Total Cost • Measured Mile • Industry Factors

21. Measured Mile Example Period 3 Period 1 Period 2 1.36 MH/LF Impact .23 mh/lf 1.13 MH/LF Budget .75 MH/LF 1.0 MH/LF

22. Measured Mile Example

23. Industry Factors • Mechanical Contractors Association Of America (MCAA) • Used For Thirty Years • Updated Publication In 2005 • Derivation Of Factors Not Known • Most Complete Approach • Corps Of Engineers Modification Impact Evaluation Guide (COE Guide) • July 1979 • Curves For Certain Impacts (Trade Stacking, Crew Size, Overtime) • Officially Withdrawn By The Corps • Construction Users Roundtable (CURT) • Recent Empirical Data • Not Published • Deals With Overtime, Weather, Schedule, Planning

24. Pitfalls Of Industry Factors Approach • Basis Of Data Is Often Unclear • Applicability To Your Situation • Different Industry • Different Impacts • Very Judgmental

25. Equipment Costs

26. Reasons For Increased Costs – Equipment Costs • Scope Increases • Unit Rate Changes • Labor And Material Unit Rates • Inefficiencies (Disruption) • Delays • Time Related Costs • Inflation • Cost Of Capital (e.g., Interest)

27. Equipment Costs – Issues • Construction Equipment Can Be Owner-Supplied, Contractor-Owned, Or Rented. • Very Complex Area Due To Number Of Disparate Views Of “Actual” Costs. • Can Be Complicated By “Related Party” Transactions. • Equipment Is Frequently Priced By “Agreed To” Rates To Avoid Confrontations Over Costs. • Blue Book • Cal Trans

28. Equipment Costs –Cost Components • Ownership Costs - Charges For Depreciation Of Acquisition Costs, As Well As Overhauling, Insurance, Financing, Taxes, And Storage Of Equipment. • Operating Costs - Expenses The Contractor Faces By Turning The Equipment “On.” Charges Include Routine Equipment Maintenance, Fuel, Lubrication, Tires, Tracks, And Tool Attachment Repair.

29. Equipment Cost Issues • What Does The Contract Say? • Change Order Rates Vs. Major Claims? • Recording Equipment Hours • Idle Vs. Standby • What Are Actual Costs?

30. Home Office Overhead Costs

31. Reasons For Increased Costs –Home Office Overhead • Scope Increases • Unit Rate Changes • Labor And Material Unit Rates • Inefficiencies (Disruption) • Delays • Time Related Costs • Inflation • Cost Of Capital (e.g., Interest)

32. Planned Revenue 160 Year 13 G&A 12% 140 Year 10 Planned G&A 15% Actual Revenue 120 Actual G&A 21% 100 $ MILLIONS Year 7 G&A 14% 80 60 $20M G&A Supports $131M-?M in Revenue 40 $15M G&A Supports $71M-$130M in Revenue $10M G&A Supports Up to $70M in Revenue 20 G&A Expenses 0 5 6 7 8 9 10 11 12 13 14 15 YEARS Home Office Overhead –Conceptual Issues

33. Officers’ Salaries • Rent • Advertising & Promotion • Corporate Accounting • General & Administrative • Estimating • Legal • Insurance • Utilities • Office Supplies • Telephones • Contributions • Medical And Other Benefits • Taxes Home Office Overhead –Example Costs

34. Home Office Overhead • Generally Represents The Cost To The Project For Support From A Remote Home Or Division Office, Which Provides Some Services To The Project. Also Called General & Administrative (“G&A”) Costs. • The Eichleay Formula Is Often Used As A Means Of Allocating Some Portion Of Home Office Overhead To Projects, Which Have Been Delayed By Owner Caused Interference (Billings To Billings).

35. Contract Billings x = Total Billings For Contractor Home Office Overhead Allocable Home Office In Contract Period For Actual Contract Overhead Period Allocable Home Office Daily Home Office Overhead = Overhead Rate Allocable Actual Days Of Contract Performance To Contract Daily Home Office Number Of Days Of x Claimed Home Office = Overhead Allocable To Compensable Delay Overhead Contract Home Office Overhead –Eichleay Formula

36. Percentage Costs $195,000 $520,000 $585,000 $1,300,000 Project A 10% Project B 40% Project C 50% TOTAL 100% Eichleay Method $480,000 x 10% = 48,000 Cost-To-Cost Method $480,000 x 15% = $72,000 vs. Home Office Overhead –Eichleay Vs. Cost-To-Cost Percentage 15% 40% 45% 100% $140,000 $560,000 $700,000 $1,400,000 Billings Claim Project

37. Why Are We So Careful?

38. Daewoo Engineering And Construction Co., Ltd.V.United States of America

39. Background

40. Background • Palau Has A “Compact Of Free Association” With The U.S. • U.S. Was To Build A Road Around Island Of Babeldaop (One Of 300 Islands That Make Up Palau). • Issue Was Compaction Specification For Embankments, Weather.

41. Background • Daewoo’s Certified Claim • $13.4 Million In “Incurred Damages,” Additional Costs Of $50 Million Not Yet Incurred. • REA Was Ultimately Denied By The CO. • Daewoo Hired Exponent To “Update/Reprice” The Claim. Resulted In Measured Mile Study Of $42M.

42. Court Findings • Contracts Disputes Act Fraud Clause: “If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim in addition to all costs to the Government attributable to the cost of reviewing said part of his claim.” $50 Million

43. Setting The Stage To Claims Analysis And Pricing • Relevance Of Claims • Some “Street - Lore” • Identifying Contract Changes • Challenges Of Claim Preparation • Hypothetical Claim • Possible Reasons Claim Might Be Waived 42 42

44. Why Claims Are Relevant • Management – Claim Knowledge Will Improve Job Performance • Customer – Expects Some Claims • Owners And Creditors • Equity • Security For Financing 43 43

45. NOT! Some “Street - Lore” • 100% Avoidance Of Changes • Customer Is Offended By Changed Work Claims • Claim Preparation Is Not “Fun” 44 44

46. Identification Of Contract Changes • Formal Changes • Unilateral Customer Directives • Pricing • Constructive Or Informal Changes • Technical Specifications • Statements Of Work 45 45

47. Claim Preparation Challenges • Skill - Mix • Sufficiency Of Resources • Scope And Pricing • Timeliness • Organization 46 46

48. Hypothetical Claim 47 47

49. Hypothetical Claim (Continued) 48 48

50. Hypothetical Claim (Continued) • Claim Settlement Compared To New Business • Assume Average Before Tax Profit Is 10% • $30 million ÷ 10% = $300 million 49 49