A Guide on Damages Evaluations: Analysis and Quantification

Since construction projects are prone to issues like delays and cost overruns, the potential for damages is ever-present. Generally speaking, damages refers to the monetary compensation awarded to an injured party. However, in contract law, the term “damages” is more nuanced, and settling a claim typically focuses on fair resolution for all parties involved.

Whether a claim leads to litigation or negotiation often depends on the presence of a detailed, objective damages evaluation. A damages evaluation involves analyzing records to identify the cause of a disruption, determine liability, and quantify the resulting damages. It’s a complex process, but it’s necessary nonetheless to achieve positive outcomes for all involved — particularly in large construction projects. 

Common Areas of Damages

Due to the complexity of construction projects, damages can occur in a wide range of areas. Examples include:

• Extended overhead costs caused by schedule delays
• Loss of productivity costs 
• Outstanding or unapproved change orders
• Unpaid contract balance
• Project acceleration costs
• Disruption impacts
• Lost profits or economic damages

Any of the above damages could lead a stakeholder to seek compensation through a claim or dispute resolution, leading to the need for a damages evaluation.

The Importance of an Accurate Damages Evaluation 

An accurate damages evaluation is crucial for determining how much compensation a party owes a claimant — if any. For example, if a project owner makes changes to a design beyond contractual limitations, resulting in incurred costs for the contractor, the contractor will need to illustrate those costs to seek fair compensation.

The claimant must also provide the evidence to substantiate the damages they seek. This process involves demonstrating a clear link between the damages and the cause. Claimants can substantiate damages by providing detailed supporting documentation, an analysis of relevant cost data, and in some cases, expert witness testimonies.

Failure to accurately assess damages can lead to the following:

Financial Implications

An inaccurate evaluation can lead to over or underpayment of cost overruns, productivity loss, liquidated damages, or other losses.

If the damages are understated, the claimant will likely not recover the real costs and will lose money as a result. If the damages are overstated, it will be harder to reach an agreement with the other party, further delaying a resolution and increasing the effort required to achieve one.

Consider an example in which a contractor experiences significant delays due to a design error, extending their overhead substantially. However, they overlook multiple eligible expenses, like loss of productivity and administrative costs, when evaluating damages. Consequently, they claim a lower amount than owed, potentially losing thousands of dollars.

From a project owner’s perspective, an understated damages evaluation might lead to lost profits in the present and future. For instance, if a design related delay prevents them from reaching full occupancy of a commercial building on time, they must consider total economic damages to recover full costs.

Regardless, both parties bear the burden of proof to ensure they aren’t suffering unreasonable financial loss.

Legal Implications

An unsubstantiated damages evaluation increases the risk of a dispute, which might escalate to litigation. Without clear, objective, and defensible evidence, a claimant is not positioned to persuade the opposing party and reach an agreement. 

Failure to properly support and substantiate damages calculations also makes it easy for the other party to challenge the claim, preventing resolution and increasing the likelihood of the issue becoming a legal dispute requiring litigation. A lawsuit can quickly rack up costs related to legal fees and other expenses — an undesired outcome for both parties.

Reputational Implications

No matter the industry, trust is one of the key elements to retaining clients, attracting new ones, and maintaining profitability. According to PwC’s 2024 Trust Survey, 93% of business executives say that trust improves the bottom line.

By not preparing an accurate damages report, a construction business risks harming its credibility and trustworthiness in the eyes of stakeholders. This failure to provide correct information can cause friction between parties even if they reach a resolution, harming any opportunities for future partnerships.

An inaccurate damages evaluation can harm a business’s reputation in the public eye as well, making it challenging to secure new projects. A tarnished reputation can linger for years, leading to countless lost contracts and requiring investments in reputational repair.

In a highly competitive market like construction, it’s better to get a damages evaluation right the first time and protect the company’s reputation. 

Common Challenges in Damages Evaluations 

Properly assessing and quantifying damages is a challenging undertaking for many construction companies, often warranting assistance from a third party. The process requires in-depth knowledge and a multitude of skills, including a deep understanding of construction processes, CPM scheduling, cost analysis, and various quantification methods, in addition to objectivity.

The evaluator must be equipped to overcome the following challenges:

Complexity of Damages 

Construction damages often involve many moving parts and stakeholders, making it difficult to pinpoint causation. Since the same damage can stem from multiple sources, skill is needed to determine the actual cause of the realized damages. It’s also challenging to quantify damages because a disruptive event can have a ripple effect on other project activities, impacting cost on multiple levels in the present and future.

Contracts add to the complexity, as they are often filled with legal jargon and technical language that can be difficult to understand without experience. Contract ambiguity can lead to misunderstandings of obligations or rights, impacting the validity of claims and potentially resulting in conflict.

Lastly, evaluators must consider and decipher between the various types of damages to determine if they are recoverable. Damages are classified as:

• Actual damages: Also called direct damages, actual damages are the quantifiable losses that can be directly traced to a contract breach, such as labor and material costs related to a delay. Actual damages can include a combination of realized damages, or those already accounted for, and forecast damages.
• Liquidated damages: If a party fails to meet project milestones, they may be required to pay liquidated damages as defined in the contract. That said, some contracts make it challenging to distinguish between liquidated damages and penalties.
• Consequential damages: These result indirectly due to a contract breach and are often connected to a delay or performance issue. Examples include reputational damage and loss of future sales.

The above categories can overlap and further complicate matters. For instance, if a contractor breaches a warranty clause and then takes time to repair a defect, which leads to a project delay and damages the owner’s reputation, the owner will need to evaluate for actual, liquidated, and consequential damages.

Documentation Issues and Data Gaps

Data gaps and poor documentation are common challenges in the construction industry. Construction companies may struggle to keep accurate, updated records of costs, schedules, correspondence, and disruptive events due to unstandardized or decentralized document management systems. Some contractors may lack the time to document events in detail given the fast-paced nature of construction work. 

Without adequate documentation, both contractors and project owners will have difficulty gathering the data they need to accurately analyze and quantify damages.

For example, if a contractor claims the owner caused disruptions that led to delay damages, they’ll need to prove these disruptions actually occurred and impacted specific activities that led to financial loss. If they don’t keep detailed daily reports, it will be hard to link disruptions to delayed activities and therefore difficult to accurately quantify the related damages.

It’s essential to maintain good documentation throughout the entire life of the project, as issues leading to damages can arise unexpectedly at any time. By documenting events, decisions, communications, and performance data at every phase, parties are better prepared to establish causation, quantify damages, and support their claims — all of which can lead to a streamlined resolution.

Bias and Subjectivity

Bias is a challenge and concern in damages evaluations — and it’s often unintentional. Confirmation bias, in particular, is a common form of bias impacting damages evaluations and their results. It involves selecting details that confirm a claim while overlooking or downplaying evidence that contradicts it.

According to psychology researchers, everyone is susceptible to confirmation bias, as it’s part of how the human brain processes information. For example, a study found that roughly 30% of incident investigators structured their interviews based on their initial presumptions, seeking to obtain particular evidence.

Any form of bias, whether unconscious or conscious, undermines the accuracy and fairness of a damages evaluation. It can lead to conflict, postpone dispute resolution, and erode trust between the parties involved. Working with an impartial, third-party evaluator can be an effective strategy for preventing confirmation bias.

Subjectivity is yet another challenge. Claimants may need to make many subjective judgments when evaluating damages, such as estimating costs if there are data gaps, interpreting vague contractual language, or determining whether costs are reasonable.

When data is based on subjective judgment, it sets the stage for disagreements and disputes. It also makes it more challenging to prove the validity of claims in court, where objective facts are always favored over opinion.

One way claimants can reduce the impact of subjectivity if they face data gaps is to use data sampling. Data sampling involves using smaller datasets to infer the characteristics of a larger population. With that in mind, the larger the sample size of high-quality data, the more bias and subjectivity generally shrink. Partnering with an outside party to review data and formulate damages can help reduce subjectivity.

Techniques for Damages Analysis and Quantification

An accurate and objective damages evaluation requires a structured approach using various techniques, methods, and data analysis tools. The process typically begins with an entitlement review, which involves examining the contract and relevant laws to establish what damages are recoverable.

If the evaluator determines there are grounds to recover damages, they can use reliable methods to identify causation and quantify the losses. 

Actual Damages

The following methods can be used to quantify actual damages:

• Discrete quantification is the best method for quantifying actual damages. It involves breaking down damages into separate components, allowing evaluators to review, document, and track all actual costs and quantify damages individually. Discrete quantification enables a more detailed account of damages.
• Measured mile analysis estimates damages resulting from lost productivity by comparing activities that occurred during a disruption to similar activities that took place during an unaffected period. The measured mile analysis is the preferred method for measuring and quantifying loss of productivity damages.
• Industry studies or industry estimating guides can be used to develop a hypothetical cost versus what actually happened. This method can be helpful when benchmarking data is needed or there aren’t reliable records available.
• Modified total cost calculates damages based on the difference in total costs incurred and the bid amount, taking costs like bid errors and other expenses the liable party is not responsible for into account. This calculation method may be used if there’s a lack of solid documentation.

Liquidated Damages

Liquidated damages can be quantified by using the following delay analysis methods:

• Contemporaneous period analysis, also called windows analysis, is the preferred method to study schedule impacts on a period-by-period basis. This technique entails breaking the schedule into smaller durations to pinpoint and quantify the actual impact of a delay or disruption.
• As-planned vs. as-built schedule analysis compares planned timelines to actual timelines. It’s a delay analysis technique that can be used to demonstrate that a delay occurred, as well as its duration.
• Prospective time impact analysis (TIA) quantifies projected delay events by placing them in a schedule and recalculating timelines. This method is most often used to assess changes during project execution. TIA enables evaluators to see the impacts of delays in near real time and demonstrate causation to support a time extension claim.

Consequential Damages

Economic models can help evaluators estimate consequential damages and future financial loss as well as more accurately quantify present damages by taking factors like market conditions and inflation into account. Models include: 

• Regression analysis looks at the relationship between a dependent variable, like cost, and an independent variable, such as material prices, to quantify the impact of independent factors. This model can help claimants determine a fair amount for compensation.
• Discounted cash flow estimates the present value of an asset by predicting future cash flow and discounting it to account for present values. Discounted cash flow can be used for various purposes in damages evaluation, such as quantifying the lost profits a contractor might claim for wrongful termination.

It’s also worth mentioning earned value management (EVM). While not an economic model in itself, EVM can help businesses acquire data for use in economic models or quantification methods.

EVM is a project management technique that involves monitoring the progress and performance of a construction project. It uses various metrics — planned value, actual cost, and earned value — to measure progress, determine the status of a project, and identify cost overruns.

Data Analysis Tools

Technology is pivotal in helping evaluators analyze large amounts of data efficiently and accurately. Digital tools can also help evaluators present data to stakeholders in a digestible format, which can be crucial in expediting a negotiation.

There are countless tools available to facilitate data analysis and collaboration, including:

• Project management and scheduling software: Oracle Primavera P6 and other project planning solutions can help construction companies manage complex schedules and analyze delays. For example, Primavera P6 keeps a log of identified risks linked to scheduled activities, enabling simplified delay analysis.
• Cost estimating software: Tools like STACK and PlanSwift help managers obtain accurate cost data, which they can then use in methods like direct cost analysis and discrete quantification. These tools break costs down in detail, helping evaluators validate them.
• Data visualization tools: Microsoft Power BI and Tableau are data visualization tools that can help evaluators present complex datasets to stakeholders in a simplified way. For example, presenters can use charts to illustrate project delays or the impact of a disruption, making a claim easier to understand and more persuasive.
• Cloud-based project management platforms: While project management solutions like Procore may not directly perform quantification techniques, they can be instrumental in managing essential supporting documentation like contracts, change orders, daily logs, and project costs. Cloud-based platforms also streamline communication and collaboration with stakeholders.

Achieve an Accurate and Objective Damages Evaluation With Spire

Whether you need to prepare or validate a claim, an accurate and objective damages evaluation is nonnegotiable. By analyzing and quantifying damages precisely, you’ll form a clear and convincing picture of causation and the compensation owed. 

If you need the help of a third-party expert for a damages evaluation, consider Spire Consulting Group. We offer comprehensive dispute resolution services, including damage assessment and quantification, delivered by experienced construction consulting experts and tailored to your needs.

Our team has built a strong reputation for impartiality, ensuring our partners receive damages evaluations that are fair, persuasive, and defensible. Explore our portfolio of worldwide projects to see our results.

Ready to discuss your project needs? Contact our team today.

The content included in this article is for informational purposes only and does not reflect the opinions or recommendations expressed by any individual unless otherwise stated.