The Role of the Budget as a Tool to Prove Damages and Promote Improvement

Many commercial, public works and industrial construction projects involve competitive bids in which the successful bidder subsequently converts the work items or categories of work in the bid to a construction budget for the project.  On a complex construction project the budget may contain dozens of categories of work with hundreds of cost codes.

Budgetary overruns in cost codes or categories of work lead some construction managers to “dump costs” into cost code(s) that are otherwise under-budget.  This is problematic for a number of reasons including: 1) minimizing/degrading the integrity of the budget as a means to track the accuracy of the bid/estimate for the project; and 2) it can lead to potential problems in proving damages where the cost increases are due to causes other than bidding/estimating errors.

Construction costs should be properly allocated to the appropriate construction category and/or cost code in the budget.  This allows construction professionals to make adjustments where the estimate/bid did not include realistic projections on production, time and costs  (i.e. improve on future projects).  Conversely, proper construction cost tracking allows construction professionals to rely on past bids and budgets where accurate estimates proved profitable for the construction company (i.e., improve on future projects).

From a legal perspective, proper construction cost tracking is also essential to assist in calculating damages.  When construction managers “dump costs” into inappropriate cost codes it can make it very difficult to accurately track and determine damages for cost increases not caused by the contractor, and for which the contractor may be entitled to compensation. Additionally, when events arise, such as changed conditions, it is critical to create a new budget line item for the changed condition. Creating a new budget line item for the changed condition segregates the costs resulting from the change and allows for accurate cost tracking, defensible documentation, and clearer claims to entitlement.  It is also important to take steps to avoid the inclusion of cost increases independent of the changed condition due to the contractor’s own inefficiencies.   A budgetary overage may not mean the estimate/bid is unreliable or inaccurate.  Rather, it could mean that something arose that could not have been reasonably anticipated at the time of bid.

For more information on how proper construction budgets affect damages and project improvement, contact Milo D. Miller Law Group, P.C. at 720-306-7733.