"Total cost" claim fails

In the recent case of Petromec, the Commercial Court refused to permit the claimant to proceed with its “total cost” claim.

What is a “total cost” claim?

It is a claim for additional payment, where the amount claimed represents the difference between the contractor’s actual cost (plus profit margin) and the contract price for the work in question. “Total cost” claims involve rolling up a number of heads of claim into a single claim. E.g. if a contractor is given 120 variation instructions, which have the effect of increasing its overall volume of work, the contractor may attempt to make a single claim for its increased cost arising from the variations, rather than making 120 individual variation claims. Claims are often expressed as “total cost” claims because it is difficult (or perhaps impossible) to demonstrate how each individual matter (e.g. each individual variation instruction) caused a contractor’s costs to increase.

What is the potential problem with this approach?

In a word - causation. “Total cost” claims don’t attempt to demonstrate how each individual event (e.g. each variation instruction) caused its costs to increase. “Total cost” claims assume that a number of events had the aggregate effect of increasing the contractor’s costs. But what if there were other causes of the contractor’s costs increasing, for which the owner is not responsible? Did the contractor’s additional costs occur because the contractor poorly managed the project? Or were other factors at play, e.g. labour shortages or bad weather?
“Total cost” claims often suffer from the same weakness as “global” delay claims, i.e. they fail to demonstrate persuasively how a number of events caused a particular result. This can lead to them being struck out by a court at an early stage, or failing even if they proceed to trial.

Petromec

The claimant was engaged to build an oil rig. Part way through the project the owner made numerous changes to the specification for the rig. The claimant claimed for its additional costs i.e. the total cost incurred in building the rig to the new specification, less the cost that would have been incurred in building the rig to the original specification. The claimant did not identify specific costs incurred due to individual changes.
The court rejected the claimant’s “total cost” approach. The judge noted that the “total cost” method assumes that which it is necessary to prove, i.e. in this case, that the additional costs were incurred by the contractor related to work which was required for the new specification, and that instructions for the additional work were given. In order to succeed the claimant must identify the work, and the cost attributable to that work, together with the instructions from the defendant to carry out the work.

Relevance

Petromec highlights the difficulties that “total cost” claims face in court and arbitration proceedings. The case does not alter the position that courts are generally reluctant to accept claims on this basis because they are not pleaded with sufficient particularity. The ultimate test of such claims is whether they demonstrate persuasively that a number of matters for which the owner is responsible led to a claimed increase in cost. Sometimes they will be persuasive, but often they are not. The better approach - which should be possible if proper site records are kept - is for costs to be attributed to individual items, rather than roll them up into a single claim.

Case: Petromec Inc v Petroleo Brasileiro SA [2007] EWHC 1589 (Comm)

If you would like further information about this case please contact Billie Bingham at [email protected] or 020 7367 2766.