Construction defect disputes are often complex matters. The evaluation of repair costs and the proper allocation to responsible parties is an important process that often needs to be addressed as part of the dispute resolution. To date, there is little to no consensus for the method of allocating responsibility and costs to implicated parties.
Here’s a standard method developed by a consulting group to allocate repair costs to implicated parties.
Identify the defect issues
The first step in the allocation process is to identify the defective conditions that are the basis of the claim. This process should follow well-established standards to investigate and develop forensic evidence supporting the allegations being raised. The result must include a well-organized listing of deficiencies that will provide a basis to subdivide the claim.
Identify the responsible parties
Responsible parties are identified by review of the project records including subcontractor agreements or other supporting documentation that link a party to defective work. Responsible parties are assigned a percentage of responsibility for each deficiency based upon their contractual responsibility as well as the effect their work had on the defective condition.
Calculate the cost of repair
The cost of repair may be derived from actual costs incurred or from a cost estimate of work yet to be performed. The total project cost must be assigned to all defects.
A complex claim may have multiple cost categories. While some items of cost can be assigned entirely to one defect, other costs may require further breakdown by the assessor. An example of a complex breakdown of costs is the replacement of a wall system due to multiple defective conditions. In this case, costs are divided among defect categories by considering the portion or area of the overall system impacted by the defect.
Other costs such as project overhead or special equipment can be allocated based upon the defect’s percentage of the overall cost or percentage of a subset of costs that share an item.
Allocate the repair costs to the responsible parties
A party’s allocation of the total project cost can be calculated by multiplying the cost per defect by each party’s percentage of responsibility for a given defect category.
While there could be other valid methods to allocate responsibility and damages, the scientific methods summarized in this article are a reasonable and equitable approach. Any application of this, or any other, allocation method should be used in conjunction with sound professional judgement.
This article represents an overview of KKCG’s analyses and methodologies in allocating repair cost to responsible parties.
