By Dr Franco Mastrandrea, Hill International
"Even an analyst armed with this raw data may find the task less than straightforward. A simple and commonplace complication may be the account coding allocated to a particular entry: costs may easily be miscoded. The reasons for this may range from blameless inadvertence to mischievous accountancy."
By “quantum analyst” I mean the financial appraiser of construction claims. I do not mean the tribunal charged with deciding a construction dispute; the person I have in mind usually acts as a quantum expert. By “construction claims” I mean claims against under-performing professionals, defects claims, claims for components of the contract price, termination claims or, more frequently, delay and disruption claims. As someone who himself practises in this field, I declare an interest.
The single factor likely to be uppermost in the minds of those involved in the resolution of construction claims is the financial worth of those claims. The quality of the quantum analyst can therefore be of the first importance in their satisfactory resolution.
Let me immediately set out what I consider the core qualities required. The sound quantum analyst is well informed yet inquisitive. He or she is creative, and motivated to trace a problem down to its essential components. He or she will search for gaps, hypothesise about missing material and explore justifiable answers.
This summary may be thought to conceal a potential tension between expertise in matters to do with quantum, and the discharge of the role of quantum expert.
In England, an expert witness (sometimes called a “testifying expert”) is someone who has been instructed to prepare or give expert evidence for the purposes of contested proceedings. He or she owes an overriding duty to the tribunal, regardless of the interests of those from whom the expert has received his instructions, or by whom he or she is paid. The work should be independent, uninfluenced as to form or content by the exigencies of litigation.
An “advising” expert, by contrast, may be retained by a party for the purposes of giving advice to that party. Such an expert will be free to help in the development of a case; his or her instructions and advice given in the contemplation of legal proceedings will usually be privileged against disclosure.
Whichever role he or she discharges, however, the expert should, in my view, always be objective and have a well-developed scepticism for the commitment of the protagonist, particularly one who advances his or her case in finite and inflexible terms. He or she should be cautious of the temptation (no doubt sometimes spurred on by the desire for a ready answer) to furnish an unwarranted or unsatisfactorily rationalised evaluation.
The evaluation of construction claims sits at the crossroads of a number of disciplines. It is perhaps understandable that those who do not have either the training or the experience in a variety of relevant fields will be nervous as analysts.
The primary disciplines likely to be invoked by the sound quantum analyst working in construction are law, economics, accountancy and the construction process, including its organisation and management.
Occasionally, the sound quantum analyst will consult the tenets of even more distant disciplines. This might extend to the work of the historian and philosopher (in relation, for example, to causation), the psychologist and welfare economist (in relation, for example, to attitude to and motivation for work), and the time and motion analyst (in relation, for example, to resource outputs and efficiency).
A sound quantum analyst may therefore be a multidisciplinarian. If not, then he or she will be able to identify and call upon the relevant additional expertise or assistance when required, and properly assimilate and balance the information or advice received.
Given this specification of qualities, it might be thought that the sound quantum analyst is likely to be drawn from a limited pool of people working within a well-defined discipline, in a well-recognised (if not common) structure, pursuing an established practice and procedure, deploying a tight, well-developed and comprehensive set of principles through the use of standard tools and methodologies.
In fact, the pool turns out to be much larger. It is highly fragmented, being a mixture of people drawn from diverse backgrounds. There is great divergence in individual skills, and limited consensus between its practitioners, who often draw heavily on their subjective perceptions and particular competencies.
In addition, some areas of practice commonly verge on the insular. By way of example, the layperson usually associates the concept of a “remedy” with a process whereby a defaulting defendant is brought to account by overtly formal legal means. As part of this process, the claimant is usually seeking a remedy for the invasion by the defendant of an “interest” protected by the law. The sound quantum analyst should be in a position to identify the appropriate interest; be aware of the considerations involved in pursuing a particular interest rather than any alternative interests; and be able to evaluate it financially. Yet the construction claims evaluation literature notably fails, on anything other than a superficial and faltering basis, to recognise, categorise, discuss or seek to reflect the various interests addressed by the law of remedies or their proper evaluation.
This deficiency is to be noted also at the workface: few analysts reflect these various interests in their work. That remains the case, notwithstanding (in the context of damages for breach of contract) the publication in the legal literature 80 years ago of a seminal (and still the leading) essay on the subject (Fuller and Perdue, “The Reliance Interest in Contract Damages”, 46 Yale LJ 52 and 373 (1936)). Thus, the vast majority of quantum analysts would be mystified by references to “essential” or “incidental” reliance, or the “expectation”, “restitution” and “indemnity” interests (which have differing objectives, may constitute alternatives and may have significant consequences on the burden of proof) which form the essence of that now classic formulation.
I limit myself in this to considerations of “cost”, which are likely to occupy a substantial part of the work of the quantum analyst.
The proper allocation of cost may often be the key to establishing its recoverability as part of a construction claim. The question whether a particular cost is properly categorised as time-related, volume-related, “once-only”, etc, is beyond the scope of this article. The essential point, however, is that the skills involved in determining the proper allocation of that cost are as much technical construction skills as they are a facility with the proper assembly, attribution and manipulation of the relevant figures.
The differing approach of the various disciplines to “cost” may also be a significant consideration. Thus, to the traditional accountant cost usually represents the historical outlay made to secure particular resources. This approach can expose significant difficulties, such as with long-lived assets, and assets contributing to more than one product. In construction claims, plant and overheads are prime examples of these sorts of assets. Some costs, on the other hand, such as the imputed interest on capital used in the business, may not be reflected at all by the traditional accountant. To the economist, the concept of cost tends to be used more as an aid to decision-making, indicating whether, for example, the resource under analysis is being put to its best use. The cost of a particular commodity is then the value that would have been attributed to that commodity in its next best alternative use, ie, its “opportunity cost”. The analyst should be aware of these differences and be prepared to articulate and justify his or her use of and/or preference between them.
Another important distinction is between fixed and variable costs. These are, again, primarily of interest to the economist, who usually seeks to distinguish between those costs that can be avoided in the short run (variable costs), and those costs that cannot be so avoided (fixed costs). This distinction can turn out to be of fundamental importance also to the quantum analyst and significantly affect his or her conclusions.
Sufficient confidence in the claimant’s costs may only be achieved by an analyst who has at his or her fingertips a thorough understanding of the costing system used by the claimant. This will usually involve consideration of comprehensive accounting data. This ranges across the various stages of the costing hierarchy, starting with the lowliest requisition sheet through to the global corporate and/or management accounts, sufficient to provide a full financial picture of the project in the context of the claimant’s business as a whole. An analyst who fails to achieve this level of understanding may be falling short of what is reasonably to be expected of him or her in that role.
Even an analyst armed with this raw data may find the task less than straightforward. A simple and commonplace complication may be the account coding allocated to a particular entry: costs may easily be miscoded. The reasons for this may range from blameless inadvertence to mischievous accountancy.
To illustrate more significant complications, assume that the task of the quantum analyst is to establish the expenditure incurred by the contractor over a particular period, being the expenditure relevant to a delay claim, and that he or she has accesss to the contractor’s account ledgers. It would be normal, in seeking to establish the expenditure over the relevant period, to take the balance shown in the general (or particular) ledger at the end of the period and to take from it the balance as at the beginning of the same period. That, however, must be subjected to adjustments for a range of items. Two of particular interest would be provisions and post-event allocations.
Provisions represent anticipated expenditure whose precise magnitude may not be known at the date the provision is made. They therefore act as temporary entries. As and when actual expenditure is made or identified, the provision is adjusted. Accordingly, one must take care to adjust provisions by actual expenditure. Where provisions are made against expenditure to be incurred in respect of a future obligation, it may be sensible to exclude it from the period in which the provision is made, and track it forward into the relevant period. It would thus become an “omission” from the ledger.
Post-event allocations occur when an expense is posted in the ledger at some date later than the commitment to which it relates. It will clearly be necessary to consider the period beyond that which is the focus of immediate interest to the analyst and to effect relevant corrections. Corrections may be by way of additions or omissions. Omissions are most likely to result from an analysis of the hinterland before the beginning of the period which is the focus of interest; additions are most likely to result from an analysis of the hinterland beyond the end date of the period which is the focus of interest.
Adjustments that do not make an obvious appearance in the accounting material before the quantum analyst may or may not fall within the period of focus in the analysis. Dealings with third parties often provide a fruitful source for such adjustments. A recurrent example is discounts that the contractor is able to secure against his liabilities to third parties. The unscrupulous contractor will not disclose such discounts. In as much that it is relevant to any claim, it is important for the analyst to see the full extent of intermediate invoicing and the documents that constitute the settlement of accounts between the contractor and such third parties.
In fact, adjustments or accommodations made may go beyond not only the immediate time frame of analysis but also beyond the project that is the focus of analysis. These pose some of the greatest challenges, simply because they are not to be seen, or readily to be discerned, from the data to which the quantum analyst is likely to be directed, or given access. These may include:
Because it is impossible to be certain that the analyst has been provided with a complete and accurate picture, an effective supplement may be for the analyst who has otherwise done his or her best to secure a comprehensive understanding of these matters, to provoke production of an express statement of truth. This should be from either a responsible officer of the claimant organisation or an independent auditor (preferably both), and should verify that the accounting data made available identifies and quantifies all relevant matters. A formulation which I have devised, and used successfully, requires confirmation that, in relation to all sums claimed, the claimant has disclosed and taken into account in his claims evaluation: all relevant transactions, (positive and negative) accruals, provisions, discounts, credits, allowances, rebates, reversals, post-event allocations, accommodations, or other accounting arrangements, etc, whether in relation to the particular project under scrutiny, any other projects, or the broader dealings between the claimant and third parties.
The essential message is, therefore, that sufficient confidence in the claimant’s costs may often be achieved only by an analyst who has at his or her disposal a thorough understanding of the accounting system used by the claimant, comprehensive accounting data, access to the various stages of the costing hierarchy, and a complete financial picture of the project in the context of the claimant’s business as a whole.
Investigation of documents directly relevant to the work of the quantum analyst may provide important additional information, with consequences beyond the matters strictly relevant to the analyst’s work. While investigations into these areas must always be treated objectively and with some circumspection (and are probably best done under specific authorisation once a lead is identified), it is clear that this sort of material may come to the attention of only the quantum analyst (as nobody else is likely to be charged with considering it), and yet may be of much broader significance in the dispute resolution process. This sort of material may not only undermine the credibility of the individuals associated with its creation and dissemination, or the case as a whole, but also provide the employer with a remedy direct against the contractor (through the concept of vicarious responsibility), and against the contractor’s quantity surveyor, as well as founding criminal proceedings.
The primary disciplines drawn upon by the sound quantum analyst are likely to be law, economics, accountancy and the construction process, including its organisation and management.
The most satisfactory evaluations are likely to be those which have regard to and seek to balance a solution from among the answers provided by these relevant disciplines. By contrast, an answer which achieves satisfaction of only one, or less than the full complement of answers from the relevant disciplines, is likely to prove less satisfactory or persuasive. In that event, the analyst should be in a position to make, and justify, a rational choice between the disparate answers which result.
The sound quantum analyst will be familiar with this wide variety of relevant influences upon his work and be able, persuasively, to accommodate and apply them.
A version of this article first appeared in extended form in 2008, in International Construction Law Review (at 28). Surprisingly little has changed since that time.
For more information, contact Franco Mastrandrea firstname.lastname@example.org