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From the Ground-Up

Allocation of responsibility in construction-defect litigation

December 16, 2022 Photo

Construction-defect litigation claims come in all possible project types, sizes, and ownership structures. There are usually multiple parties that share responsibility; sometimes there are dozens. The mechanism for allocating responsibility needs to be flexible, from a single issue on a small project, to more than 100 allegations occurring at hundreds of locations to dozens of parties.

Because allocation is complicated, we have engineered a process to assign supportable portions of the cost to repair defects and other damages to each responsible party. Allocation is mostly “science,” but critical parts include the “art” of applying professional judgment. This includes making a sensible list of defects (issues) that can be allocated, assigning values to each issue or category, making a list of all possibly involved parties and understanding their role in the project, and assigning justified portions of responsibility for each issue. A real, professional, supportable allocation has a lot of moving parts—there is a lot of math, connected spreadsheets, and professional judgment from expert witnesses and lawyers.

Working Backwards

Since most claims settle, we won’t address trial or arbitration, although much of the work to support our claims against each party will be used if trial becomes necessary. We will work backwards from a successful mediation. To succeed in settling a multimillion dollar case with dozens of issues and more than a dozen defendants, the mediator, lawyers, and experts need information that allows them to understand the big picture and to drill into details when making their case.

The culmination of our allocation is a one- or two-page, tip-of-the-iceberg spreadsheet called “Allocation Summary with Settlement Ranges” (see below). This document is typically not shared with other parties. Column one lists of all the players involved, and column two is for important settlement notes. Next are columns for one or more allocated costs, and two columns on the right for low and high potential settlement amounts.

 Each column of allocated costs is a separate allocation analysis, as described later in this article.

Analyzing Construction Defects

The “Engineered Collection of Deliverables” table (see below) shows how we ultimately arrive at our Allocation Summary. “Inspection & Testing Data Analysis,” and the project file behind it, is the foundation for all further work. It includes detailed inspection and testing photographs, notes, diagrams, and marked-up plans; inspection summaries; testing summary and maps; and testing analysis reports. Then experts can compose reports that range from a couple to hundreds of pages. On projects large enough to warrant allocation, reports typically exceed 100 pages.

 

The most difficult, lengthy, and important part of a construction-defect report begins with a list of all issues, and then the issue-by-issue analysis for each. We begin each issue analysis with a plain language summary that everyone can understand. That is followed by a detailed investigation section that summarizes the document reviews, interviews, inspection, testing, and more, that were performed to inform our understanding.

Our analysis often includes composition of images, maps, plans, and other visual aids for communicating this highly technical information. The conclusions for each issue might include a scope of repair, a list of responsible parties (later included in allocation), or an “allocation by trade” if we do not yet know who did what work and where. Finally, published costs for each issue are summarized.

The Allocation Matrix is a worksheet that includes a complete issues list down the left-hand column, and all of the players across the top. Each party will have at least two columns titled, “% Responsible” and “$ Amount.” The “$ Amount” is a simple calculation of the total cost for that item, times the “% Responsible.” This matrix requires fancy formulas to do the math, including math checks, to make sure there are no errors. This can get complex when there are lots of issues and lots of parties, and is then further complicated when multiple parties work on the same trade in various phases or physical areas.

Who, What, Where

For each issue, we use the Project File to try to figure out who did what, and where. For example, if the first issue is roof leaks, and there were two phases of construction, do we know who installed the roofs on both phases? For more complex issues like waterproof decks, we might need to dig to figure out the cause of problems and who might be responsible, including the architect, engineer, framer, sheet metal fabricator/installer, door installer, waterproofing applicator, tile installer, siding contractor, handrail installer, and the general contractor who was supposed to coordinate all these parties.

As we begin assigning “% Responsible” in the Allocation Matrix, we often need to make multiple passes across the general and player Project File to prove who did exactly what and where. In some circumstances, there will be more than one party that performs work on the same trade, but in different locations. If there are two project phases, one with two buildings and the second with three, all of the same size, then phase one is 40% and phase two is 60% of the roofing.

This is an iterative process. To decide on and support the “% Responsible,” we cycle through the Report and the Project Files multiple times, learning and documenting more and more with each pass. Scope of work and allocation data is often best presented graphically using photographs, diagrams, images, maps, and plans, both in the Report and in the individual Allocation-Claim Packages.

This evidence collected should be memorialized in the issue-by-issue section of the Report and/or in the Allocation-Claim Package Memo for each player. The organization of this information is important and complex, and if it is only saved in the brain of an expert or attorney, then it is a terrible system.

At this point, we have all of the information we need to complete a Joint & Several Allocation on any of the costs (plaintiff, defense costs of plaintiff scope, or defense scope) since we know who did what work and where. Joint & several liability means that if you are 1% responsible, then you might pay 100%. This is a consumer protection aspect of law that means if there are two responsible parties but only one has the means to make the consumer whole, then the one could end up paying a larger percentage of cost than its percentage of responsibility. We know each state has different laws on this but that is beyond the scope here. For our roof example, the two roofers would never get more than 100% of the portion of the project they worked on, so: 40% and 60% of the total roofing costs, respectively.

In our deck example, we identified 10 parties that could have shared responsibility. If any one of those were the only one with the means to make the consumer whole, then it could end up paying 100%. With this in mind, we could populate the Allocation Matrix with 100% for each of the 10 parties. So, yes, this means we have allocated 10 times the cost total for that line item. Depending on the complexity of the issues, the grand total of a Joint & Several Allocation will generally fall between 1.5 and four times the total project cost.

Professional Judgment

Prior to the Joint & Several Allocation of the Plaintiff Estimate, we usually “normalize” the cost analysis of parties to make the allocation clearer: Each defect has a “total burdened” cost that will be allocated across the responsible parties. To allocate all of the costs to all the issues (in the left-most columns of the Allocation Matrix), the total cost needs to include direct costs, indirect costs like general conditions, overhead, profit, and other project costs including design, permits, third-party management and inspection, alternative living expenses, etc. Attorneys’ fees and other litigation costs need to be handled somewhere. We prefer them as separate line items outside the “Total Cost” column.

After all of the above, we can make “% Responsible” (allocation) judgements for a “100% Allocation” for each issue and feel confident that we have the evidence to argue persuasively. The science part of an allocation is figuring out who might have 1% or more responsibility. The art, or professional judgement, part is where we decide who is more and less responsible, like when we have assemblies such as the waterproof deck described previously.

For the most complex and expensive issues, we perform what we call a “Contracting 101 Analysis” of the roles and responsibilities of each party by looking at both the physical construction, performance, and damages; as well as the project specific contractual obligations and industry “standards of care.” From our deck example: architect 5%, engineer 0%, framer 10%, sheet metal fabricator/installer 5%, door installer 10%, waterproofing applicator 25%, tile installer 20%, siding contractor 5%, handrail installer 10%, and the general contractor 10% (Total 100%). When presented to the parties, this is where the wailing and gnashing of teeth gets loud. In mediation, when a party argues that its responsibility on any issue is less than my analysis, I invite them to go discuss it with the other parties allocated on those issues. If they can work out the percentages amongst themselves to redistribute my 100%, then I will consider it (they never like this answer).

When the Allocation Matrix is set up correctly, and each of the issues is allocated to the various parties totaling 100%, then the allocation totals to all of the parties should add up to the “Total Cost” column at each issue and at the total on the bottom line.

At the conclusion of allocating, by any one or more methods (plaintiff or defense, joint & several or 100%) the totals for each player can be linked to the “Allocation Summary with Settlement Ranges” worksheet. Then the team can consider, party-by-party, low and high settlement ranges (left most columns) based on the overall project settlement value. This is, in allocating responsibility, the ultimate act of applying professional judgement.

Making a Case

We have done a lot of work, but there is little value until we make a compelling argument to the people we expect to help pay for a settlement. Much of the work described here gets compiled, party-by-party, in individual allocation-claim packages. To make big, supportable claims, we need to collect evidence that can be evaluated by the parties. The more plain language and graphic intensive this package is, the better. Small players can have smaller packages but big player packages need heft. Sometimes, we compile a package for a major player, and realize that, in order to help other players make good decisions, we need to dig back into the project and investigation files to add additional information, and this is true for both plaintiffs and defendants. When mediation happens, the time to perform has arrived. In a large CD case, there are always surprises. If we have worked the way we have recommended here, the team will be ready.

Connecting all of the moving parts of a complex litigation matter requires organizational skill, technical expertise, and the willingness to apply professional judgment that people from opposing parties will argue with. It is not for the faint of heart.

The bottom line is that allocation is complicated. The science has been “process engineered” here. The art of professional judgement is always going to be a big part of any complex litigation and can only succeed when smart people do hard work. When we do the science and the art, good information emerges that allows smart people to make smart decisions to help tough cases get resolved.

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About The Authors
Pete Fowler

Pete Fowler is the founder of Pete Fowler 
Construction Services, Inc.  pf@petefowler.com

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