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So What’s the Deal With Lost Profits and Overhead?

Many of the construction disputes I am involved with involve a claim for lost profits and overhead. The typical situation is where one party (often the owner) alleges a breach and then terminates either the general contractor or the subcontractor. The terminated party then makes a claim for lost profits and overhead. The two questions usually asked by contractors and subcontractors in these situations are: (1) “Am I entitled to lost profit and overhead damages” and (2) “How are they calculated?”

The answer to the first question is that it depends on the contract language. Many construction contracts specifically exclude language about lost profit and overhead damages. In those situations, the contractor or subcontractor will be prohibited from making a claim for its lost profit and overhead. By contrast, AIA form contracts contain language that is similar to the following:

The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause. The Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.

With these contracts and any contracts that contain similar language, the contractor or subcontractor will be entitled to make a claim for its profit and overhead. If the contract is completely silent on lost profits and overhead, a claim can still be made by the contractor or subcontractor.

Turning to our second question: how does the contractor calculate its lost profits and overhead? Recently, the Missouri Court of Appeals (Southern District) in Williams Construction, Inc. v. Wehr Construction, L.L.C. provided us with guidance on how to calculate lost profits and overhead damages.

In Williams Construction, the trial court awarded Williams Construction $30,000 in lost profits and $5,000 in overhead damages based on Wehr Construction terminating the contract for convenience. Wehr Construction appealed and the Missouri Court of Appeals reduced the award to $15,028. The reason for the reduction was due to how the overhead damages were calculated.

The Williams court stated that, “[I]n proving an award of lost profit damages, ‘a party must produce evidence that provides an adequate basis for estimating the lost profits with reasonable certainty.’” Under Missouri law, a business owner can testify about its lost profits on a project and the trier of fact can rely on this testimony in reaching its judgment. A business owner’s testimony is also acceptable evidence to prove overhead damages.

The issue in Williams was that the business owner included labor costs that would have been necessary to generate the “profit” as an “overhead” expense and, in essence, double-dipping on the amount of damages. The Williams court stated that, “A party cannot recover both its lost profits and the overhead expenses that are tied to the production of that profit.”

The take away from Williams for contractors and subcontractors involved in a dispute about lost profits and overhead damages, is to be sure to separate the overhead costs that are necessary to produce the lost profit claimed (i.e. labor costs). It should also be remembered that the business owner can testify about overhead costs which potentially will save expert witness fees in presenting the case. Finally, contractors and subcontractors should review their contracts to make certain there is not an exclusion of lost profit and overhead damages.