Construction tender disputes – supporting the damages calculation
In the construction industry, a tender process is a common way to choose a service provider. Typically, the lowest bid that meets the criteria wins, and the project gets underway without issue. However, situations may arise in which a bidder claims that they were unsuccessful due to the alleged actions of the tendering company. If litigation results, an expert forensic accountant may be needed to provide an opinion of the loss of profit resulting from the alleged actions of the tendering company.
It is important to note that a forensic accounting expert does not provide an opinion on liability. Rather, the forensic expert focuses on the quantification of lost profit. Calculations are based upon a number of factors – including a review of documentation, financial analysis, and discussions with relevant parties – with reference to accepted approaches to estimating the financial impact of an alleged wrong.
The Type of Professional Engaged
In a tender dispute, Counsel determines the type of expert required. Because the expert may be called to testify in court, the damage quantification reports are usually prepared by a CPA, who has credentials including Chartered Business Valuator (CBV), Investigative Forensic Accountant (IFA) and/or Certified in Financial Forensics (CFF) designations. The expert’s governing professional organization sets out standards for the preparation of expert reports in litigation matters.
Confidentiality of sensitive information is of utmost importance to all parties involved. Company owners and management are concerned about releasing financial information that will not only be provided to their expert, but will also be produced to the opposing party and their expert.
Items requested may include the Request for Proposal, cost and expense estimates (tender sheets, workups, budgets), the bid document, the contract, company financial statements, subcontractor quotes, labour expense information, and financial information related to comparable projects.
Approaches to Quantifying the Loss
Generally, in a tender dispute there is a claim in which the plaintiff alleges that it was, or should have been, awarded the particular project. As a result, the financial expert is engaged to provide an opinion of the financial impact for something that did not happen. As such, the financial expert will utilize a variety of approaches to support the opinion provided. This may result in a range of damages that, in some cases, may be significant.
Although case-specific and a matter of the expert’s professional judgment, there are typically four or five methods utilized to varying degrees for quantifying the loss of profit:
- The plaintiff company’s estimate of the profitability of the project. The expert will review and analyze the company’s estimates of loss of profit. Estimates prepared during the bidding process will be reviewed and tested. The financial expert will support and test the estimates prepared by management, and may adjust them accordingly.
- Analysis of comparable projects. Profitability on comparable projects may provide a benchmark for the expected profitability of the subject project. Actual labour costs, subcontractor expenses, and other data including overall profitability of comparable projects often provides good data to assist the expert in estimating the subject project profitability. In addition, if available, the expert may compare the plaintiff company’s profitability estimates for similar projects with the actual profitability of those projects.
- Financial statements. The profitability of the plaintiff company, as set out on its financial statements, may also be a benchmark of the profitability of the subject project. This analysis may serve as a reasonableness check.
- Industry benchmarks. Although sometimes difficult to obtain, industry benchmarks and comparable company profitability may be a benchmark/reasonability test of the anticipated profitability of the subject project.
- The actual results of the Project. If a company other than the plaintiff is awarded and completes the project, the actual financial results, if available, may be a good gauge of what the plaintiff’s profitability may have been. Generally, this information is difficult to obtain as the “replacement” company will not volunteer this information unless compelled to do so.
The quantification of a loss of profit in a tender dispute is benefited from an examination of the anticipated project profitability, from a number of perspectives. The extent of reliance on each of the various approaches is case-specific and the financial expert will use professional judgment to support his or her findings.