Loss of Profits Damage Quantification – A Method to the Madness

Patricia Harris • September 09, 2019
Patricia Harris

The subcontractor that you hired on a project is suing you for non-payment. Even though the case has been going on for over a year, you still can’t believe the nerve. The amount of money that they cost you in delays, replacement materials and additional fees was extensive and led to their ultimate termination from the project. On top of that, you’ve incurred legal fees to issue a statement of defense and counter claim. At this point in the litigation, your lawyer advises you that you may need to have an expert report prepared to quantify your damages related to your counter claim.

Enter the forensic accountant who has a duty to the court to provide independent and objective expert evidence. Although hired by one party, the expert’s report must be unbiased. For a breach of contract claim, a forensic accountant typically calculates a “loss of profits” and prepares a report setting out an analysis and a quantification of the loss. The objective of a loss of profits calculation is to calculate the profit (if any) that should have been realized had the alleged wrong not occurred and to calculate the amount by which those expected profits exceed the actual profits realized.

An important point is that the calculation is of lost profit, not lost revenue. This means that all your costs (or the costs that you would have incurred had things gone as expected) must be taken into account. Other additional costs incurred as a result of a breach of contract (out-of-pocket costs) may also be included in the loss claim.

A forensic accountant will determine your loss, generally by examining actual profitability on similar projects and typically considering projected and actual results both before and after the loss period. In addition, calculations will consider any ways in which damages were mitigated. For example, if a contractor is terminated from a project, there may be profits earned by him that could not have otherwise been earned, absent the termination. In this regard, forensic accountants may need to assess capacity issues to address how the contractor mitigated its loss.

The work of forensic accountants has evolved as technological advances have made it easier for people to communicate and do business. While it is generally accepted that technology has increased our efficiency, when it comes to the work of a forensic accountant, technology has created certain challenges. For instance, technology has created complex construction costing, pricing and accounting systems, which may require specialized knowledge to navigate. As such, while technology has had an overall positive impact on our ability to do business, it has added additional complexities to the job of a forensic accountant in construction damage quantification cases.

Contact a Forensic Accounting Firm

Through the guidance of your lawyer, you may be faced with a situation where you need such expertise. Hiring an expert in forensic accounting from Fuller Landau to prepare an expert report setting out a loss of profits damage quantification will help to succinctly communicate what can often be a complicated calculation related to litigation.