Deconstructing construction claims, part 1

A complex construction defect case usually include architects, engineers and contractors, some of whom may be the claimants, some the responding parties, and some serving as expert witnesses.

Often overlooked in this legal traffic jam is the value of an experienced forensic accountant, particularly one with experience in analyzing damage claims. Such an expert can help assess economic damages, assist in the discovery of fraud and testify about business valuation and related issues in a wide range of situations.

One of the key benefits of working with a forensic accountant is that a savvy expert in this area is trained to utilize skills and techniques which will assist in investigating the claim. A good expert can help reveal crucial facts that will shed much needed light on the underlying claim for damages. This type of analysis merits consideration in the settlement process as well as at trial or arbitration. Indeed, many elements of a construction defect claim may dramatically shift upon probing analysis by a forensic accountant, either getting sharper and more potent, or crumbling under scrutiny.

In this brief three part series, we will examine how this occurs. Our analytical vehicle is a hypothetical claim made by a university in the context of a dormitory construction project that went off the rails.

Hypothetical facts

Let’s assume a university has filed a claim against a contractor, subs, architects, and engineers (to name a few potential parties) for alleged defects in two on-campus housing buildings. We’ll call them Building A and Building B. Construction defects forced the buildings to be taken out of circulation while repairs were made. To correct the problems, the university’s repair plan spanned two school years. Building A was repaired in year 1, Building B in year 2.

Claimed increase in furniture costs

The claim included costs to repair and replace alleged defects and expenses to mitigate lost earnings from taking rooms out of circulation. To accommodate displaced students, select rooms in other dormitories were reconfigured to increase students per room. As defects were repaired in Building A, the rooms were reconfigured to accommodate students from Building B, mitigating lost earnings claims in year 2.

Claimed mitigation costs included installation of temporary furniture and removal and storage of old furniture. Claims for the reconfiguration of Building A also included upgrades for wiring and sprinkler configurations.

Forensic analysis

The forensic accountants’ assignment was to validate the loss of earnings claim and mitigation costs. Initial analysis involved a review of the proposals, purchase orders and vendor invoices associated with the new furniture and the moving and storage of the old furniture. Early in the review, the forensic accountants questioned how often furniture is replaced and whether the space reconfigurations stemmed solely from the alleged defects.

As appeared in California Lawyer, May 8, 2017.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

*Effective December 2018, RGL Forensics joined Baker Tilly US, LLP. This article was published while we were RGL Forensics. The author(s) or team member(s) quoted from RGL are now employees of Baker Tilly.