The total cost method normally consists of subtracting bid price from the actual cost of performance and adding profit to the resulting amount. This approach is heavily disfavored by the boards and courts. Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180, 351 F.2d 956 (1965); Edge Const. Co. v. United States, 95 Fed. Cl. 407, 415 (2010); Appeal of the Clark Constr. Grp., Inc., GAOCAB No. 2003-1 (Nov. 23, 2004). The total cost method is disfavored because, among other things, it assumes the reasonableness of the contractor’s costs, the accuracy of its bid computations, and its lack of responsibility for increases in costs. Edge Const. Co. v. United States, 95 Fed. Cl. 407, 415 (2010); F.H. McGraw and Company v. United States, 131 Ct.Cl. 501 (1955); Boyajian v. United States, 191 Ct.Cl. 233 (1970).
Nonetheless, various decisions have allowed contractors to pursue damage methods in which their total costs in performing a contract are compared to the reasonable cost of providing the same services.
An example of such a method is the modified total cost method. Before a contractor can obtain the benefit of that method, it must prove: “(1) the impracticability of proving its actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs.” Propellex, 342 F.3d at 1338–39 (citing Servidone Constr. Corp. v. United States, 931 F.2d 860, 861 (Fed.Cir.1991)). The modified total cost method is the total cost method adjusted for any deficiencies in the contractor’s proof in satisfying the requirements of the total cost method. Id. In Boyajian v. United States, 191 Ct.Cl. 233, 423 F.2d 1231 (1970), the Court of Claims described the use of this method, thusly:
[T]he total cost computation was used as “only a starting point” with such adjustments thereafter made in such computation as allowances for various factors as to convince the court that the ultimate, reduced, figure fairly represented the increased costs the contractor directly suffered from the particular action of defendant which was the subject of the complaint.
Id. at 1240 (citation omitted); see also Propellex Corp., 342 F.3d at 1339.
N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 213 (Fed. Cir. 2007).
Updated: August 8, 2018
FAQs
Total Cost Approach. The total cost method normally consists of subtracting bid price from the actual cost of performance and adding profit to the resulting amount.
What is the total cost method? ›
The total cost formula is used to combine the variable and fixed costs of providing goods to determine a total. The formula is:Total cost = (Average fixed cost x average variable cost) x Number of units producedTo use this formula, you must know the figures for your fixed and variable costs.
What is an allowable cost in government contracts? ›
If a cost is reasonable and allocable (chargeable) to the contract, then it will be allowable, unless specifically prohibited by the cost regulations. Probably the best way to define unallowable costs is to list the ones specifically determined by the government in the FAR to be unallowable.
What is total cost approach construction? ›
A third approach is commonly called the total cost approach. With this method the contractor claims the difference between its actual and bid labor costs and argues that its counterparty caused the problems that created the overrun.
What is the formula for the cost approach? ›
When all estimates have been gathered, the cost approach is calculated in the following way: cost – depreciation + land worth = value of the property.
How does cost approach work? ›
The cost approach is a method of valuing property in which the appraiser estimates the cost of building a new property that is similar in size, quality, and features to the subject property. The appraiser then deducts depreciation from the cost of the new property.
What are the benefits of total cost method? ›
By considering all the costs associated with a product or service, companies can make more informed decisions that lead to cost savings and better performance.
- Improved Supply Chain Performance: ...
- Enhanced Risk Management. ...
- Improved Supplier Relationship Management. ...
- Better Inventory Management.
Essentially, total cost is the entire amount of money that must be spent on something to either produce, maintain, or own it. Take the example of building a car. There are many different costs that go into the process of building a car, and all of these costs together form the total cost of production.
What are the three components of total cost? ›
Components of total cost are constituted mainly of prime cost, factory cost, office cost and cost of sales. Let us take a detailed look at each of these elements: 1. Prime cost: This comprises direct material, direct wages, and direct expenses.
What are overhead costs in government contracting? ›
Overhead costs are costs incurred for the performance of multiple contracts. Examples of overhead costs include equipment, rent, depreciation, utilities, material storage and handling, property taxes, and management (other than senior management).
An allowable cost is one that can be included on your invoice to the government for reimbursem*nt.
What are indirect costs in government contracting? ›
Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs.
What is the difference between total system approach and total cost approach? ›
The total cost approach is the total costs involved in the distribution of goods from the time they are manufactured and ultimately delivered to the customers. The supply chain entails the total system approach since all the activities are connected to each other for the distribution of the products to the customers.
Why is the total cost method popular with general contractors? ›
Ultimately, the total cost approach is most effective in achieving an equitable adjustment for construction disputes involving extra work claims, especially for complex types of construction claims.
What is total cost distribution approach? ›
The total cost approach manages the logistic function, focusing on reducing the logistic cost that is storing cost. As a result, it might suggest a high-cost transporting mode to physical distribution management.
What is total cost approach and total system approach? ›
The total cost approach is the total costs involved in the distribution of goods from the time they are manufactured and ultimately delivered to the customers. The supply chain entails the total system approach since all the activities are connected to each other for the distribution of the products to the customers.
What is an example of a cost approach in real estate? ›
Cost Approach Problem Example
An appraiser used comparables to decide that a similar plot of land is worth $30,000 while attempting to value a property. He then utilizes the comparative unit method to calculate that the cost of rebuilding a 3,000 square foot home would be $25 per square foot.
What is total cost of ownership approach? ›
Total cost of ownership (TCO) is the purchase price of an asset plus the costs of operation. Assessing the total cost of ownership means taking a bigger picture look at what the product is and what its value is over time.
