The Missouri Court of Appeals decision in Penzel Constr. Co. v. Jackson R-2 School District, No. ED103878 (Mo. Ct. App. Feb. 14, 2017), is an important development for public construction contracting in Missouri. The decision adopts the Spearin Doctrine and approves the use of the Modified Total Cost method for proving damages. While these concepts have been used widely in federal construction contracting, the Penzel decision is the first published decision recognizing them in Missouri.

The Penzel case involved additions to a public high school. The School District hired an architect. The architect retained an electrical engineering sub-consultant. When the project went to bid, the School District furnished bidders with the architect’s plans and specifications. Penzel Construction Company submitted a bid as the general contractor.

Penzel’s electrical subcontractor was Total Electric. Total’s bid was $1,040,444. Neither Penzel nor Total “noticed” any errors, omissions, or other problems with the plans and specifications during the bidding process.

Total encountered delays totaling 16 months, which Total attributed to “defects and inadequacies” in the electrical design. Under a liquidating agreement between Penzel and Total, Penzel sued the District. Penzel alleged that the District impliedly warranted the design. Penzel claimed the design was not adequate for completing the project.

In addition to proving liability, Penzel needed to prove the damages associated with its loss of productivity claim. To do so, Penzel sought to use the Modified Total Cost Method. The claimed damages were comprised of additional project management and supervision costs, wage escalation, unpaid change order work, and consultant’s fees.

Spearin Doctrine

The first issue before the Court of Appeals was whether the Spearin Doctrine constitutes an actionable theory of recovery in Missouri. Until this appeal, the Spearin Doctrine had not been specifically accepted or rejected by Missouri courts.

The court concluded that when a government entity includes detailed plans and specifications in the contract, it impliedly warrants the design. As a result, any delays due to a defective or erroneous design are per se unreasonable and, therefore, compensable.

The court explained its reasoning by saying that the Spearin Doctrine places the risk of loss stemming from defective plans and specifications on the owner. In the court’s words:  “This is equitable. The owner . . . is in a better position to assess the accuracy . . . and . . . prevent the loss from ever occurring.”

Further, the court rejected the School District’s argument that Penzel was required to produce “expert testimony” to establish that the design was defective. The court held that the warranty under Spearin is that the design is “free from significant defects” and not that the design failed to meet the acceptable standard of care for architects and engineers. In the court’s view, Penzel did not need to show that the School District’s design fell below a reasonable stand of care. No expert witness was needed to establish the standard of care, according to the court’s opinion.

Proof of Damages

The court also addressed the sufficiency of Penzel’s chosen method for proving damages. The court’s analysis began with two well-accepted principles. First, damages should put a non-breaching party in the position it would have been without the breach. Second, damages must be proven with reasonable certainty.

The court found that the Modified Total Cost Method satisfies both. The Total Cost Method allows a contactor to calculate his damages by subtracting his bid from the total costs incurred. However, Modified Total Cost requires the contractor to also reduce the “costs” by amounts attributable to the contractor’s own errors. The court concluded that the Modified Total Cost approach and the goals of Missouri contract law on damages are consistent.

The court noted that the Total Cost Method is “merely a starting point” in the proof of damages. The Modified Total Cost Method allows for adjustments to the original contract price (the contractor’s bid), the total cost of performance, or both. The Modified Total Cost Method is more reliable because the calculations can be tailored to more accurately reflect the damages caused by the breaching party, thus helping place both parties in their rightful position.

The court explained that the Modified Total Cost Method provides a blueprint for a plaintiff to meet the requirement in calculating damages with reasonable certainty. But the court was careful to warn that the Modified Total Cost Method is not a requirement for every case. Using it depends on the sufficiency of the evidence and the facts in each case.

Further reading—

Metcalf and the duty of good faith and fair dealing in public construction contracting

Contractor expertise as a factor in differing site conditions claims

Missouri bid protest procedures