Jeffrey T. Willoughby, CPA, CFF, CFE, Forensic Accounting Expert
James A. Stavros, CPA, MBA, Forensic Accounting Expert
Case Synopsis: A commercial painting and cleaning contractor was hired as the general contractor to clean, repair and paint several bridges along a section of interstate highway lasting several months. The contractor hired another company to be the primary subcontractor performing painting and cleaning work. Part of the compensation for the primary subcontractor was to include a portion of the profit earned on the contract based upon the work completed. The agreement between the primary contractor and the primary subcontractor was oral.
The cleaning and painting work slowed during the winter months due to the cold weather. The subcontractor left the job site and did not return. The general contractor completed the remaining portion of the contract, working through the winter months and hiring additional workers to replace the labor expected to be performed by the primary subcontractor. The general contractor completed the work outlined in the contract at a profit, and, because of provisions in the contract, earned performance bonuses for early completion of certain portions of the contract.
The primary subcontractor was informed that the contract was completed at a profit and there were additional performance bonuses paid to the general contractor. The primary subcontractor sued the general contractor for what it believed was its share of the profit on the contract, as well as the bonuses that were paid.
Expert Analysis: A request was made to review the job cost reports and other records to determine profitability before and after the subcontractor left the job site; overall profitability, and the percentage of completion at various points during the contract, both before and after the primary subcontractor left the job site.
Based on expert analysis of the progress payments to the subcontractor and the progress payment applications of the general contractor, it was determined the contract was only marginally profitable prior to the subcontractor leaving the job site. It was also determined that the project was overbilled at the time the subcontractor left the job site and they had been compensated for all work performed. Additional conclusions were made including that the:
- profits earned on the contract were primarily based upon the work performed after the subcontractor left the job site;
- project was overbilled at the time the subcontractor left the job site (billings exceeded the amount of work performed);
- performance bonuses paid out based upon early completion of portions of the work were all completed after the subcontractor left the job site;
- based upon man-hours spent and square footage cleaned and painted, the subcontractor had been compensated for the work performed prior to leaving the job site;
- subcontractor had actually been overpaid prior to leaving the job site.
The plaintiff in this matter claimed economic harm in excess of $1,000,000, which the defendant disputed. The defendant claimed the plaintiff actually owed the defendant for work ultimately performed by the defendant. In addition to preparing alternative estimates for the defendants’ claims, we were asked to rebut the claims of the plaintiff and comment on any weaknesses in the reports prepared by the plaintiff’s expert.
Result: This matter went to trial where the trier of fact determined not only had the claims of the plaintiff not been supported, based in part upon our analysis and testimony at deposition and trial, but the plaintiff owed the defendant in excess of $200,000.
Jeffrey T. Willoughby, CPA, and James A. Stavros, CPA, Forensic Accounting Experts with DJS Associates, Inc., can be reached via email at experts@forensicDJS.com or via phone at 215-659-2010.