Commercial contract disputes turn on the profits a business lost, or the costs it incurred, because the other party did not perform. The economist reconstructs what the business would have earned had the contract been performed, compares it with what the business actually earned or could have earned by mitigating, and presents the difference with the causation, timing, and discount assumptions stated.
In short
The claim typically consists of lost profits on the contract itself, measured as the revenue that would have been earned less the costs that would have been incurred to earn it; lost profits on related business that depended on the contract, where the record supports the connection; reliance costs incurred in preparation for performance; and in some matters the diminished value of the business when the breach reduced its ongoing earnings capacity. The drivers are the contract and its performance history, historical financial statements and tax returns, budgets and projections prepared before the dispute, customer and pricing records, and the cost structure that determines what portion of lost revenue would have been profit.
The size of the claim depends on the contract's remaining term, the profit margin the business would have realized, and how much of the lost volume was or could have been replaced. Incremental cost treatment is the usual battleground: whether a given cost would have been avoided when the revenue disappeared changes the margin and therefore the loss. For a new venture or a contract without a performance history, the reasonableness of the projected revenue is the central dispute, and the period over which lost profits are claimed is scrutinized against the contract's terms and the market.
The economist establishes the but-for revenue from the contract terms, the pre-dispute projections, and the business's own history, then identifies the incremental costs that would have been incurred to earn that revenue so that only the lost margin is claimed. Actual results after the breach are analyzed to separate the effect of the breach from market conditions and other causes, and mitigation revenue is credited. Past lost profits are brought forward and future lost profits are discounted to present value at a rate that reflects the risk of the earnings stream, with the rate stated and its effect shown. The report is organized so each element of the claim ties to a document and can be tested independently.
Stage-by-stage guidance on working with a forensic economist in commercial contract dispute litigation.
Several years of financial statements and tax returns, the general ledger or detail sufficient to separate fixed and variable costs, budgets and forecasts prepared before the dispute, the contract and any amendments, and sales, pricing, and customer records for the affected line of business. Industry data supplements the company's own records when the history is short.
It reflects the risk that the projected profits would not have materialized. A stream from a long-term contract with a creditworthy counterparty carries less risk than a projection for a new product, and the rate is chosen accordingly from market data and stated in the report along with the effect of alternative rates.
It is harder, and the report says so. The economist builds the projection from the business plan, comparable businesses, the market's size and growth, and any actual performance before the breach, and presents the result with the uncertainty made explicit rather than hidden in a single number.
Lost profits measure the earnings lost over a period while the business continues. Lost business value measures the reduction in what the business is worth when the breach permanently impaired it or ended it. The report uses one or the other, or both for different periods, and explains why so the claim does not count the same loss twice.
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