Forensic accounting: Is it really lost income? part 3

The first two articles of this three-part series explained ways in which a forensic accountant can assist counsel in analyzing and uncovering non-loss related elements in a damage claim in a construction defect case. Now, in this final installment, we’ll see how the portion of the claim pertaining to lost income unfolds.

As discussed previously, our hypothetical situation involves a university that has filed a claim for alleged defects in two on-campus housing buildings. To correct the defects, the university’s repair plan spanned two school years with one building taken out of use each year.

In Part 1 of this series, we discussed claimed costs associated with building reconfigurations. In Part 2, we addressed associated claims for in-house costs allocated to the repairs.

Now it’s time to address claims for the lost income associated with taking student housing units out of circulation along with losses associated with increased density in the remaining units.

Revenue losses?

The “lost revenue” component of the claim includes asserted gross room revenue losses associated with the net number of beds lost when each building was taken off line for repairs. The repairs lasted a full school year for each building. To accommodate displaced students and to mitigate overall losses, select rooms in other dormitories were reconfigured to increase students per room.

The room reconfigurations resulted in substantial mitigation of the potential room revenue losses but still resulted in a net loss of beds available. It also created more density which resulted in beds of less value throughout campus. (The room charge for a student in a single bedroom is greater than that charged for a double occupancy which in turn is greater than that charged for a triple occupancy.)

Analysis

The forensic accountants were asked to analyze the component pertaining to lost room income. The initial analysis involved verifying the occupancy history of the campus including a review of the trends in room configurations and density. This analysis confirmed the net loss of rooms available for rental during the repair period. It also confirmed the reduction in the net revenue per bed associated with the accelerated room reconfigurations and higher than projected densities.