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BP Business Economic Loss Claim Appeal 2017-1039:AVM Methodology More Appropriate Than Construction Methodology for Electrical Contracting Company

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms

Claimant, an electrical contracting company based in Bessemer, Alabama brings this appeal of the denial of its Business Economic Loss (BEL) claim based on the determination that it does not meet the V-Shaped Revenue Pattern causation test. The program accountant concluded that Claimant’s NAICS Code and short earnings cycle required application of the Construction Methodology. As a result, Claimant was unable to satisfy the causation requirements of Exhibit 4B. On appeal, Claimant challenges this determination, asserting that the AVM methodology is more appropriate in this instance.
In reply, BP argues that Claimant’s NAICS Code falls within those listed under the Construction Methodology in Attachment A to Policy 495; and, because Claimant’s
materials are purchased on a job-by-job basis with no inventory maintained, Claimant’s variable expenses more accurately represent Claimant’s monthly activities.
Claimant asserts the claim reviewer incorrectly applied the Construction Methodology to its monthly profit and loss statements, and this reallocation of revenues resulted in the denial of the claim; and had the AVM Methodology been applied, Claimant would have passed the V-Shaped causation test.
The record reflects that Claimant is an electrical contractor, providing services and repairs. While Claimant’s tax return does have a NAICS Code of 238210-Electrical
Contractors and Other Wiring Installation Contractors, along with a primary business service/activity of “Electrical Services,” that alone does not mean the
Construction Methodology should be applied. Here, Claimant provided information about its particular business that shows the AVM Methodology would have been more appropriate. The vast majority of Claimant’s jobs are short term in nature, typically completed in less than 30 days. Claimant generally invoices each week for the previous week’s work, and payments are usually received within 30 days. Claimant recognizes revenues upon receipt. Claimant operates on a short billing cycle, and
Claimant’s revenue is recorded as received, shortly following completion of what are typically short term jobs.
Policy 495 specifically recognizes that a claimant’s NAICS code is not the determinative factor when deciding which methodology governs a given claimant. Rather, the Claims Administrator’s accountants are to consider the claimant’s business operations and the manner in which the claimant records its revenue and expenses. If “there
are factors that indicate that [a claimant’s] revenues and expenses would be more sufficiently matched by applying an alternative methodology,” then the Program
should apply the alternative methodology. See Policy 495 at A-1.
The premise behind the Construction Methodology is that a claimant’s revenue as recorded on its profit and loss statements is not an accurate measure of a traditional construction business’s economic activities. Often, typical construction companies utilize the percentage of completion method of accounting to record revenues, which lead to matching issues. For those claimants, the Construction Methodology is appropriate. See Policy 495 at C-1.
However, this Claimant is on a short cycle and records revenue as work is performed. Unlike a typical construction company, Claimant does not use the percentage of completion method, a fact that further supports the position that Claimant’s revenue should not be restated under the Construction Methodology. Claimant’s variable
expenses are not more accurate than its revenues. The amounts contained in Claimant’s P&L account, “Materials,” are recorded in the month following the actual purchase. Claimant completes most jobs within a few hours to a few days, and receives payment within 30 days. Thus, Claimant’s revenues are accurately recorded and reflect its short-cycle and weekly billing of customers.
When deciding which methodology to apply to a claimant under Policy 495, the Settlement Program must consider the true nature of a claimant’s business operations, such as the revenue billing cycle. Claimant has demonstrated that its revenues and expenses would be more sufficiently matched under the AVM Methodology, based on the short-cycle nature of its business. In the view of this Panelist, the accountants exceeded their discretion in placing unwarranted emphasis on Claimant’s expenses, as opposed to its short earnings cycle.
Moreover, the NAICS Code does not automatically require a given methodology, especially where there is other evidence that would make a different methodology more appropriate. Claimant’s financials do not present the issues which the Construction Methodology was designed to address. Accordingly, this Panel concludes that the AVM Methodology should have been applied. The Denial is therefore overturned, and the matter remanded to be calculated using the AVM methodology.

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