(c) Documentary material on Bombardier "estimates" and "actual costs"
439 In relation to the Project Full Cost Summary, Mr Olsen stated that this document was used in his analysis as "… the primary source for estimating information …" (paragraph 3.5.1). He also added that that Summary was used in his analysis "… as the reference point for corporate allocations, margins and indications of financial targets acceptable for rolling stock work" (paragraph 3.5.1).
440 In relation to the Financial Appraisal as at 3 January 2002, he stated that the document was sourced as "… the final appraisal for the project and is used in this analysis as the primary source for costs and profits on completion of the repairs".
441 As noted in the written submissions for the cross-claimant (paragraph 18), the principal challenge to the quantum of its claim is based on Mr Olsen's notional pricing estimate. If that notional estimate were to ultimately be accepted in these proceedings as indicating what were reasonable costs, then, as the submissions observe, it would result in the repair cost component of the claim being reduced from the amount of $949,974.08 actually paid by the cross-claimant down to $590,860.77, a difference of $359,113.31.
442 Mr Olsen set out his approach, methodology and conclusions in paragraphs 3.5.1 to 3.5.4 of his report (Exhibit AC). In Table 2 on p.20 of his report entitled Analysis of Estimated vs Actual Costs, he set out total production costs of $687,446 which he derived from Bombardier's "Project Full Cost Summary" being document 19 in the Appendix to his report (and which is reproduced as p.81 in the cross-claimant's written submissions). On the basis of the same document, he derived 10.3% as being the net margin recorded for the project.
443 In Table 2 of his report, Mr Olsen provided a contrasting calculation under the heading "Actuals". In that column, the "Full Cost" is stated to be $460,095 (in contrast to the abovementioned amount of $762,180) and set out a net margin of 46.1%. For the purpose of his estimation of "Actual Costs" in Table 2, as contrasted to "Estimated Costs", Mr Olsen drew upon the "Financial Appraisal" as at 31 January 2002.
444 The cross-claimant, in its written submissions, challenge Mr Olsen's analysis set out in Table 2 of his report, Exhibit AC, on the basis of assumptions he made as to the status of the two documents to which I have referred, the "Project Full Cost Summary" and the "Financial Appraisal as at 31 January 2002" (paragraph 52 of the cross-claimant's written submissions).
445 The cross-claimant raised a number of matters in challenging the proposition that the Project Full Cost Summary reflected costs of works as at the time of entering the contract. Those matters are set out in paragraph 56 of the written submissions. In short, the challenge was directed at the status of the document.
446 The Project Full Cost Summary utilised by Mr Olsen is undated. That, of itself, is not determinative, but it is one aspect to be taken into account. The document contains two columns in respect of project costs. The first is headed "Adtranz" underneath which the word "Total" appears. The second and last column in the Project Full Cost Summary is entitled "Project" under which the word "TOTAL" appears.
447 There is no explanation as to what the column "Adtranz Total" represents nor for the reasons in respect of variations between certain items under that column as against comparable items in the "Project TOTAL" column.
448 The net margin referred to above of 10.3% incorporated into Mr Olsen's analysis in Table 2: Analysis of Estimated vs Actual Costs was the net margin figure in the "Adtranz Total" column. However, the equivalent "project total" item in the same document records a net margin of 18.2%. Mr Olsen did not advert to nor explain the difference between the two figures for net margin of 10.3% and 18.2%. He simply chose the former. The difference between the two net margin figures of approximately 8% is a significant difference but it was not one to which Mr Olsen gave any attention in his report.
449 The analysis in Exhibit AC was also challenged upon the basis of Mr Olsen's further assumption as to the Financial Appraisal as at 31 January 2002. The assumption that it accurately reflected the actual costs on completion of Bombardier was disputed. The cross-defendant referred to footnote 68 in Mr Olsen's report, Exhibit AC, as indicating that the most reliable internal record of Bombardier to establish actual costs was in fact the General Ledger. The footnote (appearing at p.18 of Exhibit AC) is in the following terms:-
"68. At this stage of a project, the General Ledger is typically more accurate than at earlier stages when in the Financial Appraisal or a similar tool is also commonly relied upon for reporting of work in progress and costs accrued."
450 The criticism of Mr Olsen was that he did not refer or rely at all on the General Ledger. No explanation had been provided as to why he had not used it given that he himself described it as "the typically more accurate" record. Further, it was contended that there was no evidence that proved the status of the Financial Analysis as at 31 January 2002.
451 In determining the validity of Mr Olsen's analysis, it is, accordingly, necessary to determine whether or not the Project Full Cost Summary and the Financial Appraisal as at 31 January 2002 documents constitute primary evidence that establish the actual final pre-repair estimates of Bombardier and actual costs on completion.
452 The only evidence said to prove actual pre-contract estimates of Bombardier are the documents referred to in footnote 65 on p.17 of Exhibit AC. That footnote forms part of paragraph 3.5 of the report to which objection was taken in the Defendants' Notice of Grounds of Objection to the Plaintiff's Lay and Expert Evidence document, p.6.
453 The Project Full Cost Summary does not, on its face, evidence that the costs set out in the document in fact formed the final actual historical basis for the contract. However, it is not to be overlooked that the Financial Appraisal as at 31 January 2002 document which, like the Project Full Cost Summary contains a total production cost figure of $687,446 may be considered as some evidence tending to support the proposition that the Project Full Cost Summary document does reflect the final cost estimates for the project. However, as against that, the amount of $687,446 in the Financial Appraisal as at 31 January 2002 was constituted by different sub-total costs to those set out in the Project Full Cost Summary. That fact suggests that some of the constituent elements in the Project Full Cost Summary had been reviewed and changed at some later point or points in time.
454 It is, of course, a fundamental principle that an expert called to give evidence must identify the assumptions made or the facts, to be established by evidence, that are said to support his or her conclusions or opinions.
455 I have adverted above to the fact that the Project Full Cost Summary contains two columns providing total expenses in different amounts as well as different gross and net results and different gross and net margins. In the absence of any explanation as to the differences, it is not possible to say from the document what net margin figure was adopted by Bombardier for the purposes of the project. Whilst the figure may well have been a net margin of 10.3% (being the figure adopted by Mr Olsen for his analysis) without evidence and an explanation as to the difference between "Adtranz total" and "Project total", a conclusion as to the net margin adopted at the time of contract cannot be validated. Whilst it may have been 10.3% as Mr Olsen stated it may also have been 18.2% as the last column in the Project Full Cost Summary states, or it may have been some other margin.
456 The cross-claimant, accordingly, contended that Mr Olsen's margin of 10.3% which he employed in his Analysis of estimated versus actual costs (Table 2 in his report) is based upon an unproven assumption and, to that extent, validation of his analysis is lacking.
457 For reasons stated below, there is substance in these criticisms. Similarly, for reasons also discussed below, I do not consider that the Financial Appraisal as at 31 January 2002 can be taken as primary evidence establishing the actual costs of the project on completion.
458 Whether or not the title "Financial Estimate as at 31 January 2002" suggests that the document may be a historical record of what has transpired up to that date, closer examination raises questions as to the date the document was created and the point in time at which events had progressed as at the time the document was produced.
459 The Financial Appraisal as at 31 January 2002, on its face, does not purport to be a document that relates only to the historical cost of the project as at a particular date. The document, as it states, involves forecasting costs as at 31 January 2002. In that way, it is a document that is both retrospective and prospective in its expression. These are indicated by the sub-titles to the columns "incurred", "committed", "yet to commit" and "forecast total".
460 The Financial Appraisal as at 31 January 2002, insofar as it lends itself to an interpretation as an analysis of costs that had already been incurred and costs forecast to be incurred by 31 January 2002, there is an issue and concern as to the reliability and accuracy of Mr Olsen's assumption that it is to be construed as a record of costs actually incurred as at completion of the project.
461 The written submissions for the cross-claimant set out the detail of the arguments on these matters at paragraphs 61 and 62.
462 The cross-claimant, as noted above, also relied upon the absence of primary evidence (in particular, the General Ledger) to establish what were the actual costs of the project on completion.
463 Both the estimated and actual costs of the project in question are matters of historical record and such estimates and costs would be expected to be readily proved by Bombardier's internal project documents. Whilst the Project Full Cost Summary and the Financial Appraisal as at 31 January 2002 provide some information on estimates and actual costs, they do not, in my opinion, in themselves validate the primary facts essential to Mr Olsen's analysis. His analysis to that extent lacks a necessary primary evidentiary foundation.
464 Reference to the Financial Appraisal as at 31 October 2001 (referenced document no. 24 in Appendix 1 to Mr Olsen's report) provides further material suggesting that Bombardier's financial appraisal documents were, at least, in part, forecasting instruments or records. Like the Financial Appraisal as at 31 January 2002 so document 24 in the Appendix to Mr Olsen's report refers to the previous month's appraisal as "Previous Appraisal Forecast 30/09/01" (emphasis added). The total of costs incurred are shown as $195,492. Reference to Mr Clarke's statement (Exhibit 19, paragraph 50) together with associated invoices and payment authorisations (Exhibit 19, volume 2, tab 21) indicates that by 31 October 2001, actual "incurred" expenditure was at least $358,996. The incurred costs of $195,492 is more in line with invoices and payments made on 6 September 2001 and 28 September 2001.
465 Additionally, the evidence suggests the possibility that the Financial Appraisal as at 31 October 2001 may have been reviewed and altered after it was created. In this respect, the Financial Appraisal as at 31 October 2001 "forecast total" was at a later time reproduced in "Financial Forecast as at 31 January 2002" under the heading "Previous Appraisal Forecast 31/10/01". Some of the amounts as originally stated, changed. Thus, the amounts shown for "labour & overhead subtotal" ($137,802) is not the figure recorded in the appraisal as at 31 October 2001 ($249,252) and similarly the "materials total" of $147,939 had previously been shown as $202,832 in the Financial Appraisal as at 31 October 2001. The remaining sub-totals correlate with the Financial Appraisal as at 31 October 2001. These variations in sub-totals had a significant bearing on the total gross profit figures shown in the two document (23.19% versus 42.78%).
466 The documents are also consistent with the proposition that at some point after 31 October 2001, original forecasts for 30/09/01 and for 31/10/01 were revised due to a reduction in labour and overhead and materials sub-totals, generating a higher level of profitability. The reason for the ability to save or reduce costs on previous forecasted figures during the course of the repair project was not explored in evidence.
467 The adjusted Gross Profit of 44.28% of revenue shown in the Financial Assessment as at 31 October 2001 was expressed to be based on the revised costs to which I have referred above, on a "Forecast" basis. Even if it be assumed that Bombardier received a net return well in excess of 20%, the question remains whether, in relation to the repair project undertaken by Bombardier as specialist contractor, such a net return would render the contract costs "extravagant" or exorbitant.
468 The cross-defendants' submissions employ the term "extravagant". On his assessment, Mr Olsen does not express an opinion in those terms. Nor does he state that there was a reasonable range of repair costs or that Bombardier's contract price was outside any range. In paragraph 3.5.4 he stated:-
"Notwithstanding consideration of the commercial advantage associated with a sole tender situation, it is still arguable that the data reported in the repairer's internal documentation indicate profits in excess of typical commercial margins. A net margin of 46.1% would be considered an indication of a particularly profitable project."
469 Mr Olsen does not assert that what he terms "typical commercial margins" would necessarily be appropriate or applicable to the specialist work undertaken by Bombardier.
470 Accordingly, even accepting on its face Mr Olsen's conclusions, that the gross net margin received by Bombardier was a "particularly profitable" one that, does not in itself establish that it involved extravagant or exorbitant pricing.
471 As noted above, the cross-defendant submitted (paragraph 31) that the Court should not receive the cross-claimant's submissions on the notional price contract because Mr Olsen was not cross-examined or otherwise challenged in the same way in which the cross-claimant challenges it in its written submissions. Not to have cross-examined or challenged him is said to result in unfairness. I do not accept the submission. The cross-claimant's criticism of the materials used by Mr Olsen and his analysis were directed to the factual substratum used or assumed by Mr Olsen. The criticisms were not directed at questioning Mr Olsen's integrity and they did not involve a personal attack. There was no suggestion of him having, in any way, acted improperly or having misrepresented any information. The evidentiary basis for an expert's analysis is fundamental to the admissibility or weight to be accorded to it. An expert witness is required to expose the basis for his or her analysis or opinion: Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705, 729 to 737.
472 The cross-defendant, in my opinion, did not establish by way of primary evidence the necessary sub-stratum for the two assumptions made by Mr Olsen in relation to the two documents, Project Full Cost Summary and Appraisal as at January 2002. Mr Olsen did not, in terms, state in his report, by way of confirmation, that those documents had in fact been cross-checked against the internal records of Bombardier in order to support the accuracy of the assumptions that he had made. He simply stated in his report, as earlier noted, that he proceeded upon the basis that the documents were as he assumed them to be.
473 I have indicated earlier that, in relation to the Financial Appraisal as at 31 January 2002, the document is open to interpretation as reporting upon a position that existed and also on the project foreseen as at 31 October 2002. Whatever be the correct interpretation of the document in that respect, the primary evidence was not introduced by the cross-defendant (in particular, the General Ledger and any other relevant internal records of Bombardier) to establish what were the actual costs as at the date of completion of the project, that is, after the whole contract had been completed.
474 Even if the Financial Appraisal as at 31 January 2002 document may be taken as indicating a revision of forecasts and the reduction of costs to Bombardier as the project proceeded below what had been estimated, that does not lead to the conclusion that the costings, as at the date of the contract, were excessive or unreasonable. There may, for example, have been techniques or methodologies employed that enabled Bombardier to reduce costs as the project proceeded. The position remains, as earlier stated, that the tendering and associated procurement processes were established as having been conducted on a proper basis in accordance with appropriate standards and with independent verification. The cross-defendant did not establish that the cross-claimant acted unreasonably in entering into the contract with its specialist sub-contractor.