Page 54 - Calculating Lost Profits

Figure 7.8. Possible Categorization of Costs

Certain cost line items invite differences of opinion on how these costs should be treated. Examples in-
clude overhead, corporate allocations, leases, and management fees. The common thread between these
costs is that they are often large cost categories with the detailed costs not well described, or the costs
may relate to amounts paid to related parties, which may be subject to discretion. As described previous-
ly, practitioners may consider whether the credibility of the damage calculation could be improved by a
more detailed examination of these costs.

Other issues that may call for specific attention include the following:

 Technological changes. Cost structures can change with new technology, and the historical costs
as a percent of revenue may not hold true across many years in a lost profits calculation.

 Industry issues. Often, an industry is in a state of change, such that the historical data do not pro-
vide a good basis for forecasting future costs (for example, increased regulatory expenses, labor
union agreements, and health care reimbursement rates).

 Economic and legislative issues. Often, broader economic issues may change, such as taxes,
health care, or wages, which may alter a projection of costs.

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