Contract Damages in Florida – Avoiding the “Overhead” Trap

A party suing for lost revenue under a contract in Florida must deduct a portion of its general “overhead” expenses when calculating its damages. A plaintiff who is unaware of key aspects of this requirement could easily overestimate its potential recovery in breach of contract lawsuit—or, worse, unwittingly stumble into an evidentiary “trap” that might severely limit their recovery at trial.

A plaintiff typically seeks to recover damages based upon the net benefit it expected to receive under the contract. If the plaintiff has not performed some or all of its obligations under the contract, the damages will generally be reduced to account for the expenses it saved by not performing.

For example, imagine a contract in which the plaintiff agrees to wash 10 uniforms for $100.00. The plaintiff expects to spend $75.00 in costs, resulting in a net profit of $25.00. If the defendant breaches the contract before the plaintiff spends any of the $75.00 in costs, the plaintiff would typically expect to recover $25.00 in damages.

However, decisions of Florida’s courts over the past several years have confirmed that the plaintiff must also deduct an appropriate portion of its general “overhead” expenses, such as salaries, rent, office expenses, and the like, when calculating its damages.¹

The overhead reduction cannot be avoided by arguing that the plaintiff would have spent the same amount of money on fixed overhead costs (such as rent and staff salaries) regardless of whether the parties had entered into the disputed contract.²

It is therefore vital for parties to account for “overhead” expenses when evaluating and litigating breach of contract claims. For a plaintiff, failure to present evidence of its overhead may preclude it from proving damages or may result in a substantial reduction in damages based upon a “profit margin” theory.

Specifically, in some circumstances, damages for an unperformed contract may be determined by looking to the plaintiff’s overall “profit margin” if the plaintiff fails to properly account for overhead.³

In RKR Motors, the Court reversed an award of damages due to the plaintiff’s failure to deduct overhead expenses.⁴ However, the Court noted that the plaintiff had produced income statements indicating that the plaintiff’s overall profit margin for a three-year period was 8%.⁵ The plaintiff also acknowledged that the disputed contract was reasonably typical of the plaintiff’s work during that period.⁶ The Court reasoned that a company’s overall profit margin necessarily incorporates a deduction for overhead and therefore may provide a reasonable means of estimating the expected profit under the disputed contract.⁷ The Court therefore limited the plaintiff’s recovery to approximately 8% of the contract price.⁸

Needless to say, a plaintiff that operates at a low overall profit margin might not wish to have its breach of contract damages tied to its profit margin. A well-prepared plaintiff can avoid this result through a damages presentation that properly incorporates a deduction for “overhead” expenses pursuant to Florida law.

• Matthew C. Sanchez is complex commercial litigation attorney at Olive Judd. Matt focuses focuses his practice on complex commercial litigation, appeals, general corporate law, real estate and construction, and media and First Amendment law.

[1] James Crystal Licenses, LLC v. Infinity Radio Inc., 43 So. 3d 68, 75 (Fla. 4th DCA 2010).

[2] RKR Motors, Inc. v. Associated Uniform Rental & Linen Supply, Inc., 995 So. 2d 588, 592–93 (Fla. 3d DCA 2008).

[3] Id. at 593–94.

[4] Id. at 594.

[5] Id. at 590.

[6] Id. at 593.

[7] Id. at 594.

[8] Id.