Engineering Appraisals: Manufacturing Operations Analysis and Damages Valuations

Posted on July 1, 2020

When evaluating your needs for property appraisal or damages valuations, there are several benefits to employing an engineer with an appraisal certification rather than an appraiser with little or no engineering experience or a forensic accountant. An experienced engineer provides manufacturing and operational analysis that an appraiser or forensic accountant would not recognize nor perform. Forensic engineering integrated with astute appraisal analysis is vital for the effective representation of industrial property damages valuations, technology appraisals, and litigation support.

 

In the case of ArcelorMittal Burns Harbor v. Rockwell Automation, EPS was engaged to provide a damages valuation in response to ArcelorMittal's claim of $42+million. In contrast, EPS was able to provide substantiated operational and manufacturing analysis to support the appraisal and damages valuation close to the equipment's scrap value. EPS also offered insight and brought evidence to Counsel's attention regarding the Claimant's inclusion of typical operations costs, failure to minimize losses, and poor operating practices, which resulted in a claim substantially more than the actual machine value.

 

On March 12, 2014, at approximately 2 AM during a wind-driven snowstorm, an operating 4,800-ton stacker/reclaimer system, built in the 1970s, continued its motions without operator controls resulting in the collapse of the 1,200+ ton piece of machinery. Rockwell Automation designed and supplied a control system for Bethlehem Steel in 1999; however, the system was only partially installed by the new owner of the steel mill International Steel Group (ISG) in 2004. ISG made changes during installation to the proposed Rockwell system design. 

 

EPS' valuation of the damages included an investigation into the utility and value provided by the material handling equipment systems at the facility. In performing engineering operational analysis of the steel making, EPS was able to determine that the systems replaced had been on the verge of failure. The Claimant's purchased replacements with substantial overdesign and capacity. This analysis confirmed by the EPS site inspection and corroborated by sifting through the Claimant's production and maintenance records.

 

After reviewing the limited maintenance and inspection records on the equipment produced in discovery, EPS inspected a similar stacker/reclaimer built at roughly the same time in the 1970s and which would have been subject to similar maintenance and upgrades. EPS was able to field-verify in an inspection that several recommended repairs had not been made to these pieces of machinery, strongly indicating the equipment and established that the machine was at the end of its useful life. Where an accountant may apply a standard deterioration schedule or interpolation of maintenance spending, EPS was able to create a more informed assessment of the machinery's condition at the time of its failure.

 

Functional Obsolescence is "the loss in value of usefulness of a property caused by inefficiencies or inadequacies of the property itself" (American Society of Appraisers: Valuing Machinery and Equipment). Functional Obsolescence can be difficult for some appraisers without technical experience to quantify when they do not understand the fundamentals of engineering. Engineering knowledge in the design and function of the machinery and equipment markets is fundamental to providing fair and accurate quantification obsolescence. An engineer with years of operational experience can offer an unbiased and more informed opinion of Functional Obsolescence than an appraiser without a technical background.
 

The strong point for many accountants in appraising is the income approach. At ArcelorMittal Burns Harbor, the stacker/reclaimer is only one part of a network of material transportation equipment, which is only one part of the process of steel making and individually does not generate a specific income. EPS' counterparts claimed an income approach based on the cost of workaround activities to replace the utility that was provided by the stacker/reclaimer. An appraiser or forensic account may review invoices and reconstruct the cost or income structure in an analysis of the workaround activities. However, with operational experience, EPS was able to analyze the workaround activities following the SR's collapse, identify inefficiencies and overspending, and to utilize an accurate income approach was able to determine that the Claimant's alleged damages were invalid.

 

After reviewing the discovery material and information in the public domain, EPS determined the stacker reclaimer was designed initially to provide utility for a more expansive steel mill. EPS was able to quantify the stacker reclaimer's utilized capacity, finding that the utility the equipment provided was less than the utility claimed by the Plaintiffs and less than the replacement cost of the equipment claimed. 

 

An experienced engineer performing an appraisal or damages valuation can provide operational analyses and substantiation for a defendable analysis.