Avoided Costs
Definition
The costs the claimant did not incur because the wrongful conduct interrupted operations. In a lost-profits calculation, avoided variable costs are deducted from lost revenues to arrive at lost profits, reflecting the principle that the claimant should not recover costs they did not actually spend.
- Also called
- Avoided variable costs
- Role
- Deducted from lost revenue
- Yields
- The lost profits figure
- Principle
- Claimant should not recover costs never spent
Common questions
Why are only variable costs deducted and not fixed costs?+
Fixed costs generally continue whether or not the interruption occurred, so they were not actually avoided by the claimant and should not reduce the damages figure the way genuinely avoided variable costs do.
How does a damages expert verify which costs were genuinely avoided?+
The expert examines the claimant's historical cost structure and financial statements, comparing actual spending during the interruption against what would have been spent under normal operations.
Related terms
- But-for Scenario
- The hypothetical financial position the claimant would have been in had the wrongful conduct not occurred. The damages figure is the difference...
- Diminution in Value
- The reduction in the market value of a business or asset attributable to the defendant's conduct. Used when lost profits are not...
- Discount Rate
- The rate used to convert future projected cash flows to their present value. It reflects the time value of money and the...
- Lost Profits
- The net income the claimant would have earned during the damages period but for the defendant's wrongful conduct. It focuses on the...
- Unjust Enrichment
- A damages measure that focuses on the benefit the defendant gained from the wrongful conduct rather than the loss the claimant suffered....