The Lost Profits Playbook: Comparison of the One-Model and Two-Model Approaches [Part 1 of 6]

BY ANDREW G. ROPER, CPA, CFE

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The preceding article was prepared by its author. The opinions expressed in the article represent the author’s and may not reflect the view and/or opinion of Vallit Advisors and its staff. Views/opinions are based on the specific facts and circumstances of each Matter.

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Andrew Roper, CPA, CFE is a Manager with Vallit Advisors, LLC. Andrew has over 8 years of experience in dispute consulting, lost profit and lost value calculations, complex damage measurements, and other litigation services. He is a Certified Public Accountant (CPA) with the Virginia Board of Accountancy and a Certified Fraud Examiner (CFE) with the Association of Certified Fraud Examiners.

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DAMAGES IN THE FORM OF LOST PROFITS TYPICALLY ARISE FROM A MEASURABLE DECLINE IN REVENUE AND PROFITABILITY DUE TO INTERFERENCE WITH NORMAL COMPANY OPERATIONS. HOWEVER, BECAUSE THE USE OF LOST PROFITS AS A MEASURE OF DAMAGES ASKS THE COURTS TO CONSIDER A HYPOTHETICAL “BUT-FOR” WORLD, USING IT REQUIRES A CAREFUL, DISCIPLINED, AND WELL-SUPPORTED ANALYSIS. IN THIS ARTICLE, WE OUTLINE TWO APPROACHES THAT AN EXPERT CAN USE TO CALCULATE LOST PROFITS – THE ONE-MODEL APPROACH, AND THE TWO-MODEL APPROACH. WE INVESTIGATE THE DIFFERENT METHODOLOGIES UNDER EACH APPROACH, CONSIDER THE PROS AND CONS, AND HIGHLIGHT SCENARIOS IN WHICH THESE APPROACHES WOULD BE THE MOST EFFECTIVE.

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Introduction

In commercial litigation, one of the most commonly disputed forms of economic damage is lost profits.[1] Whether damages arise from breach of contract, business interruption, intellectual property infringement, or another commercial tort, lost profits represent the earnings a business would have generated “but-for” the alleged wrongful act. Because these damages are forward-looking and often rely on assumptions about how a business would have performed under different circumstances, courts require that lost profits be proven with reasonable certainty. This threshold can be difficult to meet without a methodical, well-supported analysis.

 

Calculating lost profits is both an art and a science. Financial experts must rely on a combination of historical data, industry benchmarks, and sound economic reasoning to estimate what would have occurred in a hypothetical “but-for” world. The methodology selected for the analysis plays a critical role in the credibility and persuasiveness of the damages opinion.

 

This article provides an overview of two different categories of approaches to calculating lost profits: the One-Model Approach and the Two-Model Approach. While each approach is built on the same fundamental principle (i.e., quantifying the difference between the business’s actual performance and what it would have earned absent the alleged wrongdoing), they differ in structure, complexity, and applicability depending on the facts of the case. Understanding these approaches is essential not only for financial experts, but also for attorneys and clients seeking to assess the potential exposure or recovery associated with a lost profits claim.

 

Overview

Lost profits are a measure used in calculating expected damages, generally in a forward-looking manner.[2] Said another way, lost profits are the net earnings a business would have realized if not for the alleged harmful act or breach by another party. They are typically used as a measure of damages when a business experiences a measurable decline in revenue and profitability due to interference with its normal operations and often result from a contractual breach, delayed project, supply chain disruption, or other commercial dispute.

 

Legal & Financial Requirements

To successfully claim lost profits, plaintiffs must satisfy several key legal and financial requirements. While standards vary by jurisdiction, courts generally require the following elements:

 

Causation

The plaintiff must demonstrate that the defendant’s actions were the direct cause of the plaintiff’s lost profits.[3] This involves separating the impact of the alleged misconduct from other possible causes such as market trends, operational issues, or unrelated external factors. One such example of “other possible causes” is the closures of business and supply chain issues that arose from the COVID-19 Pandemic.

 

Reasonable Certainty

Courts will not award damages that are speculative or based on conjecture.[4] The claim must be supported by reliable data and sound methodologies that allow the expert to project lost profits within a reasonable degree of certainty. Historical performance, contemporaneous financial records, and industry data are commonly used to support this standard. It’s important to note that not all this information will always be available depending on the case, such as historical performance for new businesses, or industry data for specialized practices.

 

Foreseeability

The lost profits must have been a foreseeable result of the breach or wrongful act at the time the agreement was made, or the harm occurred.[5] For example, if a supplier breaches a contract, it must have been foreseeable that the buyer would suffer business interruption and lose sales as a result. Foreseeability can be analyzed through the consideration of financial records, consideration of reasonable anticipation of financial risks, and drawing on your own personal experience and expertise.

 

Measurable Loss

There must be a quantifiable financial impact. Lost profits are typically measured as the difference between the profits the business would have earned “but for” the defendant’s actions (“But-For Profits”) and the profits it actually earned during the relevant damage period (“Actual Profits”).

 

It is important to distinguish lost profits from other types of damages such as lost revenues, lost business value, or out-of-pocket costs. Lost profits are net of avoided (mostly variable), costs. Avoided Costs are any expenses the business did not incur due to the reduced activity. These costs must be subtracted from the lost revenue. In some cases, production costs are already spent and unavoidable depending upon which stage in the process the damaging act occurred. This nuance is critical to calculating damages that are economically accurate and legally defensible.

 

Components of a Lost Profits Analysis

While lost profits can be calculated in a wide variety of ways, there are typically several key components that are consistent throughout these methodologies.

 

Damage (or Loss) Period

Put simply, the damage period is the time over which lost profits (or damages) have occurred or are expected to occur because of the wrongful act.[6] Typically, this period will begin at the point in time when the damaging act occurred and will end when the damaged party is no longer earning or able to earn fewer profits than would have been earned but for the wrongful act. Determining the damage period is typically one of the first considerations when calculating lost profits.

 

Lost Historical (and/or Future) Revenues

Lost revenues are the monetary amount of revenues that have not and will not be earned by the plaintiff, as a result of the defendant’s wrongful acts.[7] The calculation of revenues that would have been earned is typically referred to as the But-For Revenues, or what revenues would have been earned but for the actions of the defendant. While the law does not explicitly outline a specific process or methodology to determine lost revenues, typical analyses that result in credible measurements of lost revenue include understanding the underlying allegations and wrongful acts, understanding agreements or contracts at issue, analyzing relevant documents and information, assessing the reliability of information, determining applicable methodologies, and reviewing estimates for reasonableness.

 

Avoidable Costs

Avoidable costs are expenses avoided as a result of lost revenues not having been earned.[8] When considering avoidable costs, an understanding of cost accounting is important for determining whether costs are categorized as variable or fixed costs. Variable costs typically increase with an increase in sales, whereas fixed costs typically do not change with an increase or decrease in sales. While these categories can provide a starting point, you should always consider the information available. For example, certain variable costs might already be sunk costs by the time the damaging period occurred. If so, those costs would not be avoidable.

 

Lost Profits

As previously noted, lost profits are the net earnings the damaged party would have earned but for the alleged harmful act or breach by another party. When considering the lost profits that would have been earned, it is important to identify any mitigating profits, or actual profits, earned by the parties involved and offset these amounts against the lost profits.

 

The One-Model Approach

Under the one-model approach, the expert constructs a single financial model that directly estimates the profits earned but for the defendant’s actions (“But-For Scenario”).[9] The actual results (“Actual Scenario”) are known and observed, so the model only needs to forecast the scenario of what would have happened but for the actions of the defendant. The lost profits are then determined by comparing the model’s projected profits to the actual outcomes.

 

Structure

The One-Model approach begins with the development of revenues, costs, and profits that the business was expected to achieve but for the alleged wrongful act. The But-For Profits are then compared to Actual Profits that were realized during the damages period. The difference between these profit measurements represents the lost profits. The presentation of the lost profits, however, is typically shown as a net amount instead of showing both the But-For and Actual Scenarios separately.[10] This approach assumes that the actual results, although affected by the wrongful act, are sufficiently reliable as a baseline for comparison.

 

Methodologies Used Within the One-Model Framework

Before-and-After Method

The Before-and-After Method compares the plaintiff’s financial performance before the alleged wrongful act to its performance after the event, under the assumption that the pre-incident period reflects normal operating conditions.[11] The expert then adjusts the pre-incident results to reflect expected trends and uses them to model but-for profits during the damages period.

 

How It Works

1. Identify a period of time that reflects typical or representative profitability for the entity.
2. Analyze post-incident performance affected by the alleged wrongful act.
3. Project but-for performance by extrapolating pre-incident results forward.
4. Compare projected but-for profits to actual results.

 

When It Works Best

1. Businesses with stable, predictable financial histories.
2. Situations where the wrongful act created a clear inflection in performance.
3. Industries with relatively steady demand, such as professional services, retail, distribution, or manufacturing.

 

Common Challenges

1. The pre-incident period must be representative of the performance of the business. The inclusion of periods affected by unrelated events (i.e. new competitors, seasonal changes, large scale events like COVID-19) may distort the baseline.
2. Defendants often argue the chosen comparison periods are biased or incomplete.

 

Example

A regional logistics company experiences a sudden drop in revenue after losing access to a key shipping route due to a breach of contract. An expert may use the prior 24 months of stable performance as the baseline for projecting but-for earnings.

 

Yardstick (Benchmark) Method

When the plaintiff’s own history is insufficient or unreliable, the Yardstick Method uses external, comparable sources to estimate what the plaintiff would have earned absent the alleged wrongful act.[12] Yardsticks may include other businesses, industry or market averages, comparable geographic regions, or unaffected divisions or locations of business within the plaintiff company.

 

How It Works

1. Identify an appropriate comparable business, market, or business unit.
2. Evaluate similarities in size, operations, demographics, cost structure, and market exposure.
3. Use performance of the comparable as the basis for projecting but-for results.
4. Adjust for material differences (i.e., scale, pricing, customer mix).

 

When It Works Best

1. Startups or early-stage companies without sufficient operating history.
2. New business lines or geographic expansions where internal data are limited.
3. Industries where strong benchmark data exist (i.e., hospitality, retail, franchising, utilities).

 

Key Considerations

1. The comparability of the benchmark is critical as courts have been known to scrutinize yardsticks closely.
2. Adjustments must be transparent, well-supported, and economically sound.
3. Yardsticks cannot ignore meaningful differences in business model or risk profile.

 

Example

A new restaurant’s lost profits claim may rely on the performance of comparable restaurants in similar neighborhoods, particularly if it opened only months before the alleged harmful event.

 

Contribution Margin Method

The Contribution Margin Method calculates lost profits by determining the incremental profit the business would have earned from lost sales, units, customers, or projects during the damages period. Contribution margin is defined as revenue minus variable (incremental) costs. Fixed costs are excluded because they are generally unaffected by changes in activity. A determination must be made on each variable cost component as it relates to revenue.

 

This method is flexible and can be applied to product lines, service providers, subscription businesses, and even entire enterprises.

 

How It Works

1. Identify the quantity of lost sales, customers, units, or output attributable to the alleged misconduct.
2. Determine the contribution margin associated with those revenues (revenue – variable costs).
3. Multiply the lost units/revenues by the contribution margin to calculate incremental profit loss.

 

When It Works Best

1. Businesses with measurable lost units or transactions (i.e., manufacturing, retail, wholesale, SaaS subscriptions).
2. Situations where variable costs are clearly identifiable and fixed costs remain unchanged.
3. Cases involving partial operational disruption, specific customer loss, or reduced output.

 

Strengths

1. Provides a clear, economically intuitive measure of incremental profit.
2. Particularly effective when lost volume can be reasonably quantified.
3. Avoids overstating damages by excluding fixed costs.

 

Challenges

1. Requires accurate segregation of fixed and variable costs.
2. Lost units must be defensibly quantified.
3. Courts require the expert to justify contribution margin assumptions with actual historical data.

 

Example

A specialty parts manufacturer loses a large customer due to a competitor’s misrepresentation. If the company’s contribution margin on that product line is 40%, and it loses $5 million in revenue, lost profits equal $2 million.

 

Business Types Where This Methodology Is Commonly Used

The contribution margin method is especially useful for:

1. Professional services firms (i.e., law, accounting, consulting) where revenue and labor costs are tightly linked.
2. Hospitality and events businesses where variable staffing and supply costs scale with sales.
3. Subscription or recurring revenue models where churn or lost accounts can be tied to a known margin.
4. Franchise or multi-location businesses where performance can be compared across similar units.
5. Service contractors where billing is based on labor hours or service volume.

 

Strengths and Limitations

Strengths

1. Straightforward and easy for factfinders to understand.
2. Works well in cases involving short-term disruptions, product-specific losses, or companies with a single stream of revenue.
3. Efficient when supported by reliable sales and cost data.

 

Limitations

1. Assume that fixed costs remain unchanged, which may not hold true in longer-term disruptions.
2. Can oversimplify cases where the harm affects multiple products or cost structures.
3. Relies heavily on accurate classification of avoidable costs.

 

This method is particularly effective in situations where there is a clear relationship between units lost and margins, such as with retail, manufacturing, or service businesses that have consistent pricing and cost patterns.

 

Two-Model Method

While the one-model approach estimates lost profits by forecasting only the but-for scenario, the two-model approach explicitly constructs both the but-for and actual scenarios as separate financial models. This dual-model structure allows the expert to isolate the defendant’s impact from other forces that affected the business during the damages period.

 

To build these models, experts employ a variety of analytical techniques. These techniques are each useful in cases involving complexity, external market forces, or multiple overlapping causes. The subsections below summarize the primary methodologies used within the two-model framework.

 

Overview

The cornerstone of the two-model method is the construction of two independent and internally consistent financial models. The But-For Model is a model that projects what financial performance would have looked like absent the alleged wrongful act. The Actual Model is a reconstruction of what financial performance actually looked like after removing or adjusting for unrelated events and external influences. Lost Profits are measured as the difference between these two outcomes.

 

Methodologies Used Within the Two-Model Framework

Dual Financial Modeling (Separate But-For and Actual Models)

The cornerstone of the two-model method is the construction of two independent and internally consistent financial models. The But-For Model is a model that projects what financial performance would have looked like absent the alleged wrongful act. The Actual Model is a reconstruction of what financial performance actually looked like after removing or adjusting for unrelated events and external influences. Lost Profits are measured as the difference between these two outcomes.

 

How It Works

1. Build the But-For Model and include revenue forecasts, cost behavior, capacity assumptions, and market trends expected under normal conditions.
2. Build the Actual Model that adjusts the company’s recorded performance to remove unrelated influences such as: macroeconomic swings, regulatory changes, supply chain disruptions, pre-existing operational challenges, and unrelated customer losses.
3. Calculate Lost Profits by subtracting the adjusted actual model from the but-for model.

 

Strengths

1. Allows the expert to clearly separate defendant-caused effects from other factors.
2. Particularly persuasive in complex, multi-variable environments.

 

Challenges

1. Requires detailed documentation and transparent assumption-building.
2. Courts scrutinize internal consistency between the models.

 

Example

A construction company experiences both a wrongful contract termination and a regional economic downturn. The actual model removes the economic downturn impact, while the but-for model reflects performance expected had the contract continued.

 

Scenario Analysis and Sensitivity Modeling

Scenario analysis expands the two-model approach by testing the but-for and actual models under multiple plausible sets of assumptions. This allows experts to show the trier of fact the range of damages outcomes under different economic conditions or operational outcomes.[13]

 

How It Works

1. Define key variables such as pricing, demand, cost inflation, and capacity constraints.
2. Model multiple scenarios: Base Case, Optimistic Case, and Conservative Case.
3. Evaluate how changes in assumptions impact lost profits.

 

Strengths

1. Demonstrates robustness of the analysis.
2. Helps address uncertainty and competing narratives between plaintiff and defendant.
3. Courts appreciate transparency around assumption sensitivity.

 

Challenges

1. Requires strong justification for selected variables and ranges.
2. Needs clear explanation to avoid appearing speculative.

 

Example

A renewable energy company alleging lost profits due to delayed permitting may model varying electricity pricing scenarios and capacity factors to show how damages would range under realistic market conditions.

 

Econometric or Statistical Modeling

Econometric techniques are used to identify and quantify causal relationships between variables (i.e., demand drivers, market trends, price elasticity) that influence the but-for and actual scenarios.[14] These methods help isolate the defendant’s impact from broader economic forces.

 

How It Works

1. Regression analysis identifies how revenues or margins respond to market drivers such as GDP, commodity prices, or customer demand.
2. The model is used to forecast But-For Performance based on the drivers expected absent the wrongful act, and Actual Adjusted Performance by removing unrelated influences detected in the data.

 

Strengths

1. Rigorous, data-driven, and statistically supported.
2. Particularly powerful in industries with rich datasets or where market forces significantly influence performance.

 

Challenges

1. Requires high-quality data and careful specification.
2. Opposing experts may challenge statistical assumptions or variable selection.

 

Example

An airline claiming lost profits from slot interference may rely on econometric models linking passenger demand to macroeconomic variables and fuel prices, enabling clear attribution of losses to the defendant.

 

Counterfactual Operational Modeling

This technique models how the business would have operated operationally—not just financially—under the but-for scenario. It is common in disputes involving production capacity, supply chain interruptions, or project delays.

 

How It Works

1. Reconstruct production schedules, staffing plans, supply chain flows, or project timelines.
2. Quantify outputs (units, hours, milestone completions) under both actual and but-for conditions.
3. Translate the differences into revenue and contribution margin impacts.

 

Strengths

1. Excellent for cases where lost profits turn on capacity, throughput, or operational bottlenecks.
2. Often provides clearer causation analysis than purely financial models.

 

Challenges

1. Requires operational data and expert understanding of the plaintiff’s processes.
2. May need interviews, engineering reports, or internal planning documents.

 

Example

A manufacturer whose operations were partially halted due to defective machinery supplied by the defendant may create operational models showing how many units would have been produced absent the defect and convert that into lost profits.

 

As an alternate example, a cannabis company is denied a newly issued operating license due to alleged negligence from the defendant on account of failure to identify certain criteria. As the business was not able to commence operations, a counterfactual operational model can be used to estimate the production capacities of the new business if they had received the license.

 

But-For and Actual Cost Reconstruction

In some disputes, cost impacts (not revenue impacts) drive the lost profits calculation. This methodology reconstructs cost structures under both but-for and actual scenarios, often in cases involving cost overruns, supply chain disruptions, or inefficient operations triggered by the wrongful act.

 

How It Works

1. Identify which costs increased due to the defendant’s conduct.
2. Separate avoidable vs. unavoidable costs.
3. Model what costs would have occurred under normal, unaffected conditions.
4. Compare to actual incurred costs.

 

Strengths

1. Useful when damages arise primarily from increased costs rather than lost revenue.
2. Highly relevant to construction, government contracting, and manufacturing cases.

 

Challenges

1. Requires granular cost data and documentation of incremental vs. fixed costs.
2. Must avoid double-counting or misallocating overhead.

 

Example

A supplier fails to deliver raw materials on time, causing the plaintiff to purchase substitute materials at a premium. A dual cost reconstruction model isolates increased costs attributable to the defendant.

 

Integration of External Market Indices and Adjustments

This methodology incorporates external market data, such as commodity price changes, industry growth metrics, price indices, inflation, or interest rates, to adjust the but-for and actual models.

 

How It Works

1. Identify external factors relevant to the plaintiff’s performance.
2. Quantify how these factors affected actual results.
3. Apply appropriate adjustments to isolate the defendant’s impact.

 

Strengths

1. Critical in industries heavily influenced by external forces, such as energy, agriculture, construction, and financial services.
2. Helps address causation challenges by showing which changes were caused by the defendant vs. unrelated market shifts.

 

Challenges

1. Requires reliable, relevant external datasets.
2. Must ensure indices accurately reflect the plaintiff’s economic environment.

 

Example

A contractor claiming lost profits from a delayed project may adjust actual results to remove the effects of unrelated steel price increases using a recognized construction cost index.

 

Comparing the Two Methods

Lost profit analyses rely on constructing a credible estimate of what the injured party’s financial performance would have been but for the alleged wrongful act. Experts commonly rely on either the one-model approach or the two-model approach to structure this analysis. While both frameworks seek to answer the same fundamental question, they differ in evidentiary demands, complexity, transparency, and suitability depending on the facts of the case.

 

The chart below provides a conceptual comparison:

 

Both approaches are widely accepted in litigation, as long as the model is grounded in evidence and helps the trier of fact understand the financial consequences of the alleged wrongful act.

Hybrid Approaches

In certain circumstances, a combination of elements from the one-model approach (such as a But-For Model) and the two-model approach (such as making selective adjustments to actual results) is most appropriate. This combination of elements could be considered a Hybrid Approach. While the two approaches are typically treated as distinct frameworks, many analyses can pull elements from both of them. This combined structure allows experts to tailor the analysis to the specific facts of the case, taking advantage of the simplicity of the one-model framework while incorporating the additional rigor of adjustments traditionally associated with the two-model method.

 

In practice, the expert would prepare a But-For Model and use actual results as a starting point for their analysis. They would then adjust the actual results in situations where the unrelated factors are clearly identifiable and measurable. While this approach might not be applicable in all scenarios, a hybrid approach is most effective when one or more of the following apply:

1. An isolated external event impacts the entity with measurable impacts (such as short-term supply chain issue or a single weather event);
2. The plaintiff is a stable business with modest external influence;
3. The case includes partial causation disputes (like non-defendant client attrition or labor shortages); and
4. Situations where full reconstruction is not feasible (in cases where the client is in a highly dynamic market, lacks detailed cost or operational data, or does not have a suitable proxy).

 

While this approach attempts to bridge the gap between the reduced complexity of a One-Model Approach and providing greater causation clarity under a Two-Model Approach, it’s important to recognize there are still risks associated with trying to strike a balance between the two approaches, such as claims of inconsistency, selective adjustments, and over-optimized projections.

 

Practical Considerations in Lost Profits Analysis

While the theoretical frameworks for lost profits calculations are well established, applying these approaches in real-world disputes requires careful judgment and close attention to practical considerations. Legal and financial professionals must ensure that lost profits estimates are both economically sound and legally admissible. Below are several key factors that can significantly influence the quality and credibility of a lost profits analysis.

 

1. Availability and Reliability of Data

The strength of any lost profits claim is grounded in the quality of the underlying financial information. Experts rely on historical performance, customer data, cost records, and internal projections to build credible models. Incomplete, inconsistent, or unaudited financials may weaken the analysis or lead to greater scrutiny.

 

Analysts should consider the following questions related to the availability and reliability of data:

• Are historical financials consistent and detailed?
• Is the cost structure well understood and documented?
• Are there contemporaneous forecasts or budgets prepared before the alleged harm?

 

2. Understanding Cost Behavior

Properly classifying variable versus fixed costs is critical—especially when using the contribution margin method. Misclassification can materially distort the results. Experts should conduct a cost analysis specific to the nature of the business and damaging event that transpired rather than rely solely on standard accounting definitions.

 

Analysts should consider the following questions related to understanding cost behavior:

• Do fixed costs remain constant across the damage period?
• Are some fixed costs actually semi-variable (i.e., salaried labor, utilities)?

 

3. Isolating the Impact of the Harm

Establishing causation is just as important as quantifying the loss. The analysis must distinguish the effects of the alleged wrongdoing from other market, economic, or operational factors. This often involves comparing actual results to industry benchmarks or similar unaffected periods.

 

Analysts should consider the following questions related to causation:

• Was the business already experiencing a decline?
• Were there other contributing factors (i.e., macroeconomic shifts, regulatory changes)?

 

4. Consideration of Mitigation

Plaintiffs are generally required to take reasonable steps to mitigate their losses. A thorough lost profits analysis should consider whether alternative revenue sources, cost-cutting measures, or business recovery efforts reduced the financial impact.

 

Analysts should consider the following questions related to any potential mitigation:

• Did the business recover lost customers or shift capacity elsewhere?
• Were substitute suppliers, markets, or clients available?

 

5. Duration and Tail of Loss

Determining the length of the damage period and whether the impact permanently reduced the company’s value is often a key point of dispute. Experts must assess whether the company returned to pre-event performance levels, remained impaired, or experienced long-term decline.

 

Analysts should consider the following questions related to the damage period:

• Is the damage short-term, long-term, or permanent?
• Does the loss affect future growth or competitive positioning?

 

6. Role of Expert Judgment and Testimony

Lost profits calculations require not only technical accuracy, but also clear communication. Courts expect financial experts to explain their assumptions, methods, and conclusions in a manner that is transparent and understandable. Experts must be prepared to defend their work under cross-examination and distinguish it from speculative or unsupported claims.

 

Analysts should consider the following questions related to communicating their analysis results:

• Are all assumptions clearly disclosed and supported?
• Can the expert explain the analysis effectively to non-financial audiences?

 

Conclusion

Determining lost profits in commercial disputes requires more than just financial modeling. It requires a clear demonstration of what the plaintiff would have earned, but for the alleged wrongful conduct, that is supported by credible evidence and grounded in sound methodology. The one-model and two-model approaches offer two distinct but complementary frameworks for assembling that analysis.

 

The one-model approach provides a straightforward, efficient structure for cases where the causal link between the alleged wrongdoing and the plaintiff’s financial results is relatively clear. By focusing solely on the but-for scenario and comparing it directly to actual performance, this method works particularly well in stable environments with minimal external interference. Its simplicity makes it easier to communicate and defend, especially when historical performance provides a reliable benchmark.

 

The two-model approach, by contrast, is designed for complexity. When external factors, operational disruptions, or market volatility influence the plaintiff’s performance, a more nuanced analysis is required. By separately reconstructing actual results to remove unrelated effects, the two-model approach brings sharper clarity to causation and allows the expert to isolate the defendant’s true impact with greater precision. While more demanding in terms of data and assumptions, it can provide a stronger evidentiary foundation in disputes where competing narratives must be addressed.

 

Ultimately, no single methodology is universally superior. The choice depends on the facts of the case, the quality of available evidence, and the degree to which external factors influenced performance. Effective damages analysis requires the judgment to apply the right approach—and the discipline to execute it transparently and reliably.

 

For attorneys and clients, understanding the strengths and limitations of both frameworks is essential for building a persuasive claim, anticipating opposing arguments, and preparing expert testimony. For experts, selecting and defending the appropriate methodology is central to meeting the legal standard of reasonable certainty.

 

As commercial disputes become increasingly data-driven and complex, the ability to tailor the damages methodology to the circumstances at hand is no longer optional. It’s a critical element of credible, defensible lost profits analysis.

 

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References

[1] FVS Practice Aid, Calculating Lost Profits, Chapter 1, 1st paragraph.

[2] FVS Practice Aid, Calculating Lost Profits, Chapter 2, Types of Damages, 2nd paragraph.

[3] FVS Practice Aid, Calculating Lost Profits, Chapter 2, Causation.

[4] FVS Practice Aid, Calculating Lost Profits, Chapter 2, Reasonable Certainty.

[5] FVS Practice Aid, Calculating Lost Profits, Chapter 2, Foreseeability.

[6] FVS Practice Aid, Calculating Lost Profits, Chapter 5, Overview.

[7] FVS Practice Aid, Calculating Lost Profits, Chapter 6, Overview.

[8] FVS Practice Aid, Calculating Lost Profits, Chapter 7, Overview.

[9] Baker Tilly. “Credible Lost Profits Analysis: One- or Two-Model Approach?” Baker Tilly Insights, November 6, 2015. Accessed November 18, 2025.

[10] Ibid, pg. 2.

[11] Bouchner, Scott. “3 Methods for Calculating Lost Profits.” Berkowitz Pollack Brant CPAs + Advisors, June 13, 2023. Accessed November 18, 2025.

[12] Bouchner, Scott. “3 Methods for Calculating Lost Profits.” Berkowitz Pollack Brant CPAs + Advisors, June 13, 2023. Accessed November 18, 2025.

[13] EconOne. 2025. “Key Questions to Ask Economic Damages Expert Before Trial.” EconOne. Accessed November 19, 2025.

[14] Vanderhart, Jennifer, Steven Schwartz, Richard Brady, and Aminta Raffalovich. 2024. “The Use of Econometric and Statistical Analysis in Damages Assessments.” In The Guide to Damages in International Arbitration, 6th ed. Global Arbitration Review, June 21.