How to manage construction disputes to minimize surety and construction claims

How to manage construction disputes to minimize surety and construction claims

Construction Claims & Disputes

In Part I of our series of how to manage construction disputes to minimize surety and construction claims, we addressed the construction delay claims and the methods typically used to analyze them.

We indicated there that the most frequently encountered claims include:

1.    Construction Delay Claims

2.    Disruption and Loss of Labor Productivity Claims

3.    Design and Construction Defect Claims

4.    Force Majeure Claims

5.    Acceleration or Compression of the Schedule Claims

6.    Suspension, Termination and Default Claims

7.    Differing Site Conditions Claims

8.    Change Order and Extra Work Claims

9.    Cost Overrun Claims

10. Unacceptable Workmanship or Substituted Material Claims

11. Non-payment Claims (stop notice (or Notice to Withhold) claims, mechanics’ lien (only for private construction projects) and payment bond claims)

Delay and disruption often occur together. However, there is a difference between a disruption claim and a claim for pure delay. Disruption of the contractor's planned sequence and method of construction typically causes a loss of productivity. This loss of productivity, however, does not necessarily mean that the overall contractual completion date will be delayed as a result of the disruption.  Understanding these claims not only will help clients avoid litigation but will also encourage clients to transform their contracts from those that increase client vulnerability to litigation to those that can foster a construction environment that is resilient in the face of the confusions and setbacks of a construction project.

Over the years, the construction industry has developed various methods of contractually allocating the risk of project delay and disruption. Some of these methods include liquidated damages provisions, "no damages for delay" clauses, mutual waivers of consequential damages, provisions that limit liability, claims notice provisions, and provisions addressing responsibility for the adequacy of the construction plans and specifications.  Parties frequently litigate the sufficiency of these risk-shifting efforts in conjunction with the underlying merits of delay and disruption disputes.

The conditions that erupt into delay and disruption claims do not occur in a vacuum. When the owner or the owner's agents-such as the construction manager, architect, and engineer, among others-ostensibly delay or disrupt the contractor, the actual cause may be that the owner breached one or more of its obligations to the contractor. These obligations include providing adequate plans and specifications, providing site access, cooperating with the contractor when difficulties or problems are encountered, and making timely progress payments.

Part II of this series discusses item 2 above: Disruption and Loss of Labor Productivity Claims

Disruption and Loss of Labor Productivity Claims

In general, disruption can be described as the result of being forced to perform contracted work in a manner different and less efficient than originally planned.  When a contractor bids a project, the bid costs for the work are based on assumptions concerning construction procedures, levels of manpower, and sequences of work activities.  Any deviation from these planned factors may result in an increase in the costs required to perform the contracted work.  This could result in a loss of efficiency claim against the owner.

Although the distinction sometimes is blurred, courts have generally recognized the distinction between damages caused by disruption (loss of efficiency) and damages caused by delay. See L & A Contracting Co. v. Southern Concrete Servs., Inc., 17 F.3d 106, 112-13 (5th Cir. 1994) (holding a subcontractor liable for damages even though the contractor completed its project on time: “[Contractor] is entitled to recover those costs regardless of whether it timely completed its own obligation….”); Id. at 966-67. In John E. Green Plumbing & Heating Co. v. Turner Constr. Co., 742 F.2d 965, 966-67 (6th Cir. 1984), the Court distinguished lost productivity damages from delay damages by awarding the subcontractor damages for interferences despite a no damages for delay clause.

The important thing to remember is that while delay claims are time related and contain time related damages such as extended overhead or increased direct costs related from the delay, disruption claims (which may arise from the same event justifying delay claim) generally involve losses based on lost labor and equipment efficiency.

A contractor's request for damages due to loss of labor productivity relates to the additional labor costs incurred when work is disrupted or delayed.  The following are examples of events or interferences that could cause a loss in labor productivity.  Whether an interference with the contractor’s work is a breach of contract depends on the circumstances of the case:

·         Adverse weather conditions; when a contractor is forced by owner delays to perform in a season different from the one scheduled or to perform a greater amount of work than originally scheduled in an adverse season, any decline in efficiency will entitle a contractor to compensation.

·         Adverse job site conditions (owner’s failure to provide a suitable work site)

·         Restricted access to a jobsite; circumstances that inhibit a contractor’s access to its work area often result in labor productivity losses. These losses can include those costs associated with the “idling” of its work force or the lost labor hours caused by the work force’s efforts to overcome site access limitation.

·         Excessive safety and technical inspections

·         Excessive testing

·         Excessive change orders

·         Overtime on an extended basis

·         Out of sequence work; a common cause of labor inefficiency is work performed in a manner out of sequence with the contractor’s original schedule.  A contractor has a right to perform according to a reasonable plan of operations and can recover for the loss of efficiency caused by disruption to his schedule. Here, care must be taken to provide the causal connection between non-sequential performance and loss of productivity

·         Out of scope work; change orders can have a negative impact on labor productivity because they often force a contractor to alter its plan for completing its scope of work, resulting in a need for additional supervision or a reduction in learning or experience curve gains.

·         Untimely response to RFIs

·         Untimely approval of submittals

·         Failure to meet express contractual obligations

·         Numerous stop-and-go activities

·         Interference with other trades; many trades required to work together in an area when it is not large enough to accommodate these activities will result in labor inefficiency.

·         Failure to coordinate and/or supervise properly other contractor’s activities

·         Over or under-manning; here, inefficiency can result from crowding, diluted supervision, lack of engineering support or diminishing the level of crew experience.

The first and most common source of disruption is delay. Delays often cause damages not only by preventing the contractor from working or completing its work timely, but also by impacting the contractor’s efficiency. In Luria Bros. & Co. v. United States, 369 F.2d 701 (Ct. Cl. 1966), the court found that the owner’s changing of specifications delayed the contractor’s performance. The contractor recovered delay damages, including additional home office overhead, idle equipment, wage and material escalations, and additional insurance premiums. Id. at 709-11. But the court also found that the delays caused the contractor to work under unanticipated winter conditions, with a resulting loss of productivity. Id. at 711-14. Therefore, the contractor recovered disruption damages associated with the loss of its productivity. Id.; see also Net Construction, Inc. v. C & C Rehab and Construction, Inc., 256 F. Supp. 2d 350, 354 (E.D. Pa. 2003) (recognizing a distinct claim for lost productivity arising out of a delay, although holding that contractor failed to prove properly lost productivity damages); Williams Enter., Inc., 938 F.2d at 236 (allowed contractor both delay and loss of productivity damages against subcontractor which delayed the project);

Deviation from planned sequence or levels of manpower can also damage efficiency and productivity.  Virtually any task has an optimum sequence, and a level of manning that will provide the most cost-effective performance.  Exceeding that level reduces productivity due, for example, to shortages of workspace, trade stacking and resulting confusion.  Under-manning the optimum level may destroy the efficiencies of crew specialization and the learning effect, and wastes time in worker “transition” between activities.  Any factor, therefore, which prevents a contractor from working at planned optimum sequence or staffing levels may deteriorated productivity and raised the cost of performance.

Similarly, a deficiency in other construction resources, such as tools, equipment or construction materials, can retard the rate of production.  Crews working without the required level of support from the equipment and materials required to perform the work cannot achieve planned rate of production.

When a contractor is forced to perform work in an out-of-sequence manner due to an act or omission of the owner, the contractor's costs for loss of labor efficiency may be recoverable through disputes and claims for equitable adjustment.

Disruption and Loss of Labor productivity claims are some of the most contentious and more difficult to prove claims in the construction industry.  This is based, in part, on the fact that labor productivity losses are often difficult to distinguish contemporaneously, as opposed to many claims which are related to direct monetary costs.  Additionally, labor productivity rates and other related data are often not tracked on construction projects with any degree of precision.  As a result, substantiating a cause-and-effect relationship between issues and resulting labor productivity losses and establishing entitlement to recovery for lost labor productivity can be a difficult process.

Construction labor productivity is typically measured as labor hours per quantity of material installed.  Labor productivity loss is experienced when a contractor, or a particular crew, is not accomplishing the anticipated or planned production rates. In other words, a loss of productivity is when it takes more labor and equipment to do the same amount of work, thereby increasing project costs. There are many common causes for labor productivity impacts on a construction project, stemming from owners, contractors, and construction managers.  Common causes include, but are not limited to, mismanagement and maladministration, site access restrictions, differing site conditions, defective plans and/or specifications, changes in the work; labor availability, turnover, rework, testing/inspections, overtime and/or shift work, interferences, changes in construction means and methods, overcrowding, out-of-sequence work and inclement weather.

Primary challenges associated with labor productivity claims are identifying the root cause of labor productivity issues, quantifying associated labor productivity losses, corroborating the cause-and-effect relationship, and establishing entitlement to damages. One must review the contract to understand the basis of the agreement as certain productivity issues may have been foreseeable and therefore possibly accounted for in the contract commercial terms. The contracts may also identify if a party accepted certain productivity risks, and what contractual rights may exist to recover labor productivity damages.  Metropolitan Consulting & Engineering’s construction claims consultants have in-depth knowledge of productivity tracking methods and quantification techniques and extensive experience evaluating labor productivity issues, performing root cause analyses, and quantifying damages.  Our consultants prepare and analyze labor productivity claims, present in meditations, and testify in litigation and arbitration proceedings on issues concerning labor efficiency and productivity loss.

Metropolitan Consulting & Engineering has in-depth knowledge of labor productivity tracking and controls, impacts, industry studies, and quantification techniques. While each project has its own unique challenges and issues, Metropolitan Consulting & Engineering’s labor productivity analyses typically consider our experience in the field as project/construction management professionals, testimony and interviews of key project personnel, contemporaneous project documents (e.g., progress reports, daily reports, time sheets and labor records, etc.), our education and specialized training, as well as recognized industry labor productivity studies and reports. Our construction claims consultants specialize in labor productivity analysis and typically utilize the following industry-recognized methodologies, where appropriate: 

Listed below, in outline form, are various identified methods for estimating lost productivity.  These methods are listed in order of preference.  The recommended order of preference of the applicability of the studies and methods set forth below is based upon the weight of published literature.  That is, Project Specific Studies are preferred to Project Comparison Studies.  Project Comparison Studies are likely to be given greater weight than Specialty Industry Studies.  Specialty Industry Studies are generally considered more reliable than General Industry Studies, and so on and so forth.  Within each category, we have likewise placed the methodology in order of preference.  For example, properly performed measured mile studies are preferred to earned value analyses which, in turn, are considered more credible than work sampling or craftsmen questionnaires.

Project Specific Studies

·         Measured Mile Analysis

·         Earned Value Analysis

·         Work Sampling Method

·         Craftsmen Questionnaire Sampling Method

Project Comparison Studies

·         Comparable Work Study

·         Comparable Project Study

Specialty Industry Studies

·         Acceleration

·         Changes, Cumulative Impact and Rework

·         Learning Curve

·         Overtime and Shift Work

·         Project Characteristics

·         Project Management

·         Weather

General Industry Studies

o    U.S. Army Corps of Engineers Modification Impact Evaluation Guide

o    General and Specialty Industry Studies (Mechanical Contractors Association of America [MCAA], 

o    Construction Industry Institute [CII], Business Roundtable, etc.)

o    National Electrical Contractor’s Association

o    Other Estimating Guides

Cost Basis Methods

·         Total Unit Cost Method

·         Modified Total Labor Cost Method

·         Total Labor Cost Method

·         Time and Motion Studies

Productivity Impact on Schedule

·         Schedule Impact Analysis

It should be noted that the selection of a particular productivity analysis methodology depends on the project facts, the nature of the events being analyzed, the nature and extent of available labor data, and may vary from project to project.  Each of the above-referenced productivity analysis methodologies has inherent advantages and disadvantages.  Metropolitan Consulting & Engineering has extensive experience handling construction labor productivity claims and our construction claims consultants are skilled at tailoring our productivity analysis approach to suit a project’s needs and constraints.

The burden of proof is on the claimant

In an action for damages, the contractor bears the burden of proving both the existence and the amount of the damages incurred.  Where the existence of damages is clearly established, a contractor’s inability to prove the precise amount of those damages does not preclude recovery.  This concept is particularly applicable to major construction disputes involving such elements as substantial labor inefficiency claims.  The general rule is that the injured party must establish the extent of its damages with “reasonable certainty.”

Case Law on the burden of proof

The burden is on the party claiming the benefit of the adjustment. Wilner v. United States, 24 F.3d 1397 (Fed. Cir. 1994); Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 767 (Fed. Cir. 1987) (moving party “bears the burden of proving the amount of loss with sufficient certainty so that the determination of the amount of damages will be more than mere speculation”); B&W Forest Prod., AGBCA Nos. 96-180, 96-198-1, 98-1 BCA ¶ 29,354.

2. What must the claimant prove?

a. Entitlement (Liability)—the government did something that changed the contractor’s costs, for which the government is legally liable. T.L. James & Co., ENG BCA No. 5328, 89-2 BCA ¶ 21,643.

b. Causation—there must be a causal nexus between the basis for liability and the claimed increase (or decrease) in cost. Hensel Phelps Constr. Co., ASBCA No. 49270, 99-2 BCA ¶ 30,531; Stewart & Stevenson Servs., Inc., ASBCA No. 43631, 98-1 BCA ¶ 29,653, modifying 97-2 BCA ¶ 29,252; Oak Adec, Inc. v. United States, 24 Cl. Ct. 502 (1991).

c. Resultant Injury—that there is an actual injury or increased cost to the moving party. Servidone Constr. Corp. v. United States, 931 F.2d 860 (Fed. Cir. 1991); Cascade Gen., Inc., ASBCA No. 47754, 00-2 BCA ¶ 31,093, 2000 ASBCA LEXIS 138 (holding that a contractor claim was deficient when it failed to substantiate what specific work and/or delays resulted from the defective government specifications).

A typical discussion of the procedure used by boards of claim review is provided below:

The excerpt below from the Appeal of The Clark Construction Group, Inc., CAB No. 2003-1, Contract Appeals Board, 2004 GAOCAB LEXIS 2 (GAOCAB 2004) , illustrates the burden of proof required to recover loss of labor productivity.

It is a rare case where loss of productivity can be proven by books and records; almost always it has to be proven by the opinions of expert witnesses. However, the mere expression of an estimate as to the amount of productivity loss by an expert witness with nothing to support it will not establish the fundamental fact of resultant injury nor provide a sufficient basis for making a reasonably correct approximation of damages.  The support commonly relied upon for identifying and measuring labor inefficiency is a comparison to some accepted standard. Herman B. Taylor constr. Co., GSBCA no. 15421, July 21, 2003, 03-2 BCA P 32,320 at 159,503-04; DANAC, Inc., ASBCA no. 33394, July 31, 1997, 97-2 BCA P 29,184, at 145,152, Recon. Denied, 98-1 BCA P 29,454. Where a claim of labor inefficiency is based on assumptions that are not supported by reliable empirical data, the claim of labor inefficiency will be denied for insufficient proof.   Herman B. Taylor Constr. Co., Supra, at 159,504.  Iron provided no expert witness testimony or a comparison to some accepted standard for its claimed labor inefficiencies, and we therefore reject its inefficiency claims because no probative evidence has presented that would support recovery.

A mere estimate of labor inefficiencies will not suffice.

Once again, we address Government liability and the extent of that liability for asserted labor inefficiencies identified when a Contractor finds its labor expenditure to be in excess of the amount of labor it anticipated that it would expend. Claims of labor inefficiency are recognized to be both difficult to prove as to entitlement and even more difficult to quantify; the claims we confront here are no exception.  The parties ably and efficiently presented their positions in both the hearing and the briefs; however, their presentation has not lessened the difficulty of our task.

We have had recent occasion to discuss claims for inefficiency or impact claims in detail in Centex Bateson Construction Company, Inc. We stated there:

Impact costs are additional costs occurring as a result of the loss of productivity; loss of productivity is also termed inefficiency.  Thus, impact costs are simply increased labor costs that stem from the disruption to labor productivity resulting from a change in working conditions caused by a contract change.  Productivity is inversely proportional to the man-hours necessary to produce a given unit of product.  As is self-evident, if productivity declines, the number of man-hours of labor to produce a given task will increase.  If the number of man-hours increases, labor costs obviously increase.

Thus, our inquiry will focus on the evidence to determine whether the VA’s actions (or inaction) changed the working conditions such that PKC’s labor productivity was adversely impacted. Centex Bateson Construction Company, Inc., VABCA Nos. 4613, et. at, 99-1 BCA ¶30,153, 149,257.

Rule 703 of the Federal Rules of Evidence permits an expert witness to base his or her opinion on facts or data that are not admissible into evidence if such facts and data are “of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject . . .” Under this Rule, information supporting, for example, loss of labor productivity need not be admitted or admissible in order to be relied upon for an expert’s opinion. Federal Rules of Evidence 703, however, is not a hearsay exception and may not be used as a means of admitting inadmissible evidence.  More importantly, Federal Rules of Evidence 703 may not be used to circumvent the claimant’s obligation to admit evidence such as source documents establishing the factual bases for its damages.  Although Federal Rules of Evidence 703 may be useful in presenting expert testimony, a much more potent means of presenting the information contained in source documents lies in Federal Rule of Evidence 1006 concerning summaries.

Federal Rule of Evidence 1006 permits parties to present voluminous documents or data in a summary format. The Rule reads as follows:

The contents of voluminous writings, recordings, or photographs which cannot conveniently be examined in court may be presented in the form of a chart, summary or calculation. The originals, or duplicates, shall be made available for examination or copying, or both, by other parties at a reasonable time and place. The court may order that they be produced in court.

Proving Causation

An important element of a loss of productivity claim is proving causation.  This requires the contractor to prove that the loss of productivity was caused by an unreasonable act or omission by the Owner or the Government.  The Owner or Government may argue in defense to a labor inefficiency claim that the contractor is responsible for its labor losses by failing to estimate the job properly, by failing to properly schedule the work or by failing to coordinate the work.

Be Careful When Agreeing to Releases

Often, the Government will ask the contractor to sign a waiver or release when executing a change order.  This may preclude a contractor from claiming labor inefficiencies based on the changes’ impact on unchanged work, i.e. ripple effect.  It is therefore imperative that the contractor reserve its right to labor inefficiencies when signing a change order.  Be very specific when reserving your rights to avoid a dispute later over the scope of the release.

Interference from the owner or third parties

The impacts from interference will vary greatly depending on the type and extent of such interference.  When the contractor loses control over the construction task that he has contracted to perform, then there is an interference with his work.  The interference could be caused by the Owner, Government, or third party.  Most modern contracts contain provisions that the Owner must schedule and coordinate the work so that the contractors will not actively interfere with each other.  They also include an exception to the “no damages for delay clause” which will allow the claimant to recover for delays caused by acts of the Owner or third party constituting active interference with the contractor’s performance of the work.  Active interference typically is not defined in the contracts and this has created quite a few issues in the past.

Recently, the Connecticut Supreme Court clarified the “active interference” meaning in the case C&H Electric, Inc. v. Town of Bethel, 312 Conn. 843, 2014 Conn. LEXIS 263 (Aug. 5, 2014).  In that case, the parties’ contract included a “no damages for delay” clause, limiting the defendant’s liability for delays it caused on the project.  The no damages for delay clause specified that an extension of time would be plaintiff’s “sole remedy” for “(1) delays in the commencement, prosecution or completion of the work, (2) hindrance or obstruction in the performance of the work, (3) loss of productivity, or (4) other similar claims whether or not such delays are foreseeable, contemplated, or uncontemplated . . .”  The contract included a single exception to the no damages for delay clause, which allowed the plaintiff to recover for delays caused by acts of the defendant “constituting active interference with [the plaintiff’s] performance of the work.”  While the contract did not define “active interference,” it did specify that the defendant’s exercise of its contractual rights, including its right to suspend, reschedule or change the work, would not constitute “active interference.”

The Supreme Court of Connecticut addressed the standard for the “active interference” exception to the contract’s no damage for delay clause.  The Court first explained that in White Oak, it adopted four common law exceptions to no damage for delay clauses: (1) delays caused by the owner’s bad faith or its willful or grossly negligent conduct, (2) uncontemplated delays, (3) delays constituting intentional abandonment of the contract, and (4) delays from the owner’s breach of a fundamental contract obligation.

The Court then analyzed contractor’s two claims for active interference: (1) that the Town of Bethel concealed the abatement work from the contractor while knowing that it would cause contractor delays and lost productivity and (2) the Town of Bethel’s coordination and failure to update the specifications interfered with contractor’s ability to complete the work.

On the first claim, the Court concluded that evidence reflected that the town did not conceal the abatement work from contractor and that it did not know the abatement work would interfere with contractor.  The Court identified evidence suggesting that the Town of Bethel repeatedly discussed at public meetings the ongoing abatement work and that the Town of Bethel believed that the abatement work was sufficiently advanced for the contractor to commence its work.  The Court explained that the Town of Bethel’s decision to start contractor’s work, “supported by an environmental consultant, later proved to be erroneous does not transform the Town’s mistake or error in judgment into active interference.”  Likewise, the court explained that the Town of Bethel’s failure to affirmatively disclose to contractor the remaining abatement work was a result of a “mistake or oversight [which] is not enough to satisfy the active interference exception in the contract.”

For contractor’s second claim, the Court explained that the parties contract “categorically excluded from the meaning of ‘active interference’ any rescheduling or suspension of the work by the Town, irrespective of the extent and frequency that the Town of Bethel exercised these rights.”  The Court concluded that the Town of Bethel’s “less than fastidious” coordination of the work and project did not actively interfere with the contractor’s work.

Anticipated or Excluded Conditions

Constructions projects are in general complex and difficult endeavors, full of surprises, changed weather or site conditions, and so on.  A certain level of inefficiency is common to most construction activities and should be provided for in the contractor’s bid.  Sometimes the contract will expressly exclude claims for lost productivity due to site conditions, changed weather conditions or other anticipated events or conditions.  The contractor is therefore put on notice of such conditions and he will be able to file a claim for loss of productivity due to these conditions.

Recordkeeping

Sufficient quantity of high quality data is of paramount importance in preparing and analyzing the loss productivity claim.  In order to establish entitlement on a “lost” productivity claim, quantify the impacts, and calculate damages, a contractor will need to maintain very good contemporaneous records related to its labor and equipment productivity.  It is important to regularly compare actual productivity of labor and equipment resources with the planned levels.  As deviations occur and negative trends are established, the contractor’s written, calculated, and visual project recordkeeping should document the causal link between issues and events and the adverse impacts to its productivity. A widely accepted method of “lost” productivity calculation is a measured mile analysis. This approach makes use of contemporaneous project records to establish a baseline ‘un-impacted’ productivity period to which the “impacted” productivity period is compared and the “lost” productivity is established.

To be admissible as evidence in a court proceeding, documentation must generally be prepared in the normal course of business, at or near the time, by a person having knowledge of the events.  Specifically, courts will not admit as evidence reports prepared by project personnel -­-­ or anyone else -­-­ after the fact.

Some of the documents commonly found on construction sites are:

·         The Schedule (The Updated Schedule)

·         Revised drawings

·         Marked up drawings and other documents

·         Receipts for materials and equipment, including delivered quantities/quality

·         Productivity Reports

·         H&S monitoring records

·         Work plan and contract documents

·         Deviation Reports

·         Foreman's Daily Time Card

·         Foreman's Diary and Daily Quantities

·         Daily Site Diary/Report

·         Videos and Photographs

·         Correspondence

·         Meeting Minutes

·         Change/Work Order Files

At a minimum, the only truly effective ways for a contractor to prove legal entitlement to delay and loss productivity damages are to:

·         Prepare and submit a reasonable, accurate, and detailed construction schedule, either with the bid or quotation or submitting it prior to starting construction on the project. Original, as-planned schedules that don’t show dependencies and relationships between the various work tasks to be performed by the contractor, its subcontractors, and accompanying trades are almost worthless in proving the exact effects of delays that later occurred.

·         Prepare and submit cost estimates for as-bid man-hours, labor, equipment utilization, and materials prior to the start of construction. These estimates should be included in the schedule described above and should be accurately itemized for the various schedule activities.

·         Regularly submit daily construction record reports to the owner once construction begins. These daily records should contain a listing of all schedule activities worked on a specific day, including the manpower and trades, materials, and
equipment utilized for each activity being performed. Work stoppages and delays encountered by the contractor should also be listed by all schedule activities directly or indirectly affected. A written description of the nature and extent of the work
stoppage or delay in hours and minutes should be provided. For example, if equipment and manpower are idled, that occurrence should be accurately described according to the number of hours and minutes they were idled. If manpower and equipment had to be transferred to another schedule activity because of the work stoppage or delay, the time and money lost in shutting down and starting up again on a different task should be quantified in writing.

·         Maintain productivity records on a routine basis for all construction schedule activities being performed. Where possible, this should be included in the daily construction record reports. Delays often have hidden effects on construction productivity that are not readily apparent until the actual productivity rates are carefully examined. Time and cost records are worthless unless an accurate measure of what was being produced is recorded simultaneously.

The preceding four practices provide a basis for accurately comparing as-bid expectations with as-performed realities. If followed correctly, these practices should help detail the causes (entitlements) of even a minor delay. However, major delays or a series of minor, consecutive delays have other, less obvious and often more expensive effects on both time and cost. Some of these effects include:

·         Underutilization of project and home office overhead;

·         Increased scheduling and modification costs;

·         Failure to meet contract completion dates, resulting in extended overhead costs, hindrances to the bonding capacity (inability to maintain efficient workloads for the manpower and equipment available), and work being "pushed" into inclement weather or off-seasons;

·         Owner failure to grant time extensions due to delays, followed by enforcement of or the threat to enforce liquidated damages for late completion;

·         Constructive acceleration by the contractor to avoid enforcement activities;

·         Low morale of workers and significant productivity loss due to stop-start construction operations and the inability to perform scheduled work in a logical and efficient sequence; and

·         Owner-ordered acceleration to complete on time, in spite of major delays.

Metropolitan’s Construction Consulting professionals have extensive experience working with both owners and contractors in preparing, evaluating, and resolving complex “lost” productivity claims.  Metropolitan’s independent, objective, fact-based approach to “lost” productivity claim preparation and analysis has proven successful with all types of subcontractor trade work.  Our professionals are seasoned contractors, engineers, and project managers.  Our senior construction consultants have been qualified as experts on the topics of “lost” productivity, disruption, and inefficiency entitlement analysis; quantification of impacts; and calculation of damages by state, district, and federal courts, and various government boards.

Our services, encompassing entitlement, quantification of impacts, and damages, include:

·         Preparation of contractor change order requests for “lost” productivity issues and events

·         Preparation of contractor claims for “lost” productivity issues and events

·         Development of contractor recordkeeping systems for documentation of adverse productivity impacts 

·         Analysis of contractor change order requests for “lost” productivity issues and events 

·         Analysis of contractor claims for “lost” productivity issues and events 

·         Development of recordkeeping systems for owner documentation of contractor-alleged productivity impacts 

·         Expert witness services

Measured Mile Approach

When contractors seek additional compensation for changes, differing site conditions or other delays, they must convince the Owner or the mediator or the court of the amount they are entitled to be paid.  Whenever these types of events occur on larger highway or infrastructure construction projects, there is usually a substantial loss of productivity.  Yet, contractors are frequently unable to prove the appropriate amount.

When done properly, the preferred method of calculating loss of labor productivity is the “Measured Mile” approach.  It is the comparison of the differences in productivity between affected and non-affected conditions (i.e., time periods, work areas, or work activity) using project specific studies.  This method first analyzes work that was performed in an area that did not experience delay or disruption.  For example, if it took 100 labor hours to install 100 feet of conduit in a non-impacted area, the efficient rate of installation would be 1 ft. per hour. This measured mile can then be compared to the rate of conduit installation in disrupted areas.  The difference represents the loss of productivity.  The more detailed and accurate the contractor’s labor expenditure records, the more reliable and persuasive will be the results of loss of productivity damages quantified using project specific studies.

The Court of Federal Claims and Boards of Contract Appeals have upheld use of the Measured Mile technique.  The Measured Mile calculation is favored because it considers only the actual effect of the alleged impact and thereby eliminates disputes over the validity of cost estimates, or factors that may have impacted productivity due to no fault of the owner.

The Measured Mile methodology cannot be used if the contractor never performed the work efficiently and therefore does not have a baseline to compare to.  Courts and Boards of Contract Appeals have allowed the use of industry studies as an alternative means of calculating labor inefficiency.

Steps that Contractors Need to Take.   Applying the measured-mile method is straightforward if the contractor has kept productivity records by location, type of work and crews.

• Identify and define impacted work, including the unit of measurement for the work. For example, certain aggregates designated by the agency as suitable for use in the concrete may not be suitable if the soils contain large lumps of clay.  Under this first step, you need to identify and define the impacted work.

• Identify the impacted and unimpacted time periods and project locations for the analysis. Selecting the unimpacted (measured-mile) period and location for the project is crucial. Most common tasks on projects are constructed in different phases, at different times of the year and in different locations. In the above example, the contractor may be able to achieve a higher production after identifying and approving a different aggregate source.

• Carefully evaluate the difference between the two periods and select a representative unimpacted period. Remember that a potential challenge to this approach is the argument that the unimpacted selection is not representative of the project. This is because the measured-mile method assumes all work on the project would have been performed at the same rate as the unimpacted segment.

• Locate and assemble job-cost records, identifying man-hours, equipment and material used. Record keeping is critical to calculate and support any lost productivity claim. On highway construction projects, contractors must break the work down by location, activity and event. Review records for all unimpacted work periods. Field personnel need to maintain the records in generally the same manner for the impacted and unimpacted sections.

• Determine whether you will base the analysis on hours or dollars. Then develop an unimpacted benchmark productivity measurement. An hourly approach is based on the total crew hours required to complete a work task, such as yards of concrete paved. A dollar approach is based on the total cost to complete a task, including labor costs, equipment rental, operating costs and consumables that vary with time. Once you have developed the productivity factors and crew costs, simply apply these to the impacted work quantities.

A measured mile analysis is generally acceptable if based on reasonably similar work to the impacted work. The impacted and unimpacted work activities should draw on labor from the same labor pool, and both activities should involve similar skill level and effort. Identify and evaluate possible other causes for the claimed impact. Be prepared to explain why these do not apply.

As contractors, you will face lost productivity when there are changes, differing site conditions or delays. How well are you prepared to show the Owner or the mediator or court the amount of your lost productivity?

MCAA Manual as a Means of Measuring Labor Inefficiency

Courts and Boards of Contract Appeals have allowed the use of industry studies as an alternative means of calculating labor inefficiency.  In the Appeal of the Clark Construction Group, Inc., VABCA-5674, 2000-1 B.C.A. (CCH) P30,870 (April 5, 2000), the Board of Contract Appeals accepted the Mechanical Contractors Association of America (MCAA) Manual as a means of measuring labor inefficiencies:

Quantification of loss of efficiency or impact claims is a particularly vexing and complex problem. We have recognized that maintaining cost records identifying and separating inefficiency costs to be both impractical and essentially impossible. Therefore, we have found percentage estimates of loss of efficiency to be an appropriate method to quantify such losses and that is how we will calculate the amount of equitable adjustment due PKC here. Centex Bateson, 99-1 BCA ¶30,153; Fire Security Systems, Inc., VABCA No. 3086, 91-2 BCA ¶23,743.

We will utilize the productivity factors from the MCAA manual as the best method to arrive at the percentage estimates of PKC's and USM's undeniable productivity losses. We find no other basis in the record on which we could better calculate the amount of PKC's productivity losses in this appeal and, as we previously recognized in Fire Security, the MCAA productivity factors are a reasonable starting point to estimate efficiency losses. Despite the inherent subjectivity of the MCCA factors, the record here demonstrates that the MCAA factors are a widely used industry standard method of accounting for the impact of inefficiency on mechanical work. We will utilize the MCAA manual's direction and descriptions of the percentage inefficiency factor to be applied to the inefficiency element for which entitlement has been proven. As contemplated by the MCAA manual, we will use our reasonable judgment of how the factors apply to this contract and the two contractors.  Fire Security Systems, Inc., 91-2 BCA ¶23,743; Stroh Corporation, GSBCA No. 11029, 96-1 BCA ¶28,265.

The MCAA manual lists sixteen (16) factors   affecting labor productivity. The factors are stated as percentages to add   onto labor costs for the contract man-hours of labor. The individual MCAA   factors are ranked as Minor, Average or Severe.Percent Loss if Condition Exists
Factor	Minor	Average	Severe
1. Staking of trades.	10%	20%	30%
2. Morale and attitude.	5%	15%	30%
3. Reassignment of manpower.	5%	10%	15%
4. Crew size inefficiency.	10%	20%	30%
5. Concurrent operations.	5%	15%	25%
6. Dilution of supervision.	10%	15%	25%
7. Learning curve.	5%	15%	30%
8. Errors and omissions.	1%	3%	6%
9. Beneficial occupancy.	15%	25%	40%
10. Joint occupancy.	5%	12%	20%
11. Site access.	5%	12%	30%
12. Logistics.	10%	25%	50%
13. Fatigue.	8%	10%	12%
14. Ripple.	10%	15%	20%
15. Overtime.	10%	15%	20%
16. Season and weather change.	10%	20%	30%

Thus, if in the event all of these factors were present on a job in the "Severe" category, an add-on mark up for loss of productivity would be 413% on the direct labor hours.

MCAA Bulletin Labor Inefficiencies (2011)

Quantifying Damages using the Cumulative Impact Method

Quantifying a cumulative impact claim caused by a multiplicity of changes on a construction project is a challenge.  Generally, liability is established showing the breach of contract, by the project owner who generated the changes and evidence of the consequent disruption caused by the multitude of changes.  Causation requires that the contractor prove that the inefficiency was proximately caused by the owner's changes.  Damages do not have to be proved with mathematical certainty; the contractor must demonstrate a reasonable estimate of the loss of productivity caused by the changes to carry the evidentiary burden.  Often, the very factors that produce the loss of productivity can preclude the accurate and precise record keeping that would allow damages to be calculated with evidentiary certainty.

Like most contract and tort claims, the contractor claiming cumulative impact must prove (1) liability, (2) causation and (3) resultant injury :“In looking at [contractor's] cumulative impact claim, we must keep in mind the fundamental triad of proof necessary to sustain a contractor's recovery for a constructive change giving rise to cumulative impact costs: liability, causation, and resultant injury.”

Elements of proof for a cumulative impact claim are: (a) a significantly large number of changes; (b) the changes impact on productivity (performance time and efficiency); (c) the impact flows from the synergy of the number and scope of changes; (d) the contractor was unable at time of pricing each change order or directive to foresee the ripple-type effect of the multiplicity of changes; and (e) the contractor did not knowingly waive the right to assert cumulative impact claims when negotiating changes.

When denying claims, courts and boards often focus on the issue of causation.  Cumulative impact claims “are routinely denied because there were an insufficient number of changes, contractor-caused concurrent delays, disruptions and inefficiencies and/or a general absence of evidence of causation and impact.”  Appeals of J. A. Jones Const. Co., ENG BCA No. 6348, 2000 WL 1016846 (Eng. B.C.A., July 7, 2000).

Courts and boards tend to rely justifiably on the expert to establishing various aspects of the cumulative impact claim.  It is recommended that counsel for the contractor have the qualified construction expert focus on several factors. Where multiple changes in working conditions overlap, resulting in an established loss of productivity, the expert should determine how much of the loss was caused by or attributable to the changes. When the contractor confronts both compensable and non-compensable changes in working conditions which overlap an established loss of productivity, then the expert should focus upon determining what portion of the loss was caused by or attributable to the compensable changes versus the noncompensable ones.  Finally, where there are compensable and non-compensable change orders overlapping an established change in working conditions, the expert should focus upon determining what portion of the changed working conditions was caused by or attributable to the compensable change orders versus the non-compensable ones.

Loss of productivity claims, by their nature, do not allow for precise determination, however, by using the following accepted methods of damages computation, once the resultant injury is demonstrated, that is that damages are shown, as long as the damages are reasonably computed, (that neither the judge, jury nor arbitration panel has to guess at what the damages are) the cumulative impact can generally be demonstrated.  There are a number of accepted methods of computing the productivity losses, and these methods were listed earlier.

Earned Value Analysis.

The difference between the actual hours expended and the earned hours for the impacted period are used to calculate the inefficiency experienced (or alternatively, the revenue per man-hour in the unimpacted period is compared with the revenue per-man hour in the impacted period) to arrive at an earned value or "financial measured mile."  A number of variants of the measured mile/earned value analyses combine earned value and measured mile in hybrid approach. 

EVM involves calculating three key values for each activity in the work breakdown structure (WBS):

1.    The planned value (PV): formerly known as the budgeted cost of work scheduled (BCWS) – that portion of the approved cost estimate planned to be spent on the given activity during a given period;

2.    The actual cost (AC): formerly known as the actual cost of work performed (ACWP) – the total of costs incurred in accomplishing work on the activity in a given period. The actual cost must correspond to whatever was budgeted for in the PV and earned value (EV) (e.g. all labor, materials, construction equipment and indirect costs).

3.    The earned value (EV): formerly known as the budget cost of work performed (BCWP) – the value of the work actually completed.

These three values are combined to determine at that point in time whether or not work is being accomplished as planned.  The most commonly used measures are the cost variance and the schedule variance:

Cost variance (CV) =  EV-AC

Similarly the cost of impact of schedule slippage, the schedule variance in terms of cost, may be determined.

Schedule variance (SV) =  EV-PV

The same data can be expressed as ratios that give an indication of value for money. If work is proceeding to, or better than plan, these ratios will be equal to or greater than 1.0. Conversely unfavorable variances will be less than 1.0.

1.       How are we doing on money?

Cost performance index (CPI) = EV/AC

2.       How well are we doing on time?

Schedule performance index (SPI) = EV/PV

The EVM approach provides a most powerful control tool.  The data generated should enable senior management to identify the performance of the project as a whole, or within any part of the project, at any point in time.  Furthermore monthly trends can be easily identified by comparing the monthly cost performance index (CPI) and schedule performance index (SPI) figures.  In addition, the EVM approach enables the forecast of the out-turn situation.

In the following cases the contractors prevailed using the earned value analysis:

James Corp. d/b/a James Construction v. N. Allegheny Sch. Dist., et al.   In this case a number of subsurface differing site conditions delayed and impacted the job.  The District argued that the contractor's earned value analysis was nothing more than the disfavored "total cost" approach.  The expert however had divided the project into different time periods and analyzed each period on its own merits, including applying a conservative factor to account for the contractor's own problems.

Bell BCI Co v. United States.  The owner had surplus funds and decided to add a new floor during construction of the project which delayed the job by 19.5 months and increased the contract price substantially.  This variant starts with identifying a "reasonable labor-hour level" as the ratio of the actual and planned labor-hours for the planned quantity installed in the unimpacted period.  It then identifies reasonable labor-hours for the impacted period and compares them with the actual labor-hours.

Appeal of P.J. Dick, Inc.  Here there was no period without owner caused disruptions available for the same work.  Therefore, similar work with an undisrupted period was identified on the same project (or similar project).  Productivities were not compared directly to find the loss of efficiency as in the measured mile analysis with similar work, instead, an "efficiency factor" was determined as the ratio of actual labor-hours and budgeted labor-hours for the similar work in the undisrupted period.  Realistic budgeted labor-hours for the disrupted work were calculated by multiplying the budgeted labor-hours by the efficiency factor. 

Examples of the Measured Mile Method

Case #1

During construction of a new CIA building (cast in place concrete), in response to the Oklahoma City federal building tragedy, the GSA changed the structure to include blast walls.  The concrete subcontractor’s forming and stripping of concrete walls was drastically affected by the change.  The contractor was able to successfully employ the measured mile method to prove that the productivity loss of construction caused by the design changes.  The predesign productivity rate for forming and striping of concrete slabs and columns was shown to be only 77% as efficient after the design changes were made when compared to the predesign production rates.  Measured mile analyses generally require identical or substantially similar work for productivity comparisons.  In this case, the repetitive concrete work in a high-rise office building, where the floors are identical or substantially similar, lent itself well to a measured mile comparison.  If the affected work is unique, or the contractor did not keep good contemporaneous records, often times no measured mile exists, in such situations, the earned value analysis is more conducive to productivity loss computation.  

Case #2

A measured mile analysis compares work performed in one period not impacted by events causing a loss of productivity with the same or comparable work performed in another period that was impacted by productivity affecting events.  Contractor’s measured mile analysis was accomplished by the collaboration of two of Metropolitan’s experts.  We evaluated the original contract drawings and Contractor’s labor reports to establish the lineal feet of different piping installed and the man-hours necessary for the installation (i.e. the productivity rate).  The actual lineal feet of piping was determined by Contractor’s personnel doing detailed take-offs from the Contract drawings and providing that information to Metropolitan.  The analysis compares productivity rates for installation of four piping systems (domestic water, interstitial heating hot water, medical gas and cast iron drain, waste and vent) on the first floor with the installation productivity rates for sixth or seventh floors of the main hospital structure.  The productivity rates are expressed in the number of feet of the various piping installed per man-day.  The Contractor also compared the underground piping work for the hospital with the underground work for the nursing home which was adjacent to the construction site.  Another contractor was awarded a separate contract for construction of the nursing home and our client Contractor was also the mechanical subcontractor for that project.  The underslab utility work for the nursing home was similar to (although less complicated or extensive than) the work on the site.

The nursing home underslab work was performed according to plan since site de-watering problems had been resolved by the time the construction took place and the nursing home site was at a substantially higher elevation than the site. The first, sixth and seventh floors were chosen because installations on the first floor were accomplished in a period allegedly substantially affected by water and RFIs while the sixth and seventh floor installations were relatively unaffected by water or RFIs. The underground piping analysis compared productivity rates for installation of such work at the site with rates for installation of underground piping in the nursing home built adjacent to the site, a project separate from the site. This comparison was made because the nursing home underground piping installation was not impacted by de-watering problems and the nursing home was immediately adjacent to the main hospital building.

Overall, however, there was no unimpacted area or time on the project to establish a baseline for the measured mile analysis; therefore, the Contractor used a lesser-impacted area (sixth and seventh floors) as the baseline.

The Contractor selected the first and seventh floors for its measured mile analysis because, in Metropolitan’s second expert’s assessment, the first floor is representative of the relatively heavily impacted basement through fifth floor portion of the project and the seventh floor is representative of the relatively unimpacted sixth through ninth floor portion. For one piping system analyzed (heating hot water), Metropolitan’s second expert compared the first and sixth floors because he found that PKC had improperly coded its seventh floor work which prevented him from determining the number of man-hours actually expended to install the heating hot water system on that floor. Metropolitan’s second expert also “adjusted” the first floor actual man-day per lineal foot rates. The adjustment was made because the installations on the first floor involved more and larger pipe and fittings and the adjustment was necessary, in Metropolitan’s second expert’s view, for accurate comparison of productivity rates between the floors. The record contains neither Metropolitan’s second expert’s adjustment methodology or calculations. Metropolitan’s second expert determined a percentage inefficiency factor for the first floor installations dividing the difference of the lineal feet/man-day productivity rate between the first and sixth or seventh floor by the sixth or seventh floor productivity rate. The underslab utility inefficiency factor was determined by applying the same methodology as that used for arriving at the inefficiency factor in the main hospital and comparing main hospital underground productivity rates to the rates for the Nursing Home Rate. Adjustments to the nursing home productivity rate were made in reaching the underground piping inefficiency factor. Metropolitan’s second expert’s analysis yields the following results:

System Inefficiency Factor

Domestic Water                           28%

Interstitial Heating Hot Water          53%

Medical Gas                                27%

Cast Iron                                    20%

Underground Piping                      25%

Metropolitan’s first expert utilized the second expert’s analysis to extrapolate an overall estimated productivity loss of 44,500 man-hours for the site.  Metropolitan also used the MCAA Manual for quantifying loss of productivity retrospectively.

The Owner’s expert, questioned the utility of the MCAA Manual for quantifying the loss of productivity retrospectively.  He based his opinion on the ambiguity of the MCAA factors and the ambiguous instructions in the MCAA Manual as to how the factors are to be applied.  The Owner’s expert has previously indicated, however, that use of MCAA factors for quantifying loss of efficiency claims may be appropriate if a proper measured mile analysis is not possible.

Cost-Based Methods (“Total Unit Cost,” “Modified Total Unit/Total Cost,” and

“Total Cost”)

Cost-based methods use a contractor’s estimate and job cost records to quantify loss of productivity damages by comparing a contractor’s actual costs to its estimated costs.  To demonstrate causation, claimants using cost-based methods commonly rely on a citation of project circumstances using project documentation and testimony by fact or expert witnesses rather than by using one of the more reliable methods described above to establish a causal link between these circumstances and loss of productivity. For these reasons the cost-based methods are the least reliable. The Courts however are willing to accept these methods provided the claimant meets certain tests.

Application of the Modified Total Cost Method

Metropolitan also performed a “modified total cost” analysis for the purpose of establishing the amount of Contractor’s lost productivity attributable to the Owner.  In this analysis, Metropolitan reviewed the reasonableness of the Contractor’s bid, Contractor’s record keeping, the quality of Contractor’s performance including the reasonableness of the labor costs incurred, and the impact of the various circumstances affecting productivity during the course of the project.  This review included the project records, interviews of the Contractor’s personnel, testimony of Owner personnel and witnesses in deposition and other discovery material submitted by the Owner and the testimony in the instant hearing. Metropolitan opined that Contractor’s bid was reasonable based on Contractor’s status as large mechanical and HVAC subcontractors and the fact that Contractor’s bid was within 3% of the other proposers on the project.

Drawing on his experience both as an employee of a large mechanical contractor charged with productivity analysis and as a consultant on productivity, Metropolitan concludes that Contractor’s record keeping on the project relating to labor productivity was better than the industry standard and that there is no practical way to create or maintain records to track labor productivity by a specific cause. Metropolitan found Contractor’s performance and actual incurred labor hours to be reasonable, a conclusion based in large part on the VA’s consistent expression of its satisfaction with Contractor’s performance throughout the project. Metropolitan evaluated the circumstances affecting labor productivity during the project and estimated that one third of the Contractor’s labor overrun was due to the actions of Prime Contractor and other non-Owner caused factors.

The non-Owner factors affecting productivity considered by Metropolitan in making his allocation were: 1) Prime Contractor’s failure to create a project schedule with proper logic and to use the schedule for progression of the job; 2) Late window and exterior wall installation and “dryingin” of the building; 3) Late layout and coordination by the Prime Contractor and its subcontractors; 4) Late installation of stairs by Prime Contractor; and, 5) Prime Contractor‘s late roofing submittal and installation. Although he did not quantify how he arrived at his percentages, Metropolitan assesses that the Contractor is entitled to recover for 66% of its 84,808 man-hours of labor overrun (55,973 man-hours) and the Contractor, using the same allocation, is entitled to recover for 8,439 of its total 12,786 man-hour overrun. Using the composite labor rates, Contractor would thus be entitled to $1,523,938 for its unproductive labor.

Factors to consider when preparing a disruption claim

Disruption claims are routinely made during the course of a construction project yet they remain notoriously difficult to prove. One of the main reasons for this is that productivity losses are often extremely difficult to distinguish, as opposed to other money claims which are more directly concerned with the occurrence of a distinct and compensable event, such as an instruction for a variation during the progress of work or a properly notified compensation event.

Most claims for disruption are dealt with retrospectively and the claimant is forced to rely on contemporary records to try and establish a causal nexus for identified losses (cause & effect), which are inadequate for evidencing a loss of productivity claim.

When this happens the claimant is often forced into the situation where it advances a weak global or total cost claim to try and recover its losses. The claimant must first establish that the factor causing the disruption is compensable risk under the contract.

To do this, the contract needs to be reviewed to understand the basis of the agreement as certain productivity issues may have been foreseeable and therefore accounted for within the claimant’s productivity allowances. The contract may also identify if a party expressly accepted certain productivity risks. Common causes of disruption on projects that may lead to a loss of production include site access restrictions, unforeseen site conditions, late or incorrect design, changes in the work, labor availability, remedial/corrective work, testing/inspections, client and third party interference, changes in construction methods and adverse weather.

The primary challenges the claiming party faces in preparing a disruption claim are to identify the root cause of the loss of productivity and quantifying the associated labor and equipment productivity losses. Many methods exist to quantify a disruption claim such as the measured mile; the modified total cost approach; a time and motion study or a comparative work study.

Alternatively research data published by the Mechanical Contractor Association or the National Electrical Contractors Association on the effects of disrupted working may be utilized but care must be exercised because no one size fits all.

Productivity is normally measured as production per unit of effect or output divided by input (i.e. units/hr) or it may be expressed as input divided by output (i.e. hrs/unit). A loss of productivity occurs when it takes more labor and equipment to do the same amount of work, thereby increasing project costs. A common error made by a claiming party when preparing a disruption claim is to confuse productivity with efficiency.

Efficiency is a measure of productivity as a ratio or percentage during the affected periods. If target production is 50 units per day and actual production is 25 units per day then given the same input the efficiency of the operation would be 50%. If actual production was equal to the target production efficiency would be 100%. The efficiency formula must take into account the variable input (resources) as well as variable output (production).

For instance it is possible to increase productivity but reduce efficiency. A decrease in efficiency is often associated with one or more secondary factors unrelated to the original excusable event but which are implemented to negate or mitigate the effects of the root cause. These secondary factors include out of sequence working, multiple work fronts, new learning and unlearning curves, fatigue (overtime/shift working), dilution of supervision and stacking of trades in confined spaces.

So when preparing a disruption claim for a loss of productivity it is very important to consider not just immediate effects on the rate of production but also the inefficiencies of some of the secondary factors.

Disruption claims are routinely made during the course of a construction project yet they remain notoriously difficult to prove. One of the main reasons for this is that productivity losses are often extremely difficult to distinguish, as opposed to other money claims which are more directly concerned with the occurrence of a distinct and compensable event, such as an instruction for a variation during the progress of work or a properly notified compensation event.

Most claims for disruption are dealt with retrospectively and the claimant is forced to rely on contemporary records to try and establish a causal nexus for identified losses (cause & effect), which are inadequate for evidencing a loss of productivity claim.

When this happens the claimant is often forced into the situation where it advances a weak global or total cost claim to try and recover its losses. The claimant must first establish that the factor causing the disruption is compensable risk under the contract.

To do this, the contract needs to be reviewed to understand the basis of the agreement as certain productivity issues may have been foreseeable and therefore accounted for within the claimant’s productivity allowances. The contract may also identify if a party expressly accepted certain productivity risks. Common causes of disruption on projects that may lead to a loss of production include site access restrictions, unforeseen site conditions, late or incorrect design, changes in the work, labor availability, remedial/corrective work, testing/inspections, client and third party interference, changes in construction methods and adverse weather.

The primary challenges the claiming party faces in preparing a disruption claim are to identify the root cause of the loss of productivity and quantifying the associated labor and equipment productivity losses. Many methods exist to quantify a disruption claim such as the measured mile; the modified total cost approach; a time and motion study or a comparative work study.

Alternatively research data published by the Mechanical Contractor Association or the National Electrical Contractors Association on the effects of disrupted working may be utilized but care must be exercised because no one size fits all.

Productivity is normally measured as production per unit of effect or output divided by input (i.e. units/hr) or it may be expressed as input divided by output (i.e. hrs/unit). A loss of productivity occurs when it takes more labor and equipment to do the same amount of work, thereby increasing project costs. A common error made by a claiming party when preparing a disruption claim is to confuse productivity with efficiency.

Efficiency is a measure of productivity as a ratio or percentage during the affected periods. If target production is 50 units per day and actual production is 25 units per day then given the same input the efficiency of the operation would be 50%. If actual production was equal to the target production efficiency would be 100%. The efficiency formula must take into account the variable input (resources) as well as variable output (production).

For instance it is possible to increase productivity but reduce efficiency. A decrease in efficiency is often associated with one or more secondary factors unrelated to the original excusable event but which are implemented to negate or mitigate the effects of the root cause. These secondary factors include out of sequence working, multiple work fronts, new learning and unlearning curves, fatigue (overtime/shift working), dilution of supervision and stacking of trades in confined spaces.

So when preparing a disruption claim for a loss of productivity it is very important to consider not just immediate effects on the rate of production but also the inefficiencies of some of the secondary factors.

What You Should Look For In Your Claim

1. Productivity on projects carried-out under cost reimbursable contracts generally experienced productivity losses of 30% to 40%. He does not address whether he believes that time and material change order hours would inherently include such productivity losses. What has been your experience with the efficiency of time and material work?

2. Change should not include unproductive labor hours reimbursed through change orders, and other items such as support labor, overtime premiums, and site supervision. Recent experience has shown that contractors have included unproductive hours in their calculation of the percent of “change.”

3. When the contractor’s bid is more than five percent below the average of the other bids, Metropolitan adjusted the plaintiff contractor’s bid upward to equal the average of the other bids. How did the plaintiff contractor’s bid compare to the other bids on your job?

4. Prior to calculating lost productivity, Metropolitan agrees that the contractor should exclude unproductive and non-compensable hours associated with contractor inefficiencies, rework, labor disruptions and inclement weather. Has the plaintiff contractor in your case acknowledged any bid error or non-compensable costs? If not, he may have miscalculated his claim.

5. The number or quantity of change orders is NOT an accurate indication of the number of delays and disruptions.  Contractors have made the mistake of quoting the number of changes as somehow being related to the amount of delay or lost productivity.

6. Metropolitan’s document should only be used to “predict” loss of productivity when change order hours (adjusted downward per the above parameters) exceed 10% to 15% of the earned contract hours. Has your contractor used earned hours or total contract hours, or some other calculation?

7. Predictions obtained from Metropolitan’s document are approximations, which do not account for the specific circumstances of a particular job. Courts require strict proof of causation or connection between cause and effect. Based on Metropolitan’s recent experience, an increasing number of contractors are basing their loss of productivity claims solely on these studies, at the expense of proper causation analyses.

The reported purpose of this study was to quantify the cumulative impact of change orders on the labor efficiency of electrical and mechanical contractors. The research team consisted of representatives from the electrical and mechanical contracting community and other members of CII. Contractors submitted survey data from projects that were “perceived” to be over budget as a result of change orders, rather than from factors such as low estimates, unforeseen weather conditions, or poor field planning.

What to Look For In Your Claim

1. Industry experts agree that this document was prepared in such a way as to produce biased and unreasonable results, and to encourage the document’s misuse. In addition, industry experts agree that asking contractors to participate in the preparation of a document that might be used in the future by those same contractors in an effort to “validate” their claims against owners is patently unreasonable.

2. One of the fundamental bases of this document is that the respondent contractors submitted survey data to CII from selected projects that were “perceived” by the contractors to have experienced man-hour and cost growth as a result of changes and change orders, without due regard for the other potential causes of labor overruns such as bid error, mismanagement, etc. Therefore, this document appears to be based more on subjective perception than objective analysis.

3. Upon review of this document, defendant owners and their counsel will quickly discover that the single largest component used to calculate “%Delta”, or percent of lost craft labor productivity resulting from change orders, is called the “Constant.” This Constant is likely to equal 37 percent in your contractor’s claim, which means that the contractor believes that, just by handing you the claim document, you owe him an additional 37 percent of total incurred man-hour dollars. This “constant” is a product of an unreasonable and subjective data collection process.

SUMMARY

Based on our experiences in cases where we have represented both owners and contractors, combined with recent discussions and interaction with the authors of these studies, we are unaware of any state or federal law that recognizes, or relies on, these studies. In this regard, owners and their counsel should not be unduly influenced by the fact that the plaintiff contractor’s claim is based on, or relies on, such industry reference documents. Rather, counsel should insist that the plaintiff contractor support his claim with persuasive causation analyses, linking and providing the nexus between the owner’s actions or inactions and the contractor’s damages.

Contractors should not become reliant on industry studies as the basis of labor productivity claims. Rather, commercial and industrial contractors should implement labor management systems in the field, and track productivity throughout the project. Contractors should provide the owner with notice of events affecting productivity, and should work with their attorney or consultant to include the appropriate reservation of rights language in change orders. If possible, the contractor should periodically quantify compensable productivity losses and report those losses to the owner.

Perhaps more importantly, contractors should strive to understand these industry studies and confirm that the study they rely upon is consistent with the circumstances of their project. Regardless of the study, an objective assessment of the percentage of “change” should exclude change orders that could be readily incorporated into the work, and change orders issued after substantial completion.

Owners also should become familiar with labor productivity topics. Prior to issuing a change directive or change order, the owner would be advised to ask the contractor about the anticipated impact of the extra work.  Depending on the contractor’s response, the owner could elect to award the extra work to another contractor, and the owner could also confirm that all time and material change order billings include productivity losses. Finally, unless there is a compelling financial reason to the contrary, the owner would be advised to consider granting valid time extension requests, in lieu of paying related acceleration and labor productivity losses.

ASSISTANCE IN DEVELOPING A CONSTRUCTION CLAIM

Metropolitan provides valuable guidance in developing, analyzing, defending, and negotiating construction claims.  In the highly competitive engineering and construction industry, construction claims management has become an increasingly integral element to maintaining project profitability.  Our construction experts have successfully resolved a broad range of construction claims on a variety of projects located throughout the United States and internationally.

Although there are many programs available on the legal aspects of construction claims, few of these focus sufficiently on the practical aspects of claim entitlement, documentation, preparation, analysis, and negotiation.  .

Successful assertion of a construction claim depends on first establishing entitlement, then properly pricing the claim by assessing both direct and indirect costs.

Our construction experts guide and assist our clients in identifying and developing a basic claim "theme" that is consistent with the contract, the facts and established construction practices.

The experts at Metropolitan Associates will:

• provide leadership and support by analyzing contract requirements
• provide assistance in assessing actual costs, project delays, and impacts when reviewing a claim
• help identify and develop necessary documentation and data on the project to accurately express the client's claim "theme"
• provide guidance in assessing claim options and counterclaims
• assist clients in calculating the costs incurred by pursuing a claim
• prepare claim text and exhibits and provide continuing support

 

ASSISTANCE IN CONSTRUCTION CLAIMS ANALYSIS

Metropolitan project review and construction claims analysis will provide an objective, independent appraisal of the strengths and weaknesses of a construction claim.

Our construction experts provide clients with significant insight as to their potential liability and accordingly, a recommended course of action. We help clients develop and implement effective strategies for either asserting or defending construction claims.

 

NEGOTIATING AND RESOLVING A CONSTRUCTION CLAIM

Metropolitan provides valuable guidance in the negotiation of construction claims so that clients may avoid costly litigation and still obtain an equitable claim settlement.

• Our construction experts proven negotiation techniques facilitate active pursuit of the claim without creating excessive adversary positions
• We assist in the development and pursuit of successful claim negotiating strategies
• We lead claim negotiations as authorized by our clients and participate in settlement negotiations on behalf of our clients

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