A Layperson's Guide to Delay Claims, Part II
In Part II of the Layperson's Guide to Delay Claims, we examine a number of specific concepts regarding delay and productivity claims in greater detail. In particular, we examine the concept of lost productivity, sources of lost productivity, and one method of documentation and proof of lost productivity claims.
Second, we analyze direct and consequential damages that may be recoverable in delay cases. Finally, we discuss in greater depth extended home office overhead claims.
Defining Lost Productivity
In our last installment (October 2003), we briefly touched on the concept of lost productivity as a basis for delay-style claims. While not necessarily a true "delay" in the sense that productivity can be impacted without an extension in the time of completion, the concept of productivity and scheduling are inherently intermingled.
The basic theory in a lost productivity claim is that, due to problems outside of the contractor's responsibility, the contractor was not able to be as productive as reasonably presumed pursuant to the contract. In layperson's terms, if an event negatively impacts the work on the job and makes it harder, more complicated, or more time consuming, then the contractor may have a recoverable lost productivity claim.
Weather is an excellent example of this type of claim. A contractor may have bid a job based on the job schedule that all site work and masonry work would be performed during the spring and summer. Due to delays, the project is backed up a few months pushing the masonry work into the late fall and winter. Temperature conditions may inhibit smooth production for the mason and even require restrictive and expensive heating, tenting of the work, and other protective measures. Such measures may translate to not only increased direct expenses, but also an inability to perform the work as efficiently as reasonably expected.
Similarly, delays in an unrelated trade can lead to uncoordinated and less productive work. For example, the mason presumed clear access to scaffolding and vertical transportation on a job to perform brick and block work on one side of a building. Due to problems in unrelated trades, other trades are moved out of sequence into the mason's area of operation. These unexpected tradespeople competing for the all-important scaffolding can lead to drastic reduction in efficiency and productivity. As such, it may cost the masonry subcontractor far more money to timely finish the job due to decreased productivity.
Measuring Lost Productivity
The basic concept of lost productivity is easily understood. The question of how to measure lost productivity, however, is far more complicated. In the above examples, comparing the bidding estimates to the actual time and money spent on the work is perhaps not a fair measure. What if the contractor had failed to properly bid the job and simply underestimated their own work? That should not give rise to a claim for damages.
One method for dealing with this type of complicated legal issue is called the "measured mile" approach. The basic concept is the contractor establishes a section of work that was not impacted by the loss of productivity problems. This area is the so-called "measured mile" for what the proper level of productivity could have and should have been on the job. The measured mile is then compared with the level of production on the sections of the job impacted by delays and productivity problems. This comparison permits a quantitative analysis of the actual expenses incurred by the contractor associated with the loss of productivity.
The advantage of this approach is that it inherently accounts for differences in production that are the result of recoverable impacts rather than mistakes in bidding. The downside in the measured mile approach requires a comparable section of similar work as a baseline. The entire job could be impacted or there may not be any true similar areas of work on the job.
There are other types of analytic approaches to lost productivity. It should be noted that industry measurements of productivity in the construction industry are not well established and recognized at the current time. In terms of practical advice, when your work is taking longer or is more expensive than expected, you need to analyze and document these expenses and impacts in a timely fashion.
After all this effort to document delays, comply with notice provisions, analyze schedules and the like, the final question is: What is the payday from all this work? In the context of a delay claim, the question translates to: What are the possible damages that flow from a delay claim?
Damages fall into two basic categories. The first are direct damages, the damages that "flow directly" from the alleged breach of contract. The second category is "consequential damages," or damages that flow both from the breach of contract and from other consequences. The distinction between direct and consequential damages can be a critical issue to recovery.
One example of direct damages is a claim for increased costs of labor, materials and equipment costs resulting from the delay. For example, due to delays in construction, the mason may need to rent scaffolding for six extra months. These increased rental expenses would be direct damages in a delay claim, presuming the contractor can prove the delays were compensable.
Amongst other things, direct damages may include increased costs and expenses associated with loss of productivity as discussed above. Field overhead expenses and extended general conditions expenses may also be recoverable direct damages. Finally, extended home office overhead associated with the delayed project may be recoverable in some circumstances.
Consequential damages may also be recoverable as a result of delay claims. Lost profits associated with delay claims are an example of possible consequential damage claims. Similarly, lost profits from other work that a contractor was barred from pursuing due to the delayed project is an arguable consequential damage of a delayed project. It should be noted, however, that consequential damage claims in general, and lost profits claims in particular, are likely to be unrecoverable if speculative. As such, lost profits from other projects are likely to be a tough sell in a delay case. There are a multitude of other examples of arguable direct and consequential damages.
On a final note, many contracts contain express waivers of consequential damages. This type of waiver is included in the 1997 version of the American Institute of Architects (AIA) construction contracts. Some contracts include waivers of consequential damages but do permit recovery of lost profits under limited circumstances. An in-depth review of your contract and the law of your applicable state are required to analyze the potential recoverable damages on your project.
Calculating Extended Home Office Overhead
In addition to the complex issues of proving the causes and length of delays, extended home office overhead claims present complex legal issues. Like many aspects of delay claims, extended home office overhead claims are simple in concept but complex in practice.
When a contractor is delayed on a project, they may be placed into a "standby" position. In essence, the project is halted, but the contractor may not be in a position to procure replacement work. Meanwhile, typical overhead expenses, such as office rent, salaries, insurance and payroll continue to accrue unabated. This has resulted in a plethora of efforts to claim home office overhead, as opposed to purely job expenses, as an element of damages in delay cases.
One method of calculating such damages is known as the "Eichleay Formula," so named for a seminal case addressing this issue. Pursuant to the Eichleay formula, the contractor must engage in a three-step process to recover extended home office overhead:
Step One: Contract Billings / Total Billings for contract period x Total Overhead for contract period = Allocable Overhead
Step Two: Allocable Overhead / Days of Performance = Daily Contract Overhead
Step Three: Daily contract overhead x Number of Days Recoverable Delay = Recoverable Home Office Overhead
There are a number of critical issues involved in analyzing the recoverability of home office expenses under this formula. First, as with all delay claims, the contractor must prove the period of delays and must also prove that these delays are compensable. Second, for extended home office overhead claims, the contractor must demonstrate that it could not replace the delayed work with other work during the claimed period. This requirement is essentially to show that the contractor was on "standby" during the subject period. Finally, the claim may open up extensive discovery into the entire overhead information and body of work on the claimant.
The Eichleay formula is not the only methodology for analyzing these types of claims. The Eichleay formula is perhaps the most often used and it has been accepted by a number of courts; however, its acceptance, and indeed the recoverability of any extended home office overhead claim, is not guaranteed as it applies to your facts, your contract, and your state.
As set forth in both Part I and Part II, delay claims can require incredibly complicated and extensive legal and factual analysis. The most basic advice is that if a project is running long or taking more effort than reasonably expected, prompt analysis and documentation most be compiled and presented in a timely manner. Finally, these claims require well-timed and effective legal representation perhaps more than any other type of construction claim due to their complex nature.
About the Author
Tim Hughes is Of Counsel to the law firm of Bean, Kinney & Korman in Arlington, Va. He can be reached by email at firstname.lastname@example.org or by phone at 703-671-8200.
This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.