Category Archives: Delay Damages

IS PERFORMANCE BOND LIABLE FOR DELAY DAMAGES?

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There is an argument that a performance bond is not liable for delay damages UNLESS the bond specifically allows for the recovery of such damages.  Keep this in mind when requiring a performance bond so that the bond covers the associated risks (and damages) you contemplate when requiring the bond.    This argument is supported by the Florida Supreme Court’s 1992 decision in American Home Assur. Co. v. Larkin General Hosp., Ltd., 593 So.2d 195, 198 (Fla. 1992):

 

The language in the performance bond, construed together with the purpose of the bond, clearly explains that the performance bond merely guaranteed the completion of the construction contract and nothing more. Upon default, the terms of the performance bond required American [performance bond surety] to step in and either complete construction or pay Larkin [obligee] the reasonable costs of completion. Because the terms of the performance bond control the liability of the surety, American’s liability will not be extended beyond the terms of the performance bond. Therefore, American cannot be held liable for delay damages.

However, the Eleventh Circuit in National Fire Ins. Co. of Hartford v. Fortune Const. Co., 320 F.3d 1260(11th Cir. 2003), also analyzing an issue relating to the recoverability of delay-type damages against a performance bond, did not narrowly interpret the Florida Supreme Court’s decision in Larkin General Hospital.  Rather, the Eleventh Circuit stated:

 

Larkin General Hospital could possibly be interpreted to mean that a performance bond surety cannot be held liable for…delay damages, whether liquidated or unliquidated, unless the responsibility for delay damages is specified on the face of the performance bond. However, we do not read the decision that broadly. The “purpose of the bond” must be considered, which requires reference to the contract secured by the bond. Where a provision for liquidated delay damages is clearly delineated in the underlying contract and incorporated by reference into the bond, the surety is on notice of the time element of performance and the contractual consequences of failure to timely perform in accordance with the contract.

***

While it is true that the terms of the bonds in this case do not expressly require the surety to assume responsibility for delay, “[i]t is the general rule of contract law that where a writing expressly refers to and sufficiently describes another document, the other document is to be interpreted as part of the writing.” Even after Larkin General Hospital, Florida courts have continued to utilize the well-established doctrine of incorporation by reference to impose liability on a performance bond surety. The “purpose” of the performance bonds was to insure performance in accordance with the terms of the respective subcontracts, and those terms plainly include adverse direct consequences for delay. Therefore, under the particular facts of this case, the unequivocal delay damages provisions of the subcontracts are properly considered part of the bonds issued by National Fire because of the incorporation by reference.

Fortune Const. Co., supra, at 1275-76 (internal citations omitted).

 

It is uncertain whether a Florida appellate court will agree with the rationale of the Eleventh Circuit in Fortune Const. Co., albeit the rationale making perfect sense.  If the contract incorporated into the performance bond renders the principal of the bond liable to the obligee for delay damages, then the bond should cover delay damages.  On the other hand, Larkin General Hospital is a Florida Supreme Court decision meaning there is a very strong argument that that the performance bond’s liability for delay damages will not be extended beyond the face of the bond.  For this reason, and as mentioned above, it is essential that the face of the performance bond expresses that it covers the obligee’s delay damages or any other damages stemming from the default of the principal. (By way of example, the AIA A132 performance bond expresses on the face of the bond that it covers delay costs stemming from the bond-principal’s default resulting from the surety’s failure to act and contractual liquidated or actual delay damages, if no liquidated damages, caused by the bond-principal.)

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

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Liquidated damages are in many, many construction contracts.   They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date.  The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date).   Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap.   On private projects, the liquidated damages provision is a negotiated provision.  Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.

 

Assume a project is completed 100 days beyond the agreed-upon substantial completion date.  The contract provides for liquidated damages of $2,000 per day with no cap.  This means the contractor has liquidated damages exposure in the amount of $200,000.  The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.

 

The owner’s initial burden is typically an easy burden—known as the burden of persuasion.  The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date.  Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.).   The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay.  Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages. 

 

This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):

 

In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.

 

In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.

  

See also Sauer, Inc. v.  Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v.  State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).

Remember, a liquidated damages provision is a common provision in construction contracts.  Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

BURDEN OF PROOF CHALLENGING ASSESSMENT OF LIQUIDATED DAMAGES

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A contractor is working on a project that includes a contractual liquidated damages provision.  The liquidated damages provision says the contractor is liable for $2,000 per day in liquidated damages if the contractor does not achieve substantial completion by January 1, 2016, a date extended through agreed-upon change orders.  Substantial completion has not been achieved by this date and is not projected to be achieved until May 1, 2016.  The owner already notified the contractor that it plans to assess liquidated damages and such assessment will be deducted from the contractor’s payment (retainage payment application). 

 

When it comes to liquidated damages, who has the burden of proof: the owner or the contractor? 

The owner’s burden is actually quite simple. It is merely a burden of persuasion.  All the owner has to do is establish that the project was not substantially completed in accordance with the contract and any approved extensions of time.  Typically, an easy burden of persuasion.

This shifts the burden of proof to the contractor challenging the assessment of liquidated damages to establish that the owner was the cause of delays to the substantial completion date (or other contractual date triggering the enforcement of liquidated damages) (e.g., design errors, change orders, change order directives, permit delays, differing site conditions, etc.).  See, e.g., PCL Const. Services, Inc. v. U.S., 53 Fed.Cl. 479 (2002) (government has initial burden of persuasion showing contract was not completed on time shifting burden of proof to contractor to establish excusable delays); accord K-Con Bldg. Systems, Inc. v. U.S., 97 Fed.Cl. 41 (2011) (contractor failed to establish owner caused delays precluding the owner from assessing liquidated damages); Carrothers Const. Co. v. City of S. Hutchinson, 755, 207 P.3d 231, 241 (Kan. 2009) (“By placing the burden of proof on the party challenging a liquidated damages clause, we promote a public policy favoring settlement and avoidance of litigation, and allowing parties to make, and live by, their own contracts.”); TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1092 (Mass. 2006) (“The burden of proof regarding the enforceability of a liquidated damages clause, therefore, should rest squarely on the party seeking to set it aside.”).  

When you sign a construction contract with a liquidated damages provision, understand the application of this provision if the project is not completed in accordance with the provision.  Make sure to ask for and document extensions of time and excusable delays.  In other words, preserve your rights under any notice provisions in the contract asking for extensions of time or notifying the owner of scheduling impacts.  Also, consult with a scheduling consultant, as may be necessary, to analyze the critical path of the schedule to isolate excusable delay and any concurrent delay establishing that although the project was late there were events or issues that would reduce or fully negate the number of days the owner is assessing liquidated damages for.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

CALCULATING EXTENDED GENERAL CONDITIONS (FIELD OVERHEAD) ASSOCIATED WITH A DELAY

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You are a general contractor.  The project has been delayed 200 calendar days.  You contend the owner and the owner’s consultants caused delays to the critical path.  You submit a claim for extended general conditions / extended field overhead associated with the 200 day critical path delay.   How do you calculate the costs associated with this 200 days of compensable delay?  Calculate a daily rate! 

 

The most frequently used method [to calculate extended general conditions] is to compute a daily rate by dividing the total general conditions costs on the project by the total days of contract performance and then multiplying the result by the number of days of compensable delay. An alternative method would be to determine the actual costs curing the actual delay period.

The Clark Construction Group, Inc., GAOCAB No. 2003-1, 2004 WL 5462234 (November 23, 2004) (internal citations omitted). 

 

Construction contractors may carry field office costs, such as project supervision and administration, as direct costs to the job where the costs are specifically identifiable with that one project. In a compensable delay situation where project supervision and administration are carried as direct costs, an equitable adjustment for extended field supervision and administration is calculated as a direct cost item. Field overhead which is charged, for example, to a G&A expense pool as indirect costs should not be commingled in the direct cost calculation. Where it is impracticable to derive actual cost data during the delay period, one recognized measure of the direct costs for extended labor supervision and administration is to compute a daily rate by dividing total labor supervision and administration costs on the project by the total days of contract performance and then multiplying the result by the number of days of compensable delay. To the extent that the contractor already has recovered some field supervision costs during the delay period as part of another equitable adjustment under the contract, those amounts must be deducted from the amount of recoverable extended field supervision costs. 

MCI Constructors, Inc., DCCAB No. D-924, 1996 WL 331212 (June 4, 1996) (internal citations omitted).

 

For example, in the appeal of MCI Constructors, the board of contract appeals determined that a contractor incurred a total of direct time-related general conditions in the amount of $303,624.80.  The total contract period was 802 days, which resulted in a daily rate of $378.58.   The board multiplied this daily rate by 252 days of delay to yield extended general conditions of $95,402.   The board then reduced this amount by duplicative overhead markup included in other change orders.

 

In another example, in the appeal of The Clark Construction Group, the contractor had an original budget for general conditions in the amount of $2,540, 727.  However, shortly after contract award, the contractor realized that it underbid general conditions by $344,527.  In actuality and as the result of a delay, the contractor incurred $2,910,673 in general conditions costs through the substantial completion date.  But, because the contractor originally underbid this amount, its actual general conditions costs ($2,910,673) were adjusted downward by the underbid amount ($344,527) to total general conditions of $2,566,146.  (The reason the general conditions were adjusted downward due to the underbid amount is to put the contractor in its original position in determining its delay costs versus giving the contractor the benefit of a windfall when it originally underbid the amount.)   Then, the general conditions of $2,566,146 were divided by the duration of the project (1,066 days) to come up with a general conditions daily rate of $2,407.27.  This daily rate was multiplied by the number of days of delay to determine the contractor’s extended general conditions associated with the delay.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

LABOR INEFFICIENCIES – DIFFICULT TO PROVE, ESPECIALLY WHEN THE CONTRACT SHIFTS THIS RISK TO YOU

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The case of Electrical Contractors, Inc. v. Pike Co., Inc., 2015 WL  3453348 (D.Conn. 2015) demonstrates a court barring a subcontractor’s claim for labor inefficiencies based on the provisions of the subcontract.  Not only does this case demonstrate the challenges a subcontractor has in recovering labor inefficiencies based on the risks agreed to in a subcontract, but also the difficult hurdle a subcontractor has in actually proving its labor inefficiencies. 

 

In this case, the general contractor was hired to renovate a public school.  The general contractor hired an electrical subcontractor.  The subcontract contained provisions favorable to the general contractor, as set forth in more detail at the bottom of this article.  The general contractor prepared a CPM schedule to manage the progress of the construction, which was to be completed in phases.  During phase 3, the electrical subcontractor fell behind schedule.  A July 21, 2010 meeting was conducted and the general contractor advised the subcontractor to increase its manpower because the project needed to finish on time and it would not be giving the subcontractor any extension of time to perform. After the subcontractor completed its work in phase 3, it submitted a claim for its increased labor costs (e.g., labor inefficiencies) associated with performing phase 3.

 

The subcontractor sued the general contractor for breach of contract to recover its increased labor costs.  The court held in favor of the general contractor based on favorable subcontractual provisions to the general contractor and rather onerous provisions to the subcontractor.  Stated differently, the court held the subcontractor’s feet to the fire to the risks and provisions in the subcontract that the subcontractor accepted.

 

Subcontractor’s Notification to General Contractor of Claims

 

Section 5.4 of the subcontract (see below) required the subcontractor to notify the general contractor of claims within 3 days.  The subcontractor failed to comply with this claim notification procedure.  As a result, the court held that the subcontractor’s claims were barred by its failure to strictly comply with this claim notification requirement.

Subcontractor’s Execution of Lien Waivers in Consideration of Payment

 

The subcontractor did not submit a claim for additional labor costs associated with its phase 3 work until October 2010.  The problem, however, was that the subcontractor executed an unconditional lien waiver in September 2010 that did not reserve any rights associated with this claim.  The court held the subcontractor waived labor costs based on its execution of the unconditional lien waiver it executed.

Subcontractor Could Not Prove the General Contractor Breached the Subcontract

 

The subcontractor argued that the general contractor breached the subcontract by forcing the subcontractor to work inefficiently and not providing the subcontractor any extension of time to perform.

 

Section 3.4 of the subcontract (see below) contained a no-damage-for-delay provision.  The court held that any of the subcontractor’s costs associated with a delay were foreclosed by this provision.

 

Furthermore, although not mentioned but demonstrated by the facts, section 3.1 of the subcontract (see below) authorized the general contractor to modify the construction schedule to delay or accelerate work at its discretion without compensation to the subcontractor.

 

Subcontractor Could Not Prove Damages for Increased Labor Costs

 

“A subcontractor claiming compensation from a general contractor for cost overruns must establish the extent to which its costs were increased by the contractor’s improper acts because its recovery will be limited to damages actually sustained.  Generally, proof of damages should be established with reasonable certainty and not speculatively and problematically.” Electrical Contractors, Inc., supra, at *25 (internal quotations and citations omitted).

 

The court held that the subcontractor failed to prove causation of its damages–that the general contractor’s actions (whether stemming from delay or mismanagement) caused the increased labor hours that the subcontractor sought.   Among other inadequacies, the court found the subcontractor sought labor costs for a period of time in which it offered no evidence; the subcontractor made no adjustments for inefficiencies it caused; there was no consideration for labor hours the subcontractor underestimated at bid time for other phases of work; there was no consideration for labor hours the subcontractor overestimated at bid time for other phases of work; the subcontractor could not support the high hourly labor rate it based its damages on; and the baseline for which the subcontractor measured its labor overruns for phase 3 was not reliable.   The subcontractor used a total cost claim to establish its phase 3 labor cost overrun which is a disfavored method to calculate inefficiencies based on its inherent unreliability.

 

Takeaways:

  • Understand the risks you agree to in a contract and factor those risks into the contract price.
  • Make sure you timely submit claims in accordance with the contract.
  • Carve out exceptions to lien waivers and releases and ensure you consistently incorporate these exceptions into all lien waivers and releases you execute in consideration of payment.
  • Inefficiency damages from a subcontractor are very difficult to prove.  If you are claiming these damages, make sure you prove these damages based on a methodology that is more reliable than the total cost method (such as the measured mile or, at a minimum, the modified total cost method).  Also, make sure you have the appropriate back-up documentation to support an inefficiency claim, such as a reliable take-off of the bid amount demonstrating the labor hours and that the increased labor costs were directly caused by something the general contractor did or did not do.

 Provisions in the Subcontract

3.1 Time and Schedule Time is of the essence as to the prosecution of the Subcontractor’s Work. If requested, the Subcontractor shall provide the Contractor with scheduling information and Subcontractor’s proposed schedule for the Subcontract Work. The Contractor may prepare the Schedule of Work for the Project and Contractor shall have the right to modify the construction schedule, to suspend, delay or accelerate, in whole or in part, the commencement or execution of Subcontractor’s Work, or vary the sequence thereof, without compensation to the Subcontractor. In the event such a delay or suspension extends the overall time of performance, the time for the Subcontractor to complete its work shall be extended. The Subcontractor shall commence the Subcontractor’s Work promptly upon notice to proceed. The Subcontractor shall prosecute the Subcontractor’s Work in a prompt and diligent manner as directed by the Contractor and in accordance with the Schedule of Work without hindering the Work of the Contractor or any other subcontractor. The Subcontractor shall proceed with the Subcontractor’s Work, making all necessary deliveries, so as to make timely progress and complete the same in accordance with the Project’s Schedule of Work and as directed by the Contractor. Whenever, in the Contractor’s opinion, the Subcontractor’s Work falls behind, the Subcontractor shall increase its labor force and/or provide overtime, Saturday, Sunday and/or holiday work, and shall have each of its subcontractors do likewise, all at no additional cost to or compensation from the Contractor.

3.4 Delays Should the Subcontractor be delayed by the act or omission of the Contractor or by any other contractor or subcontractor on the Project, or by any cause beyond the Subcontractor’s control and not due to any fault, act or omission on its part, then the time for completion of the work shall be extended for a period equivalent to the time lost by reason of any of the aforesaid causes, as determined by the Contractor, and Subcontractor agrees to make no claim for damages for delay in the performance of this Subcontract occasioned by any act or omission to act of the Contractor or any of its representatives.

5.1 Change Orders and Directives The Contractor and Subcontractor agree that the Contractor may add to or deduct from the amount of Subcontract Work covered by this Subcontract Agreement, and any changes so made to the Subcontract Work, or any other parts of this Subcontract Agreement, shall be by a written Change Order. A Change Order is a written instrument prepared by the Contractor and signed by the Subcontractor stating their agreement upon the change in the Subcontract Work and the value of such change. In addition, the Subcontractor agrees to proceed with the Subcontract Work, as changed, when so directed in writing by a Construction Change Directive issued by the Contractor so as not to delay the progress of the Subcontract Work and pending any determination of the value. If the Contractor requests a proposal of cost for a change, the Subcontractor shall promptly comply with such request. Contractor shall not make changes in Subcontract Work, whether additions, deletions or other revisions in any manner except by written Change Order or Construction Change Directive. All changes in the Subcontract Work made by Change Order or Construction Change Directive shall be deemed a part of the Subcontract Work and shall be performed and furnished in strict accordance with all terms and conditions of this Subcontract Agreement and the Subcontract Documents, including the current Schedule of Work.

5.4 Claims If the Subcontractor believes that any order, directive or condition, other than as provided for in Paragraph 5.7 [“Unknown Conditions”], entitles him to extra compensation or an extension of time, he shall give the Contractor written notice of his claim not later than three (3) days after the occurrence of the event giving rise to the claim and shall, as soon as practicable, furnish sufficient facts in support of his position as may be necessary for a decision. Any claim by the Subcontractor for extra compensation or an extension of time not so made shall be waived, and the Subcontractor shall not be entitled to any extra compensation or extension of time as a result thereof. The Contractor shall not be obligated or liable to the Subcontractor for, and the Subcontractor hereby expressly waives any claims against the Contractor on account of, any damages, costs or expenses of any nature which the Subcontractor or its subcontractors may incur as a result of any delays, interferences, suspensions, changes in sequence or the like, arising from or out of any act or omission of, or attributable to, the Contractor, it being understood and agreed that the Subcontractor’s sole and exclusive remedy in such event shall be an extension of time, but only in accordance with the provisions of this Subcontract Agreement.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONSTRUCTION SCHEDULING IS AN IMPORTANT TOOL

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Construction scheduling is an important tool for planning, managing, and forecasting the performance of work on construction projects.   Generally CPM (critical path method) schedules, or schedules depicting the project’s critical path, are prepared beginning with the baseline schedule (the initial as-planned schedule) followed by schedule updates (perhaps monthly updates) as the work progresses.  Schedules identify milestone dates (such as the substantial completion date) as well as the dates and durations of construction activities / tasks.

Check out this chart for understanding key terms and meanings when it comes to CPM (critical path method) scheduling. 

Besides scheduling being a tool used for project management, schedules are helpful in assessing and measuring delays to the critical path, the acceleration of activities, and inefficiencies. 

Finally, check out this article for more information on the importance of understanding construction scheduling for strong project management.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

THE VALUE OF A WELL-WRITTEN SUBCONTRACT TO FORECLOSE SUBCONTRACTOR’S INEFFICIENCY / LOST PRODUCTIVITY DAMAGES

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I have previously discussed the challenges a subcontractor has in proving a lost productivity / inefficiency claim.  Besides being difficult to prove, subcontractors generally enter into subcontracts that include onerous provisions that foreclose a subcontractor’s right to pursue lost productivity / inefficiency claims.   General contractors try to account for these types of delay-related claims by including provisions in their subcontracts that require subcontractors to fully bear this risk.  An example of this ocurrence can be found in the opinion entered in Electrical Contractors, Inc. v.  Fidelity & Deposit Co. of Maryland, 2015 WL 1444481 (D. Con. 2015) where the trial court precluded a subcontractor from recovering lost productivity / inefficiency costs based on the language in the subcontract that precluded such claims. Additionally, and importantly, the trial court found that that the subcontractor failed to timely notify the general contractor of its claims under the strict notice provisions of the subcontract.

 

In this case, the general contractor was hired by a state agency to construct a laboratory building and furnished the state a public payment bond.  The prime contract contained a construction schedule (which is not an uncommon exhibit in a prime contract).  The general contractor then entered into subcontracts with trade subcontractors including the electrical subcontractor.  An exhibit to the electrical subcontract was a schedule that simply reproduced dates applicable to the electrical subcontractor’s scope of work that were included in the construction schedule attached to the prime contract.

 

No different than any baseline construction schedule on any construction project, it was not written in stone. This meant there were updates to the schedule that were furnished to the state agency and the state agency unsurprisingly challenged or opposed numerous schedule updates. The general contractor did not keep its electrical subcontractor apprised of the back-and-forth between it and the state agency involving schedule updates (nor was the general contractor under any real obligation to do so).

And, as we all know, the schedule of the project is really driven in the field.  So, as the construction progressed, the general contractor’s superintendents directed the electrical subcontractor to perform work in a piecemeal and unsystematic manner. This was due to work areas not being ready for the electrical scope due to delays on the project.  The electrical subcontractor notified the general contractor that it was being impacted and forced to work unproductively. Thereafter, the electrical subcontractor sued the general contractor and the general contractor’s payment bond sureties for damages that included lost productivity / inefficiency damages. 

However, the subcontract that the electrical subcontractor signed posed problems with its claims, particularly the following contractual provisions:

 

“Subcontractor agrees to … complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time … time being of the essence…. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor … shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such … altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to … additional compensation.”

***

“To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefore. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractor … and Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.”

***

“In the interest of the overall project, W–T [Contractor] reserves the right to alter the sequencing of activities in order to accommodate project conditions and/or Owner requirements. It is understood that the Subcontractor shall be obligated to complete its activities [timely] … regardless of the actual start date.”

***

“There is no guarantee of continuous work. Subcontractor shall work in all areas as they become available and as directed by Whiting–Turner [Contractor]. Subcontractor shall include the inefficiencies, supervision and manpower necessary to run separate and independent crews as necessary.”

Electrical Contractors, Inc., supra, at *6 and *7.

 

Additionally, the electrical subcontractor needed to timely notify the general contractor of its claims:

“Article 6(d) requires timely written notice as a precondition for making such claims: [N]otice in writing shall be given to the Contractor no later than seven (7) days following the occurrence on which such claim is based…. Any claim not presented within such time period shall be deemed waived by Subcontractor. The notice must describe the dispute, controversy or claim in detail so as to allow Contractor to review its merits … [and] provide detailed information to substantiate such claim including supporting documentation and calculations.”

Electrical Contractors, Inc., supra, at *8 (internal citations omitted).

 

While the 7-day claim notice requirement may seem unfair, the court explained that the electrical contractor was a sophisticated entity that knowingly assumed this notice obligation.

Of Significance: 

These subcontract provisions recited above are not uncommon provisions.  They are rather commonplace with sophisticated contractors–there is no real shock value when looking at these provisions, right?

 

If you are a general contractor that includes such provisions in your subcontracts, this case gives you reassurance as to those contractual provisions that are aimed to insulate you from a subcontractor’s delay-related damage and require the subcontractor to give you timely notification of a claim (so that you are not prejudiced by the late submission of a subcontractor claim).  These are important provisions for a general contractor to include in a subcontract and the provisions referenced above are certainly well-written provisions to model.  It is understood that a schedule is never going to be written in stone and there will be logic and sequence changes in the schedule, so protect yourself by including such provisions (including the no-damage-for-delay provision). As you can see, there is value in doing so.

 

On the other hand, if you are a subcontractor, if you accept these provisions, you need to either account for these risks in your subcontract price and/or bear the risk that these provisions may be appropriately enforced against you as shown in this case.  Alternatively, and as the court alluded to, as a sophisticated party, you have the option of not signing the subcontract or trying to negotiate the best subcontract for you with an understanding as to those onerous provisions and risks that you choose to accept.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

WALKING THAT MEASURED MILE TO PROVE AND CALCULATE LOST PRODUCTIVITY / INEFFICIENCY

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What is a lost productivity / inefficiency claim?  These are claims where a contractor claims it incurred increased labor (and, perhaps, equipment usage) because an event  (referred to as an impact) caused it to work inefficiently.  There needs to be a causal link between the cause of the impact and the increased labor costs.  See Appeals of—Fox Construction, Inc., ASBCA No. 55265, 08-1 BCPA 33810 (March 5, 2008).   Numerous factors can contribute to a contractor working inefficiently.  Oftentimes these claims are asserted by subcontractors associated with a delay to their scope of work or due to the manner in which the subcontractor’s work was sequenced.  The bottom line is that some impact (not attributable to the contractor asserting the claim) caused the contractor to work inefficiently and incur unplanned, increased labor cost (and/or equipment usage).

 

Lost productivity / inefficiency claims are very challenging claims to prove and calculate.  They require expert testimony to analyze cost reports, labor hours, and project documentation such as daily reports, etc. to determine the performance or production rate for a given scope of work.   But, remember, lost productivity / inefficiency claims also require a causal link between the impact and the increased costs meaning an expert needs to analyze project documentation to determine the impact and the causal link to the contractor’s increased costs.  Probably the most well received method to prove lost productivity / inefficiency is the measured mile methodology.

 

Measured Mile

 

The measured mile compares a period of productive work (the good period) with an unproductive period of the same work (bad period). “The measured mile approach provides a comparison of a production period that is impacted by a disruption with a production period that is not impacted.” Appeal of Bay West, Inc., ASBCA No. 54166, 07-1 BCA 33569 (April 25, 2007).  The period of productive work forms the contractor’s benchmark period of productivity.  Typically, this benchmark productivity is based on the number of man-hours during the productive period divided by the performance or production rate in that period to determine a productivity ratio.  This productivity ratio is compared to the productivity ratio during the impacted period in order to determine an unproductivity ratio that is multiplied by the unproductive performance or production rate to determine the number of unproductive man-hours.  Without determining a benchmark, the measured mile cannot be performed because there is nothing to compare the unproductive period of work to.

 

For instance, let’s take a rough hypothetical: 

 

Good Period — A contractor during a productive period installs 2500 feet  (or select another unit of production or performance) of “x” (you select the scope).  It takes the contractor 4000 labor hours to install 2500 feet of “x.” The number of labor hours (4000) divided by the production (2500 feet of “x”) gives a productivity ratio of 1.6. 

 

Bad Period — The same contractor gets impacted performing the same scope of “x.”  During this impacted period, the contractor installs 1500 feet of “x” with 4600 labor hours.  The number of labor hours (4600) divided by the production (1500 feet of “x”) gives a productivity ratio of 3.07. 

 

Calculating Lost Productivity — Subtracting the productivity ratio during the bad impacted period (3.07) with the productivity ratio during the good unimpacted period (1.6) gives an unproductivity ratio of 1.47.  This unproductivity ratio now allows you to determine the number of unproductive man-hours by multiplying the unproductivity ratio (1.47) by the unproductive performance (1500 feet of “x”) to give you 2205 unproductive man-hours.  The number of unproductive man-hours would then be multiplied by a supported labor rate plus burden to give you your unproductivity costs.

 

If you are experiencing lost productivity / inefficiency, it is good practice to consult with a lawyer and expert in order to best prove and calculate your lost productivity / inefficiency.  Although this article focuses on the measured mile methodology, there are other methodologies that can be utilized based on the facts and circumstances of the project.    Just remember, these types of claims generally require expert testimony to prove.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

GOVERNMENT CONTRACTING AND TREATING EXTENDED FIELD OVERHEAD AS A DIRECT OR INDIRECT COST

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Prime contractors working on federal government projects, or any project for that matter, have job site or field overhead / general conditions.  Incurring extended field office overhead on a federal government project happens and, in many instances, is due to differing site conditions or another impact  (e.g., design issue, change order work, etc.) caused by the government.  There are also times the government acknowledges the time impact and agrees to pay the prime contractor extended field office overhead. 

 

How is the prime contractor supposed to compute its extended field office overhead?

 

Federal Acquisition Regulation (F.A.R.) 31.105(d)(3) provides:

 

Costs incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc. [e.g. field office costs], are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor’s established and consistently followed cost accounting practices for all work.

 

Stated differently, F.A.R. allows the prime contractor to treat its field office overhead  as a direct cost or an indirect cost provided the prime contractor does so consistently throughout the project.  However, the prime contractor cannot change its methodology midstream because it learns it can better maximize its extended field office overhead damages by switching methodologies to compute its extended field overhead.

 

What is a direct cost versus an indirect cost? 

 

A direct cost is a cost that is identified specifically with a contract whereas an indirect cost is not identified specifically with a single contract, but identified with two or more contracts.

 

F.A.R. 2.101 defines both direct costs and indirect costs as follows:

 

Direct cost means any cost that is identified specifically with a particular final cost objective [e.g., contract]. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives.” See also F.A.R. 31.202.

 ***

Indirect cost means any cost not directly identified with a single final cost objective [e.g., contract], but identified with two or more final cost objectives or with at least one intermediate cost objective.

***

Indirect cost rate means the percentage or dollar factor that expresses the ratio of indirect expense incurred in a given period to direct labor cost, manufacturing cost, or another appropriate base for the same period (see also “final indirect cost rate”).” See also F.A.R. 31.203.

 

When field office overhead is treated as a direct cost, it is computed on a per diem or daily rate (e.g., $10,000 per day for each day of delay). 

 

When field office overhead is treated as an indirect cost, it is computed based on a percentage markup (e.g., adding an overhead markup of 10% on the work). 

 

The key is that the prime contractor typically has to live or die with the methodology it chooses. 

An example of this “live or die” approach can be found in the Armed Services Board of Contract Appeals decision in Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (January 26, 2015).  Here, the government hired the prime contractor to relocate a sewer lift station at a Marine Corps base.  During construction, the prime contractor encountered a differing site condition. The government did not dispute the differing site condition and instructed the prime contractor to await a contract modification (change order) before proceeding with the additional work.  The prime contractor submitted a cost proposal to the government for the additional work.  The proposal included a percentage markup for overhead as the contractor had also done under a previous cost proposal for additional work. Thus, the contractor had treated its field overhead as an indirect cost.

 

However, the government did not immediately issue the contract modification (change order) to the prime contractor authorizing the contractor to proceed with the additional work due to the differing site condition.  For this reason, the prime contractor wanted to recover its extended field office overhead as a direct cost (as it would give the prime contractor an additional approximate $40,000 and cover its costs due to the government’s delay in issuing the contract modification).  The prime contractor’s position was that when it submitted its original proposal for the changed work with the overhead percentage markup it was not anticipating a time impact, but now that it realized a time impact caused by the government, it should be entitled to its direct costs associated with the impact.  The government, however, denied this request because by the contractor tacking an overhead markup percentage to its proposals it had treated its field office overhead as an indirect cost, not a direct cost. Thus, the prime contractor couldn’t switch its methodology during the course of the project. 

 

The prime contractor submitted a claim pursuant to the Contract Disputes Act; the contracting officer issued a final decision denying the claim.  The prime contractor then appealed the contracting officer’s final decision to the Armed Services Board of Contract Appeals.  The Armed Services Board of Contract Appeals agreed with the government concluding, “[W]e conclude the fact that the contract performance period was extended and that the use of the percentage mark-up might not fully compensate appellant [prime contractor] for all field office overhead costs incurred does not, per se, entitle appellant to change its distribution base.”

 

The underpinning issue regarding field office overhead and whether to apply an overhead percentage markup to modifications (change orders) that do not result in a time impact and a daily rate to modifications that do result in a time impact was the exact issue the Armed Services Board of Contract Appeals dealt with in Appeals of M.A. Mortenson Co., 1998 WL 151792, ASBCA No. 40750 (March 30, 1998). In this matter, the prime contractor tacked an overhead percentage markup for field office overhead for changes that did not result in a time impact and then tacked on a daily rate for changes that did result in a time impact.  Hence, for changes that did not delay the job, the contractor treated its field office overhead as an indirect cost and for changes that did delay the job, the contractor treated its field office overhead as a direct cost. 

The government did not challenge the contractor’s daily rate for changes that impacted time, rather, it challenged the overhead percentage the contractor applied on changes that did not actually impact the completion of the project (since the field office was not actually extended by these changes).  The Armed Services Board of Contract Appeals agreed with the government concluding the prime contractor “cannot recover the claimed job site overhead percentage markup in these appeals because, under the facts of these cases, such a markup is inconsistent with appellant’s [prime contractor] per diem distribution base for charging job site overhead on changes that extended the contract period.”

 

Prime contractors working on federal construction projects need to be wary of how to treat changes and if they apply an overhead percentage markup on their changes it could later impact their application of a daily rate for extended field office overhead and vice versa.   Sometimes, the overhead markup benefits the contractor because it is getting a markup for overhead when the job is not otherwise delayed.  However, if the job is delayed, the government may try to deny the extended overhead based on a daily rate methodology that better compensates the contractor for its actual costs since the contractor previously treated such overhead as an indirect cost.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

CHALLENGES USING THE TOTAL COST OR MODIFIED TOTAL COST METHODS TO PROVE DELAY / LOST PRODUCTIVITY DAMAGES

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Subcontractor delay claims are oftentimes in the form of lost productivity / inefficiency claims.  These claims are premised in large part on additional, unanticipated field labor / manpower or equipment usage that was incurred due to an event that impacted the subcontractor’s performance. 

One way a subcontractor proves these damages is through a total cost or modified total cost method comparing its actual costs to its bid, with a portion of the cost overrun forming the subcontractor’s damages. This methodology, however, is not always a favored methodology because it is not the most reliable way to prove cost overruns.  Courts typically prefer parties to itemize the direct costs incurred by an impact, but this is not always practical on a complex construction project.

 

The opinion in Hill York Service Corp. v. Critchfield Mechanical, Inc., 2015 WL 410009 (S.D.Fla. 2015) illustrates the challenges in proving lost productivity / inefficiency with the total cost or modified total cost methodology.  In this case, a mechanical subcontractor subcontracted a portion of its scope of mechanical work to another subcontractor (the “Sub-subcontractor”).   The Sub-subcontractor sued the mechanical subcontractor for delays causing it to incur, among other damages, additional, unanticipated manpower. The mechanical subcontractor moved for a summary judgment to preclude the Sub-subcontractor from using the total cost or modified total cost method to prove its delay / inefficiency damages.

 

The opinion provides a good discussion on the total cost and modified total cost methodology:

 

The modified total cost approach is a variation of the total cost approach. Under the total cost approach,  the original bid cost is subtracted from the actual cost of the entire project. Essentially, the difference between the two amounts, after various modifications and adjustments, is the amount of damages incurred as a result of the owner or construction manager’s breach. The modified total cost approach allows for the adjustment of the amount calculated under the total cost approach to compensate for bid errors, specific costs arising from the subcontractor’s actions, and specific costs arising from actions of parties other than the party against whom damages are sought.

***

A jury may consider the total-cost approach when [1] the nature of the excess costs is such that there is no other practicable means of measuring damages, [2] the original bid was realistic, [3] the actual costs were reasonable, and [4] the plaintiff is not responsible for any of the additional expense. The modified-total-cost approach imposes the same requirements, except that it subtracts any identifiable costs for which the plaintiff contractor is responsible. Thus, to establish the fourth element above, the plaintiff must show that it is not responsible for any of the additional expenses, or has otherwise reasonably accounted for that portion of the total costs for which it is responsible.

 

Hill York Service Corp., supra, at *4 (internal quotations and citation omitted).

 

Here, the Sub-subcontractor wanted to use the modified total cost methodology to capture is additional manpower but failed to account for additional manpower and expenses it was responsible for (the fourth factor in establishing the reliability of this methodology).  The mechanical subcontractor was able to establish that there were items caused by the Sub-subcontractor that contributed to the delay and would have increased the Sub-subcontrator’s costs, but were never quantified and subcontracted from the Sub-subcontractor’s damages.  For this reason, the trial court granted the mechanical contractor’s motion for summary judgment preventing the Sub-subcontractor from proving its damages based on this methodology.

 

If you experienced cost overruns associated with delaying events, it is important to discuss with a lawyer and, depending on the quantum of the damages, a construction consultant in order to best calculate, present, and prove your damages.   Typically, you will want a construction consultant to serve as an expert witness to assist in proving these damages.  Lost productivity / inefficiency claims are challenging damages to prove based on the reliability factors discussed in the case. But, this methodology is used in many instances because it is not always practical to track the direct costs incurred for each event that impacted performance.  Before exploring the total cost / modified total cost methodology, a different methodology known as the measured mile approach should be explored.  Under this approach, the party compares its labor production for a scope of work that was not impacted with its labor production for that scope when it was impacted, with the delta forming the party’s inefficient manpower.  Basically, the objective is to compare productive periods of work (which forms the baseline or measured mile) with impacted, unproductive periods of work to determine the cost overrun for the delaying event.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.