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Other Categories of Delay Costs
CHAPTER THIRTEEN
Other Categories of Delay Costs The calculation of delay costs is as much an art as it is a science. This is because, while an understanding of the theory that leads to the types of additional costs that may germinate from a delay is straightforward, the appropriate cost calculations for each project situation will vary considerably. As a result, no book can address every combination and permutation. This chapter addresses certain points that may not be obvious, but are important to defining the breadth of damages that may result from delays.
DAMAGES ASSOCIATED WITH NONCRITICAL DELAYS Thus far, we have focused on delays to the critical path or delays that are associated with a delay to the overall project. However, activities that are not on the critical path can be delayed and such delays can result in additional costs without ultimately affecting the completion date. For example, a contractor has a contract for the construction of a hospital complex. The complex consists of three buildings. Two buildings (A & B) already exist and must be renovated. The third (C) is new construction. The contractor schedules the project using the critical path method. The schedule shows that the critical path of the overall project is controlled by the construction of the new building, C. The other two buildings need only be completed within that overall duration and have 12 months of float. (Fig. 13.1) Early in the project, the owner discovers asbestos in Buildings A and B. The contractor cannot proceed until the project Architects develop a method for the safe removal of the asbestos. The hold on the two buildings remains in effect for 10 months, at which time an acceptable method is devised and the contractor is released to continue work. In the interim,
Construction Delays. DOI: http://dx.doi.org/10.1016/B978-0-12-811244-1.00013-6
Copyright © 2018 Trauner Consulting Services, Inc. Published by Elsevier Inc. All rights reserved.
305
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Construction Delays
Figure 13.1 Schedule showing 2 months of float for building A and B.
the contractor works on the construction of Building C. The owner and contractor meet to negotiate a change order for the delay and the extra work associated with removing the asbestos in buildings A and B. The direct cost of the asbestos removal is a straightforward calculation. The owner and contractor can agree on the work involved and the cost of the work. The contractor, however, requests additional compensation for the delay to Buildings A and B. The owner argues that the overall project was not delayed and, therefore, the contractor is not due any delay damages or any additional compensation associated with the delay. Did the contractor experience any damages from the delayed start of these two buildings? To answer this question, the contractor must establish the effect of the delay and the corresponding additional cost. The contractor explains that the work sequence in the original schedule would have been more efficient and that the delay affects these three areas: 1. Escalation of Labor 2. Additional Supervision 3. Reduced Efficiency
Escalation of labor The contractor had originally planned to work each trade through the three buildings in a consecutive sequence. For instance, the drywall crew was to work Building A first, then move to Building B, and then move
Other Categories of Delay Costs
307
Figure 13.2 Sheetrocker manhours: planned vs. actual.
into Building C. This same sequence was planned for electrical, HVAC, plumbing, millwork, flooring, and painting. Because of the delay, the contractor was required to work several crews in all three buildings at the same time to meet the project completion date, instead of moving the same crew from building to building. As a result, the distribution of labor shifts to a later time frame. The contractor can document a wage increase of $1.25 per hour for the sheetrockers. The shift in labor is plotted on a graph as shown in Fig. 13.2. The graph shows that 1560 man-hours have been shifted to a later time frame. For the drywall crew, the contractor claims damages of $1950 (an increase of $1.25 per hour for labor for 1560 manhours). The contractor performs the same analysis for each trade affected by the change in sequence. These calculations would be similar to that shown for the sheetrockers in Fig. 13.2.
Additional supervision To allow for the inclusion of supervision costs, the contractor explains that when crew sizes increase, additional nonworking foremen must be added. The contractor calculates the additional supervision for the affected trades and summarizes the claim as shown in Fig. 13.3.
Reduced efficiency Finally, the contractor argues that if it had been able to use the same crew throughout all the buildings, it would have absorbed the initial
308
Construction Delays
Figure 13.3 Additional supervision calculation.
mobilization and learning curve to become most productive. Because each crew had to go through the mobilization/learning curve and each had different foreman and crews with varying capabilities, the result is a lower productivity level than that originally planned. The contractor argues that reduced productivity represents an increase in cost. Unfortunately, productivity is a very difficult item to document. In order to raise the owner’s level of confidence, the contractor has used the best crew for each trade as a benchmark to measure the learning curve/ startup effect and the difference in productivity caused by added crews. Fig. 13.4 is an example the contractor developed for the drywall crews.
Equipment The preceding example addressed labor costs. If the added crews needed additional equipment to complete their work, the contractor would be forced to mobilize an additional piece of equipment. The contractor would be entitled to reimbursement for the mobilization and demobilization costs of this added equipment, only, since the cost of using that equipment (once mobilized) should be included in the contract sum (Unless the cost to rent the additional equipment was more than the cost of the original piece of equipment. In this case, the contractor may also be entitled to recover the difference in cost between the hourly rate of the second piece of equipment and the hourly rate of the original piece of equipment for the hours that the second piece of equipment was used.)
Other Categories of Delay Costs
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Figure 13.4 Loss of efficiency calculation.
CONSULTING AND LEGAL COSTS In general, the costs associated with legal counsel and consultants are not recoverable in a claim situation. This does not mean that they cannot be collected in a settlement or that they can never be awarded in litigation or arbitration. The parties involved in a dispute may include legal and consultant costs as valid elements of their claims, recognizing the limited chance of recovery. Although these costs are typically disallowed in litigation, the contract may allow reasonable costs of experts expended to support a change order under the changes clause. In this case, the consulting costs would typically be connected to the administration, monitoring, or completion of extra work. Therefore, while the recovery of legal fees is generally precluded, the contract or legal statutes may provide for recovery.
LOST PROFITS/OPPORTUNITY COSTS Contractors and owners may each seek to recover damages associated with lost profits and lost opportunities. In general, these costs are extremely difficult to recover due to their speculative nature. In order to achieve recovery, the contractor or owner must prove that the lost profits or lost opportunity costs are directly caused by the delay. A well-supported claim that can clearly establish an
310
Construction Delays
economic loss, such as a loss in bonding capacity, or prove that anticipated profits are not speculative, may support the recovery of these types of damages. In the absence of a liquidated damages clause in the contract, an owner may assert that a contractor’s delay caused it to lose the use of the project and the associated profit. In that scenario, the owner may argue that the facility could have produced a certain amount of revenue had it been completed on time. However, because lost profits are usually considered to be highly speculative and subject to many diverse factors, such damages may be difficult to prove. Accordingly, courts have demonstrated a reluctance to award lost profit damages to owners. It is, therefore, recommended that owners consider including a liquidated damages clause in the contract, rather than relying on recovery of these damages through litigation. A contractor’s additional costs on other projects may also be difficult to recover. For example, a contractor may intend to use its owned excavator on a follow-on project. However, when a delay is encountered, the contractor-owned excavator is needed on the delayed project for a longer period and the contractor must rent another excavator for the follow-on project. In its delay claim, the contractor includes the cost to rent the excavator for the other project. While this argument may seem viable, these types of costs are usually not recoverable for a variety of reasons including the fact that such damages are not reasonably contemplated by the owner as a consequence of a delay or at the time the project was executed.
Interest A contractor may incur interest or financing costs as a result of borrowing funds to finance the construction costs, including the damages identified in the claim. Although these interest costs may be a real cost or damage resulting from delays, contractors often are not successful in their recovery, as interest claims may be barred by the contract or by statute. When allowable, interest may be claimed either on the overall value of the claim or as a component of the claim that represents the recovery of the cost of borrowed monies used to fund the work. The interest claimed on the value of the claim may face several obstacles to recovery. Generally, interest on an unresolved claim represents prejudgment interest and is often excluded as an allowable damage either by
Other Categories of Delay Costs
311
the contract or by statute. Contract agreements often preclude such interest charges, but typically will allow interest to be paid once a claim amount has been successfully litigated or resolved. Generally, a negotiated settlement to a claim excludes interest. If a claim is litigated, interest may also be regulated by State and Federal laws, and interest rates may be set by statute. When interest is included as a specific cost of the work, or the cost of funds borrowed to perform the work, the chances of recovery are increased. The contract must support such a claim by identifying that the increased borrowing and the interest cost is based on the actual financing cost incurred. If such interest is demonstrated to be an actual cost, recovery may be allowable, providing the contract has supplied adequate support. When calculating interest, the period of interest may vary based on the nature of the claim. The start date may be the date a payment became due or the date a claim was filed. Ending dates may be the date of recording the judgment or the date of actual payment. Other factors to consider include the type of interest allowable (compound or simple interest). Many interest claims are not recoverable because the contractor has not provided adequate support or has taken shortcuts in perfecting the claim. A successful interest claim must adhere to the contract agreement and be adequately supported.
Other Categories of Delay Costs The calculation of delay costs is as much an art as it is a science. This is because, while an understanding of the theory that leads to the types of additional costs that may germinate from a delay is straightforward, the appropriate cost calculations for each project situation will vary considerably. As a result, no book can address every combination and permutation. This chapter addresses certain points that may not be obvious, but are important to defining the breadth of damages that may result from delays.
DAMAGES ASSOCIATED WITH NONCRITICAL DELAYS Thus far, we have focused on delays to the critical path or delays that are associated with a delay to the overall project. However, activities that are not on the critical path can be delayed and such delays can result in additional costs without ultimately affecting the completion date. For example, a contractor has a contract for the construction of a hospital complex. The complex consists of three buildings. Two buildings (A & B) already exist and must be renovated. The third (C) is new construction. The contractor schedules the project using the critical path method. The schedule shows that the critical path of the overall project is controlled by the construction of the new building, C. The other two buildings need only be completed within that overall duration and have 12 months of float. (Fig. 13.1) Early in the project, the owner discovers asbestos in Buildings A and B. The contractor cannot proceed until the project Architects develop a method for the safe removal of the asbestos. The hold on the two buildings remains in effect for 10 months, at which time an acceptable method is devised and the contractor is released to continue work. In the interim,
Construction Delays. DOI: http://dx.doi.org/10.1016/B978-0-12-811244-1.00013-6
Copyright © 2018 Trauner Consulting Services, Inc. Published by Elsevier Inc. All rights reserved.
305
306
Construction Delays
Figure 13.1 Schedule showing 2 months of float for building A and B.
the contractor works on the construction of Building C. The owner and contractor meet to negotiate a change order for the delay and the extra work associated with removing the asbestos in buildings A and B. The direct cost of the asbestos removal is a straightforward calculation. The owner and contractor can agree on the work involved and the cost of the work. The contractor, however, requests additional compensation for the delay to Buildings A and B. The owner argues that the overall project was not delayed and, therefore, the contractor is not due any delay damages or any additional compensation associated with the delay. Did the contractor experience any damages from the delayed start of these two buildings? To answer this question, the contractor must establish the effect of the delay and the corresponding additional cost. The contractor explains that the work sequence in the original schedule would have been more efficient and that the delay affects these three areas: 1. Escalation of Labor 2. Additional Supervision 3. Reduced Efficiency
Escalation of labor The contractor had originally planned to work each trade through the three buildings in a consecutive sequence. For instance, the drywall crew was to work Building A first, then move to Building B, and then move
Other Categories of Delay Costs
307
Figure 13.2 Sheetrocker manhours: planned vs. actual.
into Building C. This same sequence was planned for electrical, HVAC, plumbing, millwork, flooring, and painting. Because of the delay, the contractor was required to work several crews in all three buildings at the same time to meet the project completion date, instead of moving the same crew from building to building. As a result, the distribution of labor shifts to a later time frame. The contractor can document a wage increase of $1.25 per hour for the sheetrockers. The shift in labor is plotted on a graph as shown in Fig. 13.2. The graph shows that 1560 man-hours have been shifted to a later time frame. For the drywall crew, the contractor claims damages of $1950 (an increase of $1.25 per hour for labor for 1560 manhours). The contractor performs the same analysis for each trade affected by the change in sequence. These calculations would be similar to that shown for the sheetrockers in Fig. 13.2.
Additional supervision To allow for the inclusion of supervision costs, the contractor explains that when crew sizes increase, additional nonworking foremen must be added. The contractor calculates the additional supervision for the affected trades and summarizes the claim as shown in Fig. 13.3.
Reduced efficiency Finally, the contractor argues that if it had been able to use the same crew throughout all the buildings, it would have absorbed the initial
308
Construction Delays
Figure 13.3 Additional supervision calculation.
mobilization and learning curve to become most productive. Because each crew had to go through the mobilization/learning curve and each had different foreman and crews with varying capabilities, the result is a lower productivity level than that originally planned. The contractor argues that reduced productivity represents an increase in cost. Unfortunately, productivity is a very difficult item to document. In order to raise the owner’s level of confidence, the contractor has used the best crew for each trade as a benchmark to measure the learning curve/ startup effect and the difference in productivity caused by added crews. Fig. 13.4 is an example the contractor developed for the drywall crews.
Equipment The preceding example addressed labor costs. If the added crews needed additional equipment to complete their work, the contractor would be forced to mobilize an additional piece of equipment. The contractor would be entitled to reimbursement for the mobilization and demobilization costs of this added equipment, only, since the cost of using that equipment (once mobilized) should be included in the contract sum (Unless the cost to rent the additional equipment was more than the cost of the original piece of equipment. In this case, the contractor may also be entitled to recover the difference in cost between the hourly rate of the second piece of equipment and the hourly rate of the original piece of equipment for the hours that the second piece of equipment was used.)
Other Categories of Delay Costs
309
Figure 13.4 Loss of efficiency calculation.
CONSULTING AND LEGAL COSTS In general, the costs associated with legal counsel and consultants are not recoverable in a claim situation. This does not mean that they cannot be collected in a settlement or that they can never be awarded in litigation or arbitration. The parties involved in a dispute may include legal and consultant costs as valid elements of their claims, recognizing the limited chance of recovery. Although these costs are typically disallowed in litigation, the contract may allow reasonable costs of experts expended to support a change order under the changes clause. In this case, the consulting costs would typically be connected to the administration, monitoring, or completion of extra work. Therefore, while the recovery of legal fees is generally precluded, the contract or legal statutes may provide for recovery.
LOST PROFITS/OPPORTUNITY COSTS Contractors and owners may each seek to recover damages associated with lost profits and lost opportunities. In general, these costs are extremely difficult to recover due to their speculative nature. In order to achieve recovery, the contractor or owner must prove that the lost profits or lost opportunity costs are directly caused by the delay. A well-supported claim that can clearly establish an
310
Construction Delays
economic loss, such as a loss in bonding capacity, or prove that anticipated profits are not speculative, may support the recovery of these types of damages. In the absence of a liquidated damages clause in the contract, an owner may assert that a contractor’s delay caused it to lose the use of the project and the associated profit. In that scenario, the owner may argue that the facility could have produced a certain amount of revenue had it been completed on time. However, because lost profits are usually considered to be highly speculative and subject to many diverse factors, such damages may be difficult to prove. Accordingly, courts have demonstrated a reluctance to award lost profit damages to owners. It is, therefore, recommended that owners consider including a liquidated damages clause in the contract, rather than relying on recovery of these damages through litigation. A contractor’s additional costs on other projects may also be difficult to recover. For example, a contractor may intend to use its owned excavator on a follow-on project. However, when a delay is encountered, the contractor-owned excavator is needed on the delayed project for a longer period and the contractor must rent another excavator for the follow-on project. In its delay claim, the contractor includes the cost to rent the excavator for the other project. While this argument may seem viable, these types of costs are usually not recoverable for a variety of reasons including the fact that such damages are not reasonably contemplated by the owner as a consequence of a delay or at the time the project was executed.
Interest A contractor may incur interest or financing costs as a result of borrowing funds to finance the construction costs, including the damages identified in the claim. Although these interest costs may be a real cost or damage resulting from delays, contractors often are not successful in their recovery, as interest claims may be barred by the contract or by statute. When allowable, interest may be claimed either on the overall value of the claim or as a component of the claim that represents the recovery of the cost of borrowed monies used to fund the work. The interest claimed on the value of the claim may face several obstacles to recovery. Generally, interest on an unresolved claim represents prejudgment interest and is often excluded as an allowable damage either by
Other Categories of Delay Costs
311
the contract or by statute. Contract agreements often preclude such interest charges, but typically will allow interest to be paid once a claim amount has been successfully litigated or resolved. Generally, a negotiated settlement to a claim excludes interest. If a claim is litigated, interest may also be regulated by State and Federal laws, and interest rates may be set by statute. When interest is included as a specific cost of the work, or the cost of funds borrowed to perform the work, the chances of recovery are increased. The contract must support such a claim by identifying that the increased borrowing and the interest cost is based on the actual financing cost incurred. If such interest is demonstrated to be an actual cost, recovery may be allowable, providing the contract has supplied adequate support. When calculating interest, the period of interest may vary based on the nature of the claim. The start date may be the date a payment became due or the date a claim was filed. Ending dates may be the date of recording the judgment or the date of actual payment. Other factors to consider include the type of interest allowable (compound or simple interest). Many interest claims are not recoverable because the contractor has not provided adequate support or has taken shortcuts in perfecting the claim. A successful interest claim must adhere to the contract agreement and be adequately supported.