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Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.
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.
Damage
Claims
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.
Conclusion
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.
Timothy R. Hughes, Esq.,
is the principal of the Northern Virginia law firm of Hughes & Associates,
P.L.L.C. He specializes in construction litigation, corporate and business
related representation, and complex civil litigation. He may be reached at
tim@hughesnassociates.com.
http://www.masonrymagazine.com/12-03/legal.html
Printed with permission
from Masonry Magazine
December 2003
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