A large subcontract has been awarded and no Performance & Payment Bond was stipulated. The sub commenced with the work but their major vendor is holding up the entire project – they want their purchase order (PO) “bonded.”
What are the possible solutions?
More details: The subcontract is for $4 million and the vendors purchase order is $600,000, about 15% of the subcontract.
What is your solution?
Issue a $600,000 Performance Bond on the purchase order or maybe a Payment Bond
Provide a P&P bond on the entire contract, or just a Payment Bond
Use Funds Control to assure the vendor that their payments will be processed smoothly, without interruption.
Use Joint Checks to assure that the sub cannot divert the vendor’s payments.
Issue a new contract equal to the purchase order and provide a Payment Bond to the vendor.
#2. Bonding the purchase order would be a financial guarantee obligation (pay money at a future date), very tough. Underwriters might want collateral.
#3. This is an impractical solution because the PO is such a small percentage of the subcontract – makes it appear extremely expensive (premium based on the contract amount.)
#4. Could work although the vendor has no recourse if the payments are held up.
#5. Same problem with joint checks.
#6. If the contract owner will agree to make these adjustments, it could be the best solution. A Payment Bond would be issued on the new contract and furnished to the vendor.
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Steve, This may touch upon your solutions #2 and/or #6, but I was thinking along the lines of issuing a $600,000 Advance Payment Bond covering the PO contract between the Sub (Principal) and Supplier (Obligee). A new supply contract covering the PO would likely need executed between those 2 parties, but not necessarily impact the existing contract between the GC and the Sub.
OK, yes, good thoughts!
Couple of issues: While the advance payment bond would help the vendor, it would be priced and underwritten as a financial guarantee (tough) b/c the principal is paying the obligee, not the other way around (as on a P&P bond.)
A supply contract bond will have the vendor as the principal, so that will not satisfy their need.
Pretty thorny, right? Actually this exact situation comes up from time to time. If the PO amount is substantial in relation to the contract, issuing a Payment Bond on the entire contract could be the economical solution, then you just give a copy of the bond to that one vendor. They should be happy to hold a bond that is for more than their PO amount.
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Construction delays come in various forms as do the potential for damages arising from them.
BY DENISE M. MOTTA AND SETH C. WISEMAN
DELAY CLAIMS IN the construction industry occur when the work on a construction project has not proceeded pursuant to the project’s work schedule. These delays often arise from circumstances that were unanticipated by the parties when they entered into their contracts and often result in the construction work being extended or, alternatively, accelerated to get the project schedule back on track. As a result, delays often add an additional layer of difficulty and frustration for parties involved in the modern, complex construction industry. Thus, it is important for all parties involved to understand delay claims and damages to save valuable time and money on their respective projects.
Excusable Delays v. Non-Excusable Delays
All construction delays can be categorized as either excusable or non-excusable. Generally, excusable delays are those that are: (1) beyond the control of the contractor; and (2) unforeseeable to the contractor. Simply put, for a contractor to have a right to be compensated for delays, the contractor cannot be responsible for the delays. Generally, the remedy for excusable delays is the grant of a time extension to the contractor. Specific examples of excusable delays are often enumerated in contract documents and examples of such events are owner changes, strikes, acts of God, fires, and floods.
Delays are non-excusable when the delay results from an act or neglect of the contractor, or its subcontractors or suppliers at any tier, or is the result of a risk assumed by the contractor pursuant to a contract. Because these delays may be caused by negligence or poor performance of the contracting parties, they are controllable. Non-excusable delays are usually rooted in at least some of the following causes: improper scheduling, ineffective site management, incorrect methods of construction, delayed performance in overall activities, and poor monitoring and control.
Compensable Delays v. Non-Compensable Delays
After determination that a particular delay is excusable or non-excusable, one must determine whether the delay is also compensable or non-compensable. If a delay is compensable, the contractor is entitled to an extension of time and additional money as compensation for the delay. In general terms, a delay is compensable to a contractor only if the delay is caused by the owner (or the owner’s agents) and the claimant has not waived its right to compensation in the contract. For example, if a contractor is delayed by unusually severe rain showers, it would be a non-compensable, excusable delay, leaving the contractor with a time extension, but no compensation. However, if the owner failed to provide a contractually required cover that would have allowed the work to proceed despite the weather conditions, then the delay becomes compensable because the owner had control over the potential delay. The delay in the latter example is occasioned by the conduct of the owner, as opposed to the weather, and therefore is compensable.
A contractor can waive its right to compensation for owner-caused delay in a “no damage for delay” clause or waiver of consequential damages. Additionally, most contracts will include classes of delay which are compensable, such as changes required by the owner.
Common Breakdowns of Delay Damages
Damages from delay can come in various forms. Impacts include increased labor costs, increased material and equipment costs, overhead, and loss of efficiency or productivity. When asserting a delay claim, it is important to adequately track any direct costs (labor, material, or equipment) with appropriate backup when a project is delayed.
1. Labor Costs
Extended or additional labor costs impact nearly every party in connection with project delay. Delays to a project can force the contractor to perform work out of sequence, under different labor conditions, or at a later time. Each of these will impact the work and result in an increase in labor costs. For example, a delay that pushes work into a later period can result in stacking of trades, disruption of trades, and slower progress. If pushed to a later time, work that previously had no shortage of trained labor could face shortages or unrest as labor agreements are impacted. Not all labor costs, however, should be considered part of damages due to delay. Rather, the damages are for the labor actually impacted by the delayed work.
2. Material and Equipment Costs
Courts, such as the one in Colorado Environments, Inc. v. Valley Grading Corp., 779 P.2d 80, 84 (Nev. 1989), have determined equipment standby damages usually “take the form of lost opportunities to rent idle equipment to others or the plaintiff’s inability to use the equipment at an earlier date on another job.” Such losses—when foreseeable—are “a natural consequence of the delay, and are, therefore, compensable.” Courts may award the plaintiff its lost profits and unavoidable costs (namely, its equipment leasing costs). The court will examine the damages to place the plaintiff in the position it would have had if the delaying party performed the contract.
3. Direct and Indirect Overhead
“Unabsorbed overhead” may be recoverable as part of delay damages. In Yacht West, Ltd. v. Christenson Shipyards, Ltd., 464 Fed. Appx. 626, 629 (9th Cir. 2011), the court held that, “[i]f the delay prevented the contractor from obtaining contracts during the delay period that would have ‘absorbed’ the ongoing overhead expenses,” the unabsorbed overhead is recoverable.
4. Loss of Efficiency/Productivity Claims
In Wunderlich Contracting Co. v. United States, 173 Ct. CI. 180, 198 (1965), the court held that—in construction delay claims—disruption can be compensable when it results in: (1) a loss of productivity; (2) caused by a change in working conditions; (3) for which the owner is responsible. Whether a contractor is entitled to recover the increased costs of disruption depends on the nature of the disruption, the cause of the loss of productivity, and the terms of its contract as interpreted in the light of industry practice. Of particular note, timing factors are common causes affecting project productivity and efficiency. Examples are acceleration, out-of-sequence work, schedule compression, and simultaneous operations.
Disruption is a separate and distinct phenomenon from delay, as courts have noted. Although the two claim types often arise together on the same project, a delay claim involves the time and cost of not being able to work, while a disruption claim involves the cost of working less efficiently than planned.
THE CRITICAL PATH CAN BE DEFINED AS THE SERIES OF ACTIVITIES WITH THE LONGEST EXTENDED DURATION REPRESENTING THE SHORTEST TIME WITHIN WHICH THE PROJECT CAN BE COMPLETED IF THE CONSTRUCTION PROCEEDS AS PLANNED
The Critical Path Method
The Critical Path Method (CPM) is the most widely accepted method for evaluating project delay claims. The critical path can be defined as the series of activities with the longest extended duration representing the shortest time within which the project can be completed if the construction proceeds as planned. Any one day of delay in a critical path activity will delay the completion of the project by one day.
A CPM schedule analysis can establish: (1) the duration of the project; (2) the earliest and latest that project activities can start and finish without delaying the project; (3) which activities are “critical,” meaning they must be completed on schedule, or else the entire project will take longer; (4) which activities are not critical, meaning they can be performed simultaneously with other work and/or other activities do not depend on their completion; and (5) whether or not it is cost effective or possible to accelerate the completion of a project. Although there are numerous ways to approach a delay claim analysis, they tend to all be after-the-fact, based on a combination of historical data, assumptions, and estimates.
Importance of Expert Testimony in Proving Delay Claims
Courts generally require the testimony of a properly qualified expert witness to prove the amount or impact of lost productivity. The experts will typically examine the CPM and determine the cause and length of the construction delay and the damages caused by the delay. The failure to use an expert has resulted in many courts finding the claimant unable to meet the required burden to prove inefficiency.
Furthermore, scheduling is not an exact science. Experts’ opinions can be challenged and discredited in various ways. Thus, the selection of a scheduling expert can be critical to a claim’s success. Therefore, the expert should have the credentials and the practical experience to understand and properly analyze the project schedule and the cause of the delay.
Practical tips to consider when met with delays include the following: (1) conducting a critical path delay analysis to determine the party responsible for the delay; (2) retaining a delay expert to consult regarding schedule issues; (3) being mindful of deadlines set forth in the contract for requesting change orders, including requests for time extensions; (4) requesting a time extension when impacted by delays; (5) including additional days for completion of change orders in each change order; (6) tracking all labor, material, and equipment expenses with a separate job cost code; and (7) keeping supporting backup for all expenses organized by expense.
Unfortunately, delays on construction projects are commonplace. Understanding delay claims and proactively monitoring the project schedule, as well as enlisting legal counsel and delay experts early in the process, will assist in development of proof to prove (or defend) delay claims.
Published with the permission of the authors.
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Determine the goals of the call. Doing so will involve a review of the file and consultation with other interested colleagues. Create a list and share it with your group. “Here is my list of questions and topics for the call. Have anything to add or delete?” Share the final written list with your colleagues. Decide if you want to give the complete or a partial list, to all participants. “Here’s what we want to cover.”
Contact the participants, identify a convenient day / time and share the call in info. Send the list or any other documents they may need for the call.
When the conference starts, say hello and invite some chit-chat while everyone gathers “How’s the weather today in Sheboygan?” Be sure all participants can hear / see each other.
The host should introduce everyone and indicate their role.
After re-stating the purpose of the call, the host will start to work through the list. The host and colleagues should make notes on the discussion. Write down the relevant comments and who said them. What are the critical points you want to rely on going forward? “Remember during the conference call you stated there was no open litigation, etc…”
Give everyone an opportunity to talk and ask questions, including the client.
Before ending the call, review any action steps that were identified. “Billy will send us the Subdivision Bond app tomorrow.”
After the call, share the meeting notes with your colleagues to see if you missed anything important. Everyone now has a written copy of the meeting results, including action steps for which they may be responsible.
Send an email to the participants thanking them for the call and reciting the actions steps and timetables.
Set a diary for follow up.
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