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.
A service of your best Contract, Site and Subdivision bond carrier
Need a bond? Call now! 856-304-7348