Change is inevitable on a construction project. When unanticipated changes interfere with or disrupt a contractor’s performance of the work, the changed circumstances may result in diminished productivity, increased costs, and decreased margins. The contractor may have the right under the terms of its contract to assert a claim for the resulting damages, but the likelihood and extent of recovery is significantly enhanced if the contractor has taken appropriate steps to preserve its contractual rights and build a sufficient record to enable proof of its claim. The contractor must be mindful of these considerations during performance and take appropriate steps to preserve and prepare for a future claim.
Interference and disruption of the orderly progress of a contractor’s work can produce costly impacts, including inefficiency caused by out-of-sequence work, overtime and night shifts, duplication of effort, idle time, material complications, and unanticipated manpower requirements. While inefficiency can have any number of causes, one common cause of inefficiency is interference or delay by third parties, leading to unplanned re-sequencing of work, trade-stacking, overtime, and limits on or dramatic changes to site access. To establish entitlement on a claim for lost productivity, the contractor must focus first on the nature of the impacts and then on the cause of the impacts, identifying the entity or entities that bear responsibility. Once entitlement has been established, the next step is to prove quantum.
Pursuing a claim for lost productivity is no small feat, and the likelihood of success will be increased if the claimant does not wait until all impacts are known to begin pursuing its rights. The time to plan and take action is when the unanticipated changes first occur or when the impacts of those unanticipated changes is first realized. Moreover, contractors seeking to recover their productivity losses must be prepared to prove their claim with contemporaneous data. Preserving the legal and contractual right to bring the claim and maintaining comprehensive and detailed records will enable persuasive packaging and presentation of the claim.
Entitlement In Connection With Lost Productivity Claims
A claim of lost productivity is a claim arising out of a changed condition, delay or occurrence on a construction project that causes a contractor to alter its method of performance so as to proceed in a less productive and usually more costly manner. While a lost productivity claim may share many of the same hallmark causes as a pure delay or extension of time claim, it is important to recognize the distinction between the two types of claims. [For a discussion of the differences between delay and disruption damages and the requisite elements of the latter claim, see Sauer, Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000)]. Where a project is timely completed, but a contractor nevertheless experienced disruption during its performance—be it through changed methods of performance, defective specifications, acceleration, or other factors directly impacting manpower requirements and contractor efficiency—the contractor must be able to demostrate that it incurred increased costs as a result of some factor which caused diminished productivity or required a more costly manner of performance. Disruption damages may be warranted where a project finishes on time, but at a greater expense than originally estimated because of disruptive events or scheduling errors which require acceleration, resequencing, increased manpower, or other changed methods of performance, which the owner either caused or were within its scope of responsibility. Hinderances on a contractor’s performance may reduce the productivity, but it need not result in a delay to the completion date to be actionable. See, e.g., Cty. of Galveston v. Triple B Servs., LLP, 498 S.W.3d 176 (Tex. App. 2016).
To prove a claim for loss of productivity, a contractor generally bears the burden of proof for three elements: (1) liability; (2) causation; and (3) resultant injury for the impact of changes. See, e.g., George Sollitt Const. Co. v. United States, 64 Fed. Cl. 229, 237 (2005). These elements generally must be proven by a preponderance of the evidence, meaning that the evidence must establish that it is more likely than not that each of these factors is present. “Liability” requires proof that the owner’s actions or inactions changed the contractor’s costs for which the owner is legally liable.
“Causation” requires proof of a causal nexus between the basis for liability and the resultant damages. See, e.g., Southern Comfort Builders, Inc. v. United States, 67 Fed. Cl. 124 (2005). Demonstrating causation can come with its own practical complications. A general contractor claimant must show that the loss of productivity was caused by an owner’s act or failure to act and not as a result of the general contractor’s own doing. This showing is often highly factual and can be difficult to accomplish without adequate documentation showing that notice was provided, tracking the progress of the changed or impacted work, and clearly identifying those acts or failures to act that impacted the work. See, e.g., United States ex rel. Salinas Constr., Inc. v. W. Sur. Co., No. C14-1963JLR, 2016 WL 3632487 (W.D. Wash. July 7, 2016). In claim documentation, contractors are well served to separate their own actions that affect their work from the owner-caused impacts that affect productivity, which is often difficult to do without a forensic schedule analysis after the project is complete. Moreover, contractors should also demonstrate the unforeseeable nature of the change or impact that affected productivity to support the causation argument. To demonstrate a “resultant injury,” a contractor must prove that it has incurred actual damages, including but not limited to extra or unanticipated costs for labor, wages, materials, overhead, general conditions or other similar costs. The caselaw doesn’t require proof to an exactitude, but it does require proof to a reasonable degree of certainty concerning the fact and amount of damage incurred. See, e.g., Luria Bros. & Co. v. United States, 369 F.2d 701 (Ct. Cl. 1966). This generally requires the use of competent expert opinion and analysis and acceptable methodology for quantification.
Contemporaneous Documentation Is A Contractor’s Most Reliable Route for Success
While inefficiencies may be felt throughout performance, the idea of preparing a claim may be an afterthought for many contractors. It is easy to think that, given the document-intensive nature of construction, contemporaneous documentation such as change orders, requests for information, and routine correspondence will sufficiently document the timeline of the project. However, it is entirely possible that the ultimate audience for a general contractor’s claim may not be the owner but rather an arbitrator, judge or jury. As such, the claimant may need to produce documentation to persuasively present a claim to an individual who lacks specific knowledge of the project or the issues involved.
In practice, a successful inefficiency claim is dependent upon a contractor’s contemporaneous documentation of its work on the project. There are several methods in which a contractor may keep sufficient records of the project to support its inefficiency claim. Initially, during the bid process, contractors might establish a labor cost and productivity baseline for the original scope of work. This can be done by documenting the labor productivity factors in developing the labor component of the original bid. These baseline calculations should not include post-bid changes to the anticipated productivity or labor rates. Though this may seem contradictory to the notion that a contractor must safeguard its process of determining a bid price, this baseline will be essential to establishing the losses suffered by the contractor, including that the contractor did not underbid the project.
The mechanics of a lost productivity claim often include comparing the anticipated or achieved unit rate for the as-planned installation of commodities, materials or equipment with the unit rates for the impacted work. Thus, contractors should maintain detailed job data to maintain a distinction in their job reports between budgeted unit rates and the actual unit rates encountered in performing the work. Construction cost codes also provide contractors the ability to segregate costs into different categories so that specific job or task costs are easily identifiable and able to be linked to the specific causes of inefficiency. From the standpoint of the expert claim consultant or counsel who is assisting with preparation of the claim, maintaining accurate data to calculate unit rates over the life of the job and cost coding is a significant benefit. In litigation, being able to easily categorize various costs and present the data clearly to a fact finder will likely enhance presentation of the claim and lend credibility to damages analyses.
Other actions such as maintaining detailed daily reports and minute meetings can also prove crucial. Daily reports containing not only the daily actions of on-site personnel, but also details concerning notice of issues, actions or inaction, inefficiencies being experienced, or other operations are generally useful. In the same manner, meeting minutes should highlight the issues being encountered on the project site and explain any variations in productivity, such as the reasons behind non-operational equipment or why a contractor completed only a small percentage of work in a month and a much greater percentage later in the project.
Contemporaneous documentation is generally considered more reliable and, hence, more persuasive than claim documentation created after the fact. The existence of contemporaneous documentation lends credibility to explanations concerning the root causes of impacts and the resultant inefficiency. Contemporaneous documentation may also provide a better, more persuasive basis for a contractor’s assertion that a given change or impact could not have been anticipated because it provides context. Moreover, contemporaneous records can be used to establish the link between the owner’s actions, such as changing the work, or inaction, such as failing to acknowledge a change order, and a specific measurable impact to the completion of the project.
Methods For Quantifying Lost Productivity Claims
Much has been written concerning the scheduling and damages analyses required to successfully pursue lost productivity damages. This Article will not attempt to address or summarize all aspects of the various approaches. It is important to note, however, that a rudimentary comparison of as-planned versus as-built performance will likely prove insufficient. Instead, after establishing entitlement to recover additional costs, contractors should quantify their lost productivity through the use of acceptable methodologies for quantification of production losses and resultant costs. This can usually best be accomplished with assistant of an expert who may not only render an opinion concerning the ultimate fact of damages but also on why the methodology chosen is appropriate under the specific circumstances at issue.
The construction industry has developed a variety of methodologies for analyzing and quantifying labor inefficiency claims. Which approach is utilized will often depend on the availability and quality of the contemporaneous project documentation, although other practical considerations including the reliability of the approach, venue of the dispute, or the costs of the analysis may factor into the final methodology selected. These approaches include the measured mile, modified total cost, industry studies, and sampling methods, among others. These approaches have been widely discussed at length in the construction industry. One of the most comprehensive and often cited discussions of these methodologies was published by the Association for the Advancement of Cost Engineering (AACE) International in its recommended practice entitled “Estimated Lost Labor Productivity in Construction Claims.” AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004. The AACE International’s article sets forth in great detail the recommended practices of estimating loss of productivity experienced on a job site.
The AACE recommends various methodologies in order of precedence, beginning with the measured mile analysis. This is consistent with court decisions that have concluded that the measured mile analysis is the “preferred” method of analysis. See, e.g., Appeal of Danac, Inc., ASBCA No. 33394, 97-2 B.C.A. (CCH) ¶ 29184 (July 31, 1997), aff’d, ASBCA No. 33394, 98-1 B.C.A. (CCH) ¶ 29454 (Dec. 10, 1997), James Corp. v. N. Allegheny Sch. Dist., 938 A.2d 474 (Pa. Commw. Ct. 2007). While the measured mile analysis is often recognized as the most reliable method for calculating lost productivity costs, there may be reasons to resort to other methodologies, primarily due to lack of an unimpacted period for comparable work. In such cases, contractors who have performed similar projects may utilize a comparable project analysis, using unit rate data for the same or similar work. Other recommended analyses include modified total cost or hour methodology or use of published studies that quantify lost productivity based on the nature of the impacts.
Though the methodology of proving loss of productivity damages may differ based on the facts of each case, one common requirement, particularly when presenting a measured mile or analysis using published studies, is the need to present expert testimony regarding the calculation and approach. While the contractor may attest to its original plan, the impacts, and the manner in which the costs/productivity were affected, independent and expert analysis of the appropriate unimpacted and impacted period, as well as the effect of learning curves, etc. is often necessary to present a convincing and verified analysis.
Consultation with a qualified expert and/or legal counsel early in the claim process is also advisable. Early action will provide sufficient time for the expert and/or counsel to assess available documentation, understand project-specific factors, institute best practices, and analyze other practical considerations weighing on the strategic decision of how best to approach the specific inefficiencies encountered.
Change happens. When it does, inefficiencies can result that may lead to additional costs that are compensable under the terms of the contract and/or the law. While there are numerous technically acceptable methods for quantifying inefficiency costs, the approach chosen may ultimately be determinative of the success or failure of the claim. Whether a given approach to quantifying productivity losses is available may turn on the quality and availability of contemporaneous documentation.