LABOR INEFFICIENCIES – DIFFICULT TO PROVE, ESPECIALLY WHEN THE CONTRACT SHIFTS THIS RISK TO YOU

imagesThe case of Electrical Contractors, Inc. v. Pike Co., Inc., 2015 WL  3453348 (D.Conn. 2015) demonstrates a court barring a subcontractor’s claim for labor inefficiencies based on the provisions of the subcontract.  Not only does this case demonstrate the challenges a subcontractor has in recovering labor inefficiencies based on the risks agreed to in a subcontract, but also the difficult hurdle a subcontractor has in actually proving its labor inefficiencies. 

 

In this case, the general contractor was hired to renovate a public school.  The general contractor hired an electrical subcontractor.  The subcontract contained provisions favorable to the general contractor, as set forth in more detail at the bottom of this article.  The general contractor prepared a CPM schedule to manage the progress of the construction, which was to be completed in phases.  During phase 3, the electrical subcontractor fell behind schedule.  A July 21, 2010 meeting was conducted and the general contractor advised the subcontractor to increase its manpower because the project needed to finish on time and it would not be giving the subcontractor any extension of time to perform. After the subcontractor completed its work in phase 3, it submitted a claim for its increased labor costs (e.g., labor inefficiencies) associated with performing phase 3.

 

The subcontractor sued the general contractor for breach of contract to recover its increased labor costs.  The court held in favor of the general contractor based on favorable subcontractual provisions to the general contractor and rather onerous provisions to the subcontractor.  Stated differently, the court held the subcontractor’s feet to the fire to the risks and provisions in the subcontract that the subcontractor accepted.

 

Subcontractor’s Notification to General Contractor of Claims

 

Section 5.4 of the subcontract (see below) required the subcontractor to notify the general contractor of claims within 3 days.  The subcontractor failed to comply with this claim notification procedure.  As a result, the court held that the subcontractor’s claims were barred by its failure to strictly comply with this claim notification requirement.

 

Subcontractor’s Execution of Lien Waivers in Consideration of Payment

 

The subcontractor did not submit a claim for additional labor costs associated with its phase 3 work until October 2010.  The problem, however, was that the subcontractor executed an unconditional lien waiver in September 2010 that did not reserve any rights associated with this claim.  The court held the subcontractor waived labor costs based on its execution of the unconditional lien waiver it executed.

 

Subcontractor Could Not Prove the General Contractor Breached the Subcontract

 

The subcontractor argued that the general contractor breached the subcontract by forcing the subcontractor to work inefficiently and not providing the subcontractor any extension of time to perform.

 

Section 3.4 of the subcontract (see below) contained a no-damage-for-delay provision.  The court held that any of the subcontractor’s costs associated with a delay were foreclosed by this provision.

 

Furthermore, although not mentioned but demonstrated by the facts, section 3.1 of the subcontract (see below) authorized the general contractor to modify the construction schedule to delay or accelerate work at its discretion without compensation to the subcontractor.

 

Subcontractor Could Not Prove Damages for Increased Labor Costs

 

“A subcontractor claiming compensation from a general contractor for cost overruns must establish the extent to which its costs were increased by the contractor’s improper acts because its recovery will be limited to damages actually sustained.  Generally, proof of damages should be established with reasonable certainty and not speculatively and problematically.” Electrical Contractors, Inc., supra, at *25 (internal quotations and citations omitted).

 

The court held that the subcontractor failed to prove causation of its damages–that the general contractor’s actions (whether stemming from delay or mismanagement) caused the increased labor hours that the subcontractor sought.   Among other inadequacies, the court found the subcontractor sought labor costs for a period of time in which it offered no evidence; the subcontractor made no adjustments for inefficiencies it caused; there was no consideration for labor hours the subcontractor underestimated at bid time for other phases of work; there was no consideration for labor hours the subcontractor overestimated at bid time for other phases of work; the subcontractor could not support the high hourly labor rate it based its damages on; and the baseline for which the subcontractor measured its labor overruns for phase 3 was not reliable.   The subcontractor used a total cost claim to establish its phase 3 labor cost overrun which is a disfavored method to calculate inefficiencies based on its inherent unreliability.

 

Takeaways:

 

  • Understand the risks you agree to in a contract and factor those risks into the contract price.
  • Make sure you timely submit claims in accordance with the contract.
  • Carve out exceptions to lien waivers and releases and ensure you consistently incorporate these exceptions into all lien waivers and releases you execute in consideration of payment.
  • Inefficiency damages from a subcontractor are very difficult to prove.  If you are claiming these damages, make sure you prove these damages based on a methodology that is more reliable than the total cost method (such as the measured mile or, at a minimum, the modified total cost method).  Also, make sure you have the appropriate back-up documentation to support an inefficiency claim, such as a reliable take-off of the bid amount demonstrating the labor hours and that the increased labor costs were directly caused by something the general contractor did or did not do.

 

 Provisions in the Subcontract

 

3.1 Time and Schedule Time is of the essence as to the prosecution of the Subcontractor’s Work. If requested, the Subcontractor shall provide the Contractor with scheduling information and Subcontractor’s proposed schedule for the Subcontract Work. The Contractor may prepare the Schedule of Work for the Project and Contractor shall have the right to modify the construction schedule, to suspend, delay or accelerate, in whole or in part, the commencement or execution of Subcontractor’s Work, or vary the sequence thereof, without compensation to the Subcontractor. In the event such a delay or suspension extends the overall time of performance, the time for the Subcontractor to complete its work shall be extended. The Subcontractor shall commence the Subcontractor’s Work promptly upon notice to proceed. The Subcontractor shall prosecute the Subcontractor’s Work in a prompt and diligent manner as directed by the Contractor and in accordance with the Schedule of Work without hindering the Work of the Contractor or any other subcontractor. The Subcontractor shall proceed with the Subcontractor’s Work, making all necessary deliveries, so as to make timely progress and complete the same in accordance with the Project’s Schedule of Work and as directed by the Contractor. Whenever, in the Contractor’s opinion, the Subcontractor’s Work falls behind, the Subcontractor shall increase its labor force and/or provide overtime, Saturday, Sunday and/or holiday work, and shall have each of its subcontractors do likewise, all at no additional cost to or compensation from the Contractor.

 

3.4 Delays Should the Subcontractor be delayed by the act or omission of the Contractor or by any other contractor or subcontractor on the Project, or by any cause beyond the Subcontractor’s control and not due to any fault, act or omission on its part, then the time for completion of the work shall be extended for a period equivalent to the time lost by reason of any of the aforesaid causes, as determined by the Contractor, and Subcontractor agrees to make no claim for damages for delay in the performance of this Subcontract occasioned by any act or omission to act of the Contractor or any of its representatives.

 

5.1 Change Orders and Directives The Contractor and Subcontractor agree that the Contractor may add to or deduct from the amount of Subcontract Work covered by this Subcontract Agreement, and any changes so made to the Subcontract Work, or any other parts of this Subcontract Agreement, shall be by a written Change Order. A Change Order is a written instrument prepared by the Contractor and signed by the Subcontractor stating their agreement upon the change in the Subcontract Work and the value of such change. In addition, the Subcontractor agrees to proceed with the Subcontract Work, as changed, when so directed in writing by a Construction Change Directive issued by the Contractor so as not to delay the progress of the Subcontract Work and pending any determination of the value. If the Contractor requests a proposal of cost for a change, the Subcontractor shall promptly comply with such request. Contractor shall not make changes in Subcontract Work, whether additions, deletions or other revisions in any manner except by written Change Order or Construction Change Directive. All changes in the Subcontract Work made by Change Order or Construction Change Directive shall be deemed a part of the Subcontract Work and shall be performed and furnished in strict accordance with all terms and conditions of this Subcontract Agreement and the Subcontract Documents, including the current Schedule of Work.

 

5.4 Claims If the Subcontractor believes that any order, directive or condition, other than as provided for in Paragraph 5.7 [“Unknown Conditions”], entitles him to extra compensation or an extension of time, he shall give the Contractor written notice of his claim not later than three (3) days after the occurrence of the event giving rise to the claim and shall, as soon as practicable, furnish sufficient facts in support of his position as may be necessary for a decision. Any claim by the Subcontractor for extra compensation or an extension of time not so made shall be waived, and the Subcontractor shall not be entitled to any extra compensation or extension of time as a result thereof. The Contractor shall not be obligated or liable to the Subcontractor for, and the Subcontractor hereby expressly waives any claims against the Contractor on account of, any damages, costs or expenses of any nature which the Subcontractor or its subcontractors may incur as a result of any delays, interferences, suspensions, changes in sequence or the like, arising from or out of any act or omission of, or attributable to, the Contractor, it being understood and agreed that the Subcontractor’s sole and exclusive remedy in such event shall be an extension of time, but only in accordance with the provisions of this Subcontract Agreement.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

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