GUESSING AS TO YOUR CONSTRUCTION DAMAGES IS NOT THE BEST APPROACH

Arbitrarily guessing as to your construction damages is NOT the best approach.  Sure, experts can be costly.  No doubt about it.  Having an expert versus guessing as to your construction damages caused by another party’s breach of contract is a no brainer.  Engage an expert or, at a minimum, be in a position to competently testify as to your damages caused by another party’s breach of contract.  Otherwise, the guessing is not going to get you very far as a concrete subcontractor found out in Patrick Concrete Constructors, Inc. v. Layne Christensen Co., 2018 WL 6528485 (W.D. New York 2018) where the subcontractor could not competently support its delay-related damages or change orders and, equally important, could not support that the damages were proximately caused by the general contractor’s breach of the subcontract.

 

In this case, the concrete subcontractor entered into a subcontract to perform concrete work for a public project. The project was delayed and the general contractor was required to pay liquidated damages to the owner.  Not surprisingly, the subcontractor disputed liability for delays and sued the general contractor for all of its delay-related damages “in the form of labor and materials escalation, loss of productivity, procurement and impact costs, field and home office overhead, idle equipment, inability to take on other work, lost profits, and interest.”  Patrick Concrete Constructors, 2018 WL at *1.

The general contractor moved for summary judgment as to the plaintiff’s delay-related damages – the subcontractor’s damages were nothing but guesses and the subcontractor could not prove the general contractor was the cause of the subcontractor’s damages.

The portion of the deposition transcript of the subcontractor’s president that may have also been its corporate representative as to damages is telling:

Q: After today’s exercise, do you believe you’re entitled to [$]681,740 under those items [regarding change orders]?

A: No.

Q: What amount [are] you entitled to?

A: I don’t know. I’d have to work it up.

Q: So as of right now, with my one chance to depose you, the person on damages, you can’t give me a figure that you’re actually entitled to?

A: No. We just ripped all these figures apart, so now I got to go back and refigure.

With regard to the amount of damages sought for “extra costs,” Bell [the President of subcontractor] testified as follows:

Q: Okay. Then you have – you total everything here, total of everything except for the Amount Due on Contract and Outstanding Change Order heading. So that [$]915[,000] basically added up everything under Extra Costs Not Submitted all the way down to Extra Equipment?

A: Yes.

Q: You’re asking for [$]915[,000] in this. Do you believe that’s actually what you’re entitled to today?

A: Well, like I said, we were – like you said, we have to do some adjustments here.

Q: Okay. Adjustments downward, correct, sir?

A: Yes.

Q: Can you tell me today what you think you’re actually entitled to?

A: No.

And, there was more.  The subcontractor could not locate its original estimate for the job, which is important for any loss of productivity or inefficiency claim – or any claim dealing with added labor and equipment usage. The subcontractor could not identify payroll records, time cards, vendor invoices, or anything to justify the damages it sought.  The subcontractor guessed as to labor hours without the back-up substantiating the labor hours and, equally important, could not establish it incurred the guesstimated labor hours caused by the general contractor.

In essence, Plaintiff [subcontractor] concedes that it cannot provide the Court with an “intelligent estimate without speculation or conjecture,” for either category of damages. Because Plaintiff has failed to make a factual showing sufficient to establish that the “extra costs” and “change orders” damages are capable of being proved with reasonable certainty, summary judgment dismissing these claims is appropriate.

***

Here, Plaintiff asserts that Defendant [general contractor] breached the Subcontract by delaying the Project, and that Defendant’s delay caused it to sustain damages. However, Plaintiff has admitted that Defendant was not responsible for all of the delay, and that Plaintiff and its reinforcing bar subcontractor contributed to the delay as well. Because, by Plaintiff’s own admission, it contributed to the damage-causing delays, it is required to allocate the amount of delay and resultant damages between, at a minimum, itself and Defendant.

Patrick Concrete Constructors, 2018 WL at *4.

 

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.

 

 

 

 

 

 

THE CONSTRUCTION PROJECT IS LATE – ALLOCATION OF DELAY

images-1The construction project is late.  Very late.  The owner is upset and notifies the contractor that it is assessing liquidated damages.   The contractor, in turn, claims that the project is late because of excusable, compensable delays and, perhaps, excusable, noncompensable delays.  This is a common and unfortunate story between an owner and contractor on any late construction project.  Now the fun begins regarding the allocation of the delay!

 

Through previous articles, I discussed that in this scenario the burden really falls on the contractor to establish that the liquidated damages were improperly assessed against it and, thus, it is entitled to additional time and/or extended general conditions as a result of excusable delays.   Naturally, this requires the contractor to develop a critical path analysis (time impact analysis) allocating the impacts / delays (and the reasons for the impacts/ delays) to the project completion date. The reason the burden really falls on the contractor is because the owner’s burden is relatively easy – the project was not complete on time pursuant to the contract and any approved changed orders. 

 

In a recent opinion, East Coast Repair & Fabrication, LLC v. U.S., 2016 WL 4224961 (E.D.Va. 2016), the court contained a very detailed and sound discussion regarding this common story between an owner and contractor.   Although this is a case involving a ship repair company overhauling and repairing a Navy  (government) vessel, the court’s discussion would apply to any late construction project and the allocation of delay to a late project.   Please take the time to read the Court’s discussion below as it lays the framework for the allocation or apportionment of delay. 

 

In the context of litigating liquidated damages assessed by the government in a construction contract, the government first must meet its initial burden of showing that “the contract performance requirements were not substantially completed by the contract completion date and that the period for which the assessment was made was proper.” Once the government has met that burden, the burden then shifts to the contractor “to show that any delays were excusable and that it should be relieved of all or part of the assessment.

In order for the contractor to carry its burden it must “demonstrate that the excusable event caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path” because the contractor “is entitled to only so much time extension as the excusable cause actually delayed” completion of the contract.

***

Having considered the somewhat conflicting positions taken on this issue in prior federal cases, this Court finds that the better legal interpretation regarding the proper treatment of “sequential delays” (where one party causes a delay followed by a separate-in-time delay caused by the other), is that “apportionment” should be permitted when the evidence provides a reliable basis on which to determine which party is responsible for which delay. Stated differently, the fact that the Government was solely responsible for some delays in this case…does not preclude the Government as a matter of law from recovering some amount of liquidated damages as a result of subsequent, and conceptually distinct, delays deemed to be solely the fault of ECR/Técnico [Contractor and its subcontractor].

 

As to performance delays deemed to be “concurrent,” (both parties causing a delay at the same time), the established law reveals that ECR [Contractor] is permitted to seek an extension of the project completion date for such delay, as long as the delay caused by the Government would have disrupted the “critical path” in the absence of the delay caused by the contractor. However, while ECR may seek an extension of the performance period for a concurrent delay, ECR is precluded by law from obtaining a monetary award to compensate it for “delay damages” for such delays, with the appropriate relief being only the extension of the project completion date (which, in effect, results in a day-for-day reduction of the Government’s liquidated damages claim). 

East Coast Repair & Fabrication, supra, at *13-14 (internal quotations omitted).

 

 

 

 

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.

IS PERFORMANCE BOND LIABLE FOR DELAY DAMAGES?

images-3There is an argument that a performance bond is not liable for delay damages UNLESS the bond specifically allows for the recovery of such damages.  Keep this in mind when requiring a performance bond so that the bond covers the associated risks (and damages) you contemplate when requiring the bond.    This argument is supported by the Florida Supreme Court’s 1992 decision in American Home Assur. Co. v. Larkin General Hosp., Ltd., 593 So.2d 195, 198 (Fla. 1992):

 

The language in the performance bond, construed together with the purpose of the bond, clearly explains that the performance bond merely guaranteed the completion of the construction contract and nothing more. Upon default, the terms of the performance bond required American [performance bond surety] to step in and either complete construction or pay Larkin [obligee] the reasonable costs of completion. Because the terms of the performance bond control the liability of the surety, American’s liability will not be extended beyond the terms of the performance bond. Therefore, American cannot be held liable for delay damages.

 

 

However, the Eleventh Circuit in National Fire Ins. Co. of Hartford v. Fortune Const. Co., 320 F.3d 1260(11th Cir. 2003), also analyzing an issue relating to the recoverability of delay-type damages against a performance bond, did not narrowly interpret the Florida Supreme Court’s decision in Larkin General Hospital.  Rather, the Eleventh Circuit stated:

 

Larkin General Hospital could possibly be interpreted to mean that a performance bond surety cannot be held liable for…delay damages, whether liquidated or unliquidated, unless the responsibility for delay damages is specified on the face of the performance bond. However, we do not read the decision that broadly. The “purpose of the bond” must be considered, which requires reference to the contract secured by the bond. Where a provision for liquidated delay damages is clearly delineated in the underlying contract and incorporated by reference into the bond, the surety is on notice of the time element of performance and the contractual consequences of failure to timely perform in accordance with the contract.

***

While it is true that the terms of the bonds in this case do not expressly require the surety to assume responsibility for delay, “[i]t is the general rule of contract law that where a writing expressly refers to and sufficiently describes another document, the other document is to be interpreted as part of the writing.” Even after Larkin General Hospital, Florida courts have continued to utilize the well-established doctrine of incorporation by reference to impose liability on a performance bond surety. The “purpose” of the performance bonds was to insure performance in accordance with the terms of the respective subcontracts, and those terms plainly include adverse direct consequences for delay. Therefore, under the particular facts of this case, the unequivocal delay damages provisions of the subcontracts are properly considered part of the bonds issued by National Fire because of the incorporation by reference.

Fortune Const. Co., supra, at 1275-76 (internal citations omitted).

 

It is uncertain whether a Florida appellate court will agree with the rationale of the Eleventh Circuit in Fortune Const. Co., albeit the rationale making perfect sense.  If the contract incorporated into the performance bond renders the principal of the bond liable to the obligee for delay damages, then the bond should cover delay damages.  On the other hand, Larkin General Hospital is a Florida Supreme Court decision meaning there is a very strong argument that that the performance bond’s liability for delay damages will not be extended beyond the face of the bond.  For this reason, and as mentioned above, it is essential that the face of the performance bond expresses that it covers the obligee’s delay damages or any other damages stemming from the default of the principal. (By way of example, the AIA A132 performance bond expresses on the face of the bond that it covers delay costs stemming from the bond-principal’s default resulting from the surety’s failure to act and contractual liquidated or actual delay damages, if no liquidated damages, caused by the bond-principal.)

 

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.

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

imagesLiquidated damages are in many, many construction contracts.   They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date.  The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date).   Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap.   On private projects, the liquidated damages provision is a negotiated provision.  Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.

 

Assume a project is completed 100 days beyond the agreed-upon substantial completion date.  The contract provides for liquidated damages of $2,000 per day with no cap.  This means the contractor has liquidated damages exposure in the amount of $200,000.  The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.

 

The owner’s initial burden is typically an easy burden—known as the burden of persuasion.  The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date.  Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.).   The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay.  Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages. 

 

This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):

 

In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.

 

In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.

  

See also Sauer, Inc. v.  Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v.  State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).

 

 

Remember, a liquidated damages provision is a common provision in construction contracts.  Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.

 

 

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.

 

CALCULATING EXTENDED GENERAL CONDITIONS (FIELD OVERHEAD) ASSOCIATED WITH A DELAY

Extended General ConditionsYou are a general contractor.  The project has been delayed 200 calendar days.  You contend the owner and the owner’s consultants caused delays to the critical path.  You submit a claim for extended general conditions / extended field overhead associated with the 200 day critical path delay.   How do you calculate the costs associated with this 200 days of compensable delay?  Calculate a daily rate! 

 

 

The most frequently used method [to calculate extended general conditions] is to compute a daily rate by dividing the total general conditions costs on the project by the total days of contract performance and then multiplying the result by the number of days of compensable delay. An alternative method would be to determine the actual costs curing the actual delay period.

The Clark Construction Group, Inc., GAOCAB No. 2003-1, 2004 WL 5462234 (November 23, 2004) (internal citations omitted). 

 

Construction contractors may carry field office costs, such as project supervision and administration, as direct costs to the job where the costs are specifically identifiable with that one project. In a compensable delay situation where project supervision and administration are carried as direct costs, an equitable adjustment for extended field supervision and administration is calculated as a direct cost item. Field overhead which is charged, for example, to a G&A expense pool as indirect costs should not be commingled in the direct cost calculation. Where it is impracticable to derive actual cost data during the delay period, one recognized measure of the direct costs for extended labor supervision and administration is to compute a daily rate by dividing total labor supervision and administration costs on the project by the total days of contract performance and then multiplying the result by the number of days of compensable delay. To the extent that the contractor already has recovered some field supervision costs during the delay period as part of another equitable adjustment under the contract, those amounts must be deducted from the amount of recoverable extended field supervision costs. 

MCI Constructors, Inc., DCCAB No. D-924, 1996 WL 331212 (June 4, 1996) (internal citations omitted).

 

For example, in the appeal of MCI Constructors, the board of contract appeals determined that a contractor incurred a total of direct time-related general conditions in the amount of $303,624.80.  The total contract period was 802 days, which resulted in a daily rate of $378.58.   The board multiplied this daily rate by 252 days of delay to yield extended general conditions of $95,402.   The board then reduced this amount by duplicative overhead markup included in other change orders.

 

In another example, in the appeal of The Clark Construction Group, the contractor had an original budget for general conditions in the amount of $2,540, 727.  However, shortly after contract award, the contractor realized that it underbid general conditions by $344,527.  In actuality and as the result of a delay, the contractor incurred $2,910,673 in general conditions costs through the substantial completion date.  But, because the contractor originally underbid this amount, its actual general conditions costs ($2,910,673) were adjusted downward by the underbid amount ($344,527) to total general conditions of $2,566,146.  (The reason the general conditions were adjusted downward due to the underbid amount is to put the contractor in its original position in determining its delay costs versus giving the contractor the benefit of a windfall when it originally underbid the amount.)   Then, the general conditions of $2,566,146 were divided by the duration of the project (1,066 days) to come up with a general conditions daily rate of $2,407.27.  This daily rate was multiplied by the number of days of delay to determine the contractor’s extended general conditions associated with the delay.

 

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.

 

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.

 

 

THE VALUE OF A WELL-WRITTEN SUBCONTRACT TO FORECLOSE SUBCONTRACTOR’S INEFFICIENCY / LOST PRODUCTIVITY DAMAGES

 imagesI have previously discussed the challenges a subcontractor has in proving a lost productivity / inefficiency claim.  Besides being difficult to prove, subcontractors generally enter into subcontracts that include onerous provisions that foreclose a subcontractor’s right to pursue lost productivity / inefficiency claims.   General contractors try to account for these types of delay-related claims by including provisions in their subcontracts that require subcontractors to fully bear this risk.  An example of this ocurrence can be found in the opinion entered in Electrical Contractors, Inc. v.  Fidelity & Deposit Co. of Maryland, 2015 WL 1444481 (D. Con. 2015) where the trial court precluded a subcontractor from recovering lost productivity / inefficiency costs based on the language in the subcontract that precluded such claims. Additionally, and importantly, the trial court found that that the subcontractor failed to timely notify the general contractor of its claims under the strict notice provisions of the subcontract.

 

In this case, the general contractor was hired by a state agency to construct a laboratory building and furnished the state a public payment bond.  The prime contract contained a construction schedule (which is not an uncommon exhibit in a prime contract).  The general contractor then entered into subcontracts with trade subcontractors including the electrical subcontractor.  An exhibit to the electrical subcontract was a schedule that simply reproduced dates applicable to the electrical subcontractor’s scope of work that were included in the construction schedule attached to the prime contract.

 

No different than any baseline construction schedule on any construction project, it was not written in stone. This meant there were updates to the schedule that were furnished to the state agency and the state agency unsurprisingly challenged or opposed numerous schedule updates. The general contractor did not keep its electrical subcontractor apprised of the back-and-forth between it and the state agency involving schedule updates (nor was the general contractor under any real obligation to do so).

 

And, as we all know, the schedule of the project is really driven in the field.  So, as the construction progressed, the general contractor’s superintendents directed the electrical subcontractor to perform work in a piecemeal and unsystematic manner. This was due to work areas not being ready for the electrical scope due to delays on the project.  The electrical subcontractor notified the general contractor that it was being impacted and forced to work unproductively. Thereafter, the electrical subcontractor sued the general contractor and the general contractor’s payment bond sureties for damages that included lost productivity / inefficiency damages. 

 

However, the subcontract that the electrical subcontractor signed posed problems with its claims, particularly the following contractual provisions:

 

“Subcontractor agrees to … complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time … time being of the essence…. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor … shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such … altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to … additional compensation.”

***

 

 

“To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefore. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractorand Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.”

***

 

 

“In the interest of the overall project, W–T [Contractor] reserves the right to alter the sequencing of activities in order to accommodate project conditions and/or Owner requirements. It is understood that the Subcontractor shall be obligated to complete its activities [timely] … regardless of the actual start date.”

***

 

 

There is no guarantee of continuous work. Subcontractor shall work in all areas as they become available and as directed by Whiting–Turner [Contractor]. Subcontractor shall include the inefficiencies, supervision and manpower necessary to run separate and independent crews as necessary.”

 

Electrical Contractors, Inc., supra, at *6 and *7.

 

Additionally, the electrical subcontractor needed to timely notify the general contractor of its claims:

 

“Article 6(d) requires timely written notice as a precondition for making such claims: [N]otice in writing shall be given to the Contractor no later than seven (7) days following the occurrence on which such claim is based…. Any claim not presented within such time period shall be deemed waived by Subcontractor. The notice must describe the dispute, controversy or claim in detail so as to allow Contractor to review its merits … [and] provide detailed information to substantiate such claim including supporting documentation and calculations.”

 

Electrical Contractors, Inc., supra, at *8 (internal citations omitted).

 

While the 7-day claim notice requirement may seem unfair, the court explained that the electrical contractor was a sophisticated entity that knowingly assumed this notice obligation.

 

Of Significance: 

 

These subcontract provisions recited above are not uncommon provisions.  They are rather commonplace with sophisticated contractors–there is no real shock value when looking at these provisions, right?

 

 

If you are a general contractor that includes such provisions in your subcontracts, this case gives you reassurance as to those contractual provisions that are aimed to insulate you from a subcontractor’s delay-related damage and require the subcontractor to give you timely notification of a claim (so that you are not prejudiced by the late submission of a subcontractor claim).  These are important provisions for a general contractor to include in a subcontract and the provisions referenced above are certainly well-written provisions to model.  It is understood that a schedule is never going to be written in stone and there will be logic and sequence changes in the schedule, so protect yourself by including such provisions (including the no-damage-for-delay provision). As you can see, there is value in doing so.

 

On the other hand, if you are a subcontractor, if you accept these provisions, you need to either account for these risks in your subcontract price and/or bear the risk that these provisions may be appropriately enforced against you as shown in this case.  Alternatively, and as the court alluded to, as a sophisticated party, you have the option of not signing the subcontract or trying to negotiate the best subcontract for you with an understanding as to those onerous provisions and risks that you choose to accept.

 

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.

 

CHALLENGES USING THE TOTAL COST OR MODIFIED TOTAL COST METHODS TO PROVE DELAY / LOST PRODUCTIVITY DAMAGES

imagesSubcontractor delay claims are oftentimes in the form of lost productivity / inefficiency claims.  These claims are premised in large part on additional, unanticipated field labor / manpower or equipment usage that was incurred due to an event that impacted the subcontractor’s performance. 

 

One way a subcontractor proves these damages is through a total cost or modified total cost method comparing its actual costs to its bid, with a portion of the cost overrun forming the subcontractor’s damages. This methodology, however, is not always a favored methodology because it is not the most reliable way to prove cost overruns.  Courts typically prefer parties to itemize the direct costs incurred by an impact, but this is not always practical on a complex construction project.

 

The opinion in Hill York Service Corp. v. Critchfield Mechanical, Inc., 2015 WL 410009 (S.D.Fla. 2015) illustrates the challenges in proving lost productivity / inefficiency with the total cost or modified total cost methodology.  In this case, a mechanical subcontractor subcontracted a portion of its scope of mechanical work to another subcontractor (the “Sub-subcontractor”).   The Sub-subcontractor sued the mechanical subcontractor for delays causing it to incur, among other damages, additional, unanticipated manpower. The mechanical subcontractor moved for a summary judgment to preclude the Sub-subcontractor from using the total cost or modified total cost method to prove its delay / inefficiency damages.

 

The opinion provides a good discussion on the total cost and modified total cost methodology:

 

The modified total cost approach is a variation of the total cost approach. Under the total cost approach,  the original bid cost is subtracted from the actual cost of the entire project. Essentially, the difference between the two amounts, after various modifications and adjustments, is the amount of damages incurred as a result of the owner or construction manager’s breach. The modified total cost approach allows for the adjustment of the amount calculated under the total cost approach to compensate for bid errors, specific costs arising from the subcontractor’s actions, and specific costs arising from actions of parties other than the party against whom damages are sought.

***

A jury may consider the total-cost approach when [1] the nature of the excess costs is such that there is no other practicable means of measuring damages, [2] the original bid was realistic, [3] the actual costs were reasonable, and [4] the plaintiff is not responsible for any of the additional expense. The modified-total-cost approach imposes the same requirements, except that it subtracts any identifiable costs for which the plaintiff contractor is responsible. Thus, to establish the fourth element above, the plaintiff must show that it is not responsible for any of the additional expenses, or has otherwise reasonably accounted for that portion of the total costs for which it is responsible.

 

Hill York Service Corp., supra, at *4 (internal quotations and citation omitted).

 

Here, the Sub-subcontractor wanted to use the modified total cost methodology to capture is additional manpower but failed to account for additional manpower and expenses it was responsible for (the fourth factor in establishing the reliability of this methodology).  The mechanical subcontractor was able to establish that there were items caused by the Sub-subcontractor that contributed to the delay and would have increased the Sub-subcontrator’s costs, but were never quantified and subcontracted from the Sub-subcontractor’s damages.  For this reason, the trial court granted the mechanical contractor’s motion for summary judgment preventing the Sub-subcontractor from proving its damages based on this methodology.

 

If you experienced cost overruns associated with delaying events, it is important to discuss with a lawyer and, depending on the quantum of the damages, a construction consultant in order to best calculate, present, and prove your damages.   Typically, you will want a construction consultant to serve as an expert witness to assist in proving these damages.  Lost productivity / inefficiency claims are challenging damages to prove based on the reliability factors discussed in the case. But, this methodology is used in many instances because it is not always practical to track the direct costs incurred for each event that impacted performance.  Before exploring the total cost / modified total cost methodology, a different methodology known as the measured mile approach should be explored.  Under this approach, the party compares its labor production for a scope of work that was not impacted with its labor production for that scope when it was impacted, with the delta forming the party’s inefficient manpower.  Basically, the objective is to compare productive periods of work (which forms the baseline or measured mile) with impacted, unproductive periods of work to determine the cost overrun for the delaying event.

 

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.

 

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

letter of intentJust because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor.   While it is good practice for there to be an executed contract in place, this does not always occur.  But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract.  Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor.  The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

 

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract.  Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project.  The specifications, among other things, contained a liquidated damages section.  A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

 

pilingThe sub-subcontractor started to perform its scope of piling work based on the letter of intent.  Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work.  The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work.  Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor.  The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions.  The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions. 

 

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance.  As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay.  The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

 

 

Take-aways:

  • If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications.  The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

 

  • It is good practice to have both the contractor and subcontractor sign the letter of intent.

 

  • An unexecuted contract does not mean there is not a written contract between the parties.  Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

 

  • It is  good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions.  In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract. 

 

 

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.

DELAY, DELAY AND MORE DELAY! EXCUSABLE OR NON-EXCUSABLE?

imagesThe word “delay” is an all too familiar word utilized during construction because it is not remotely uncommon for a construction project to experience delays.  While contractors never want a delay to actually happen because time is money, delays unfortunately do happen as construction schedules are not written in stone.

 

There are two types of delay: (1) non-excusable delay (or inexcusable delay) and (2) excusable delay.

 

Non-excusable delay is the type of delay that contractors never want to hear.  This is the delay solely caused by them and may trigger the owner’s assessment of liquidated damages.  Not only this, but this type of delay will not entitle the contractor to additional time or compensation.  Why? Because again, the delay was caused by the contractor, hence the reason why it is the type of delay a contractor never wants to hear!

 

Excusable delay is not the fault of the contractor and is the type delay that will entitle the contractor to additional time, additional compensation, or both.  Excusable delay is further broken down into (a) compensable, excusable delay (entitling the contractor to additional compensation and time) and (b) non-compensable, excusable delay (entitling the contractor to additional time, but not additional compensation).

 

Excusable, compensable delay is a delay solely caused by the owner or its consultants and is not caused by the contractor.  This is the good type of delay in the sense that it should entitle the contractor to additional time to substantially complete the project and, based upon the contract, additional compensation in the form of extended general conditions.  This type of delay could be the result of owner-directed changes, differing site conditions, design revisions, suspension of performance, i.e., actions that are outside of the contractor’s control but within the owner and its agents’ control.

 

Excusable, non-compensable delay, on the other hand, is typically your force majeure delay including unusually severe weather conditions, fire, or labor strikes—these are the types of delay that are beyond any parties’ control in the construction process, which is why the contractor would be entitled to additional time, but not additional money.

 

The contractor claiming excusable delay has the burden of proving the delaySee R.P. Wallace, Inc. v. U.S., 63 Fed.Cl. 402, 409 (Fed.Cir. 2004) (“The contractor must prove that the excusable event proximately caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path.”).  For this reason, it is important that the contractor well-document the cause of the delay including how the delay impacted its critical path, and provide timely notice under the contract regarding the event causing the delay.

 

Now, construction contracts contain may contain a “no damage for delay” clause that is designed to prevent the contractor from being entitled to extended general conditions for excusable, compensable delay.  Basically, if there is an excusable delay, the contractor’s sole and exclusive remedy is an extension of time and not extended general conditions.  The “no damage for delay” provision is enforceable in many jurisdictions.  While there are certain recognized exceptions to the application of an enforceable “no damage for delay” provision (e.g., fraud, active interference), a contractor agreeing to such a provision certainly cannot operate on the premise that it will argue around it in the event of an excusable, compensable delay.  Rather, the contractor needs to operate on the premise that it is assuming a certain risk that a delay could be caused by the owner or the owner’s agents and the contractor’s sole remedy for the delay is more time to substantially complete the project.

 

The objective for any contractor is to understand what the legal implications and consequences are for delays on a construction project, whether an excusable delay or non-excusable delay.  Some tidbits for contractors to absolutely consider on the front-end and prior to the execution of the contract include:

 

  • Does the contract define excusable delay that would entitle the contractor to additional time and/or money?  For instance, in government contracting, the prime contract may incorporate Federal Acquisition Regulation 52.249.10 and 52.249.14 regarding excusable delay, as set forth below.
  • Is there a “no-damage-for-delay” provision in the contract?
  • What are the notice provisions to ensure the contractor is timely providing notice for the cause of the delaying event? Notice should always be given even if the full impact of the delay is unknown. Many contracts contain onerous language that if notice is not given with “x” number of days after the delaying event, the contractor waives any and all claims for delay.  Watch out for this!
  • Does the contractor have appropriate language in its subcontracts that will enable it to flow-down damages associated with non-excusable delay (the owner’s assessment of liquidated damages and the contractor’s own extended general conditions)?
  • Does the contractor have an experienced scheduling consultant or scheduler that can capture the delaying event to show the event impacted the critical path?

 

 

52.249-10    Default (Fixed–Price Construction) (APR 1984)

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if–

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

(d) The rights and remedies of the Government in this clause are in addition to any other rights and remedies provided by law or under this contract.

See also F.A.R. 52.249-14 (regarding bolded language).

 

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.