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.”

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“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.”

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“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.”

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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.

 

WALKING THAT MEASURED MILE TO PROVE AND CALCULATE LOST PRODUCTIVITY / INEFFICIENCY

UnknownWhat is a lost productivity / inefficiency claim?  These are claims where a contractor claims it incurred increased labor (and, perhaps, equipment usage) because an event  (referred to as an impact) caused it to work inefficiently.  There needs to be a causal link between the cause of the impact and the increased labor costs.  See Appeals of—Fox Construction, Inc., ASBCA No. 55265, 08-1 BCPA 33810 (March 5, 2008).   Numerous factors can contribute to a contractor working inefficiently.  Oftentimes these claims are asserted by subcontractors associated with a delay to their scope of work or due to the manner in which the subcontractor’s work was sequenced.  The bottom line is that some impact (not attributable to the contractor asserting the claim) caused the contractor to work inefficiently and incur unplanned, increased labor cost (and/or equipment usage).

 

Lost productivity / inefficiency claims are very challenging claims to prove and calculate.  They require expert testimony to analyze cost reports, labor hours, and project documentation such as daily reports, etc. to determine the performance or production rate for a given scope of work.   But, remember, lost productivity / inefficiency claims also require a causal link between the impact and the increased costs meaning an expert needs to analyze project documentation to determine the impact and the causal link to the contractor’s increased costs.  Probably the most well received method to prove lost productivity / inefficiency is the measured mile methodology.

 

Measured Mile

 

The measured mile compares a period of productive work (the good period) with an unproductive period of the same work (bad period). “The measured mile approach provides a comparison of a production period that is impacted by a disruption with a production period that is not impacted.” Appeal of Bay West, Inc., ASBCA No. 54166, 07-1 BCA 33569 (April 25, 2007).  The period of productive work forms the contractor’s benchmark period of productivity.  Typically, this benchmark productivity is based on the number of man-hours during the productive period divided by the performance or production rate in that period to determine a productivity ratio.  This productivity ratio is compared to the productivity ratio during the impacted period in order to determine an unproductivity ratio that is multiplied by the unproductive performance or production rate to determine the number of unproductive man-hours.  Without determining a benchmark, the measured mile cannot be performed because there is nothing to compare the unproductive period of work to.

 

For instance, let’s take a rough hypothetical: 

 

Good Period — A contractor during a productive period installs 2500 feet  (or select another unit of production or performance) of “x” (you select the scope).  It takes the contractor 4000 labor hours to install 2500 feet of “x.” The number of labor hours (4000) divided by the production (2500 feet of “x”) gives a productivity ratio of 1.6. 

 

Bad Period — The same contractor gets impacted performing the same scope of “x.”  During this impacted period, the contractor installs 1500 feet of “x” with 4600 labor hours.  The number of labor hours (4600) divided by the production (1500 feet of “x”) gives a productivity ratio of 3.07. 

 

Calculating Lost Productivity — Subtracting the productivity ratio during the bad impacted period (3.07) with the productivity ratio during the good unimpacted period (1.6) gives an unproductivity ratio of 1.47.  This unproductivity ratio now allows you to determine the number of unproductive man-hours by multiplying the unproductivity ratio (1.47) by the unproductive performance (1500 feet of “x”) to give you 2205 unproductive man-hours.  The number of unproductive man-hours would then be multiplied by a supported labor rate plus burden to give you your unproductivity costs.

 

If you are experiencing lost productivity / inefficiency, it is good practice to consult with a lawyer and expert in order to best prove and calculate your lost productivity / inefficiency.  Although this article focuses on the measured mile methodology, there are other methodologies that can be utilized based on the facts and circumstances of the project.    Just remember, these types of claims generally require expert testimony to prove.

 

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.

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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.