LOST PRODUCTIVITY OR INEFFICIENCY CLAIM CAN BE CHALLENGING TO PROVE

Posted on April 16, 2022April 16, 2022 by Edward Garber

One of the most challenging claims to prove is a lost productivity or inefficiency claim. There is an alluring appeal to these claims because there are oftentimes intriguing facts and high damages. But the allure of the presentation of the claim does not compensate for the actual burden of proof in proving the lost productivity or inefficiency claim, which will require an expert. And they really are challenging to prove.

Don’t take it from me. A recent Federal Claims Court opinion, Nova Group/Tutor-Saliba v. U.S., 2022 WL 815826, (Fed.Cl. 2022), that I also discussed in the preceding article, exemplifies this point.

To determine lost productivity or inefficiency, the claimant’s expert tried three different methodologies.

First, the expert looked at industry standard lost productivity factors such as those promulgated by the Mechanical Contractor’s Association. However, the claimant was not a mechanical contractor and there is a bunch of subjectivity involved when using these factors. The expert decided not to use such industry standard factors correctly noting they provide value when you are looking at a potential impact prospectively, but once you incur actual damages and have real data, it is not an accurate measure.

Second, the expert tried the preferred methodology – the measured mile approach. The expert testified: “[T]he measured mile approach is an approach where you look at an unimpacted piece of the work to find out what it actually took to do that piece, and you compare it to the impacted production to see if you had a production loss, and you can measure that loss.” Nova Group, supra, at *50. The expert, however, elected not to use this approach due to the limited data he had to make this an accurate methodology.

Lastly, the expert tried and implemented the modified total cost methodology finding it to be the most appropriate methodology to capture the claimant’s lost productivity damages in the context of the claim.

A total cost method determines damages by taking “the difference between the actual cost of the contract and the contractor’s bid. This method is disfavored by courts “because of concerns about bidding inaccuracies, which can reduce the contractor’s estimated costs, and performance inefficiencies, which can inflate its actual expenditures.” “The modified total cost methodology addresses some of the objections to the total cost method” by adjusting for possible inaccuracies.

The modified total cost method requires the contractor, typically through an expert, to prove: (1) the impracticability of proving actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) its lack of responsibility for the added costs.

Nova Group, supra, at *51 (citations omitted).

The government (opposing the lost productivity claim) countered that the claimant failed to prove these factors. In particular, the government argued that the claimant did not prove the reasonable of its costs or its lack of responsibility for its added costs. In doing so, the government relied on testimony of its own expert that addressed factors that went into the claimant’s cost overrun. The Federal Claims Court agreed that the claimant failed to prove the required factors to utilize a modified total cost approach: “Plaintiff has not met its burden of providing modified total cost damages, in particular, Plaintiff’s lack of responsibility for lost productivity costs….” Nova Group, supra, at *52.

When presenting a lost productivity or inefficiency claim, it is imperative that an expert is utilized. While the claimant’s expert did the right thing by analyzing different lost productivity methodologies, by failing to fully and completely address all of the factors to sustain the modified total cost approach, the lost productivity claim failed because the burden of proof was not met.

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.

HOW THE CUMULATIVE IMPACT THEORY HAS BEEN DEFINED

Posted on November 1, 2020November 1, 2020 by Edward Garber

Largely in the federal contract arena, there is a theory referred to as “cumulative impacts” used by a contractor to recover unforeseeable costs associated with a multitude of changes that have an overwhelming ripple effect on its efficiency, particularly efficiency dealing with its original, base contract work. In other words, by dealing with extensive changes, there is an unforeseeable impact imposed on the contractor relative to its unchanged or base contract work. Under this theory, the contractor oftentimes prices its cumulative impact under a total cost approach with an examination on its cost overrun. However, this is not an easy theory to prevail on because there needs to be a focus on the sheer number of changes, causation supporting the impact, and whether there were concurrent impacts or delays that played a role in the ripple effect. See, e.g., Appeals of J.A. Jones Const. Co., ENGBCA No. 6348, 00-2 BCA P 31000 (July 7, 2000) (“However, in the vast majority of cases such claims are routinely denied because there were an insufficient number of changes, contractor-caused concurrent delays, disruptions and inefficiencies and/or a general absence of evidence of causation and impact.”).

To best articulate how the cumulative impact theory has been defined, I want to include language directly from courts and board of contract appeals that have dealt with this theory. This way the contractor knows how to best work with their experts with this definition in mind–and, yes, experts will be needed–to persuasively package and establish causation and damages stemming from the multitude of changes. While many of these definitions are worded differently, you will see they have the same focus dealing with the unforeseeable ripple effect of the extensive changes.

Any contractor seeking an equitable adjustment from the Government must prove liability, causation, and resultant injury. An impact claim—often characterized using other names, such as, “cumulative impact,” “ripple effect,” “loss of labor efficiency,” or “loss of productivity”—is based upon the theory that individual compensable changes to a Contract, taken as a whole, can have such a disruptive effect on the contractor’s performance that the contractor has a compensable claim for costs in addition to the amounts of its individual change orders.

In order to recover on an impact claim, a contractor must do more than present evidence of the sheer number or scope of changes. Nor is it sufficient to compare the cost of the work, as changed, to the original contract price. A contractor must also present evidence of causation and impact. Cumulative impact claims are fact-intensive and require the contractor to substantiate its claims that its work was delayed or was performed in an inefficient, unproductive, or more costly manner as a result of the individual changes to the Contract. As one board observed, “[t]here must be testimony and contemporaneous documents evidencing the type and extent of disruption to the work, and a showing that the disruption resulted from Government actions.”

Jackson Const. Co. v. United States, 62 Fed.Cl. 84, 103–04 (2004) (internal quotations omitted).

Or:

Because contractors are required to include known and generally foreseeable impacts on unchanged work in pricing the cost of a change, the term “cumulative impact” has come to mean, in a generic sense, the impact on unchanged work which is not attributable to any one change but flows from the synergy of the number and scope of changes issued on a project. The underlying theory is that numerous changes cause a cascading ripple-type of impact on performance time and efficiency which is too uncertain or diffuse to be readily discernable at the time of pricing each individual change.

***

We do not question that such impacts from cumulative changes do, in some instances, occur and should be compensated. However, we are mindful that impacts, whether on changed or unchanged work, which flow directly from individual changes are, with few exceptions, legally compensated by the price negotiated for the change and, thus, should be excluded from recovery under a cumulative impact claim. We are also mindful that even when a compensable cumulative impact is found, proof of damages under a total cost approach (an approach often relied upon in this type of claim) is acceptable only where safeguards for its use have been clearly established. The total cost method is not favored, in part, because it is extremely difficult to assure that the contract is not transformed into a de facto cost reimbursement contract and that costs which should be borne by [the contractor] are excluded. Thus, we must carefully examine any claim of cumulative impact under a total cost approach to assure that the four factors generally recognized for its use have been met.

Mcmillin Bros. Constructors, Inc., EBCA No. 328-10-84, 91-1 BCA P 23351 (Aug. 31, 1990).

Or:

Cumulative impact is the unforeseeable disruption of productivity resulting from the “synergistic” effect of an undifferentiated group of changes. Cumulative impact is referred to as the “ripple effect” of changes on unchanged work that causes a decrease in productivity and is not analyzed in terms of spatial or temporal relationships. This phenomenon arises at the point the ripples caused by an indivisible body on two or more changes on the pond of a construction project sufficiently overlap and disturb the surface such that entitlement to recover additional costs resulting from the turbulence spontaneously erupts. This overlapping of the ripples is also described as the “synergistic effect” of accumulated changes. This effect is unforeseeable and indirect. Cumulative impact has also been described in terms of the fundamental alteration of the parties’ bargain resulting from changes.

***

Causation, in the context of a cumulative impact, can be an elusive commodity because the concept of cumulative impact is, in itself, somewhat amorphous. Several points relevant to cumulative impact and causation, however, are clear. First, the mere existence of numerous contract changes in and of themselves, whether or not the number of changes is considered to be reasonable or unreasonable and whether or not the changes resulted from defective specifications, establishes no right to recover cumulative impact costs. Consequently, contract changes alone, regardless of their number or nature combined with Government liability do not serve as a substitute for causation and do not necessarily give rise to cumulative impact damages. Second, it is clear that demonstrating an overrun in labor and the existence of numerous changes without some evidence linking the changes to the overrun is insufficient proof of causation. Finally, there must be some proof of a causal connection established showing that the undifferentiated group of contract changes affecting the changed and unchanged contract work resulted in the loss of productivity on that work. This proof may take the form of demonstrating that there are no other reasons for a loss of productivity for which the Government is not responsible.

Appeal of Centex Bateson Const. Co., Inc., VABCA No. 4613, 99-1 BCA P 30153 (Dec. 3, 1998).

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

Posted on February 6, 2015February 6, 2015 by Edward Garber

Subcontractor 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.