This article is an overview of the components included in calculating and quantifying a delay claim. Generally, the method for calculating the claim or damages is based on the type of claim or theory of liability. There are two basic theories of liability: contract or tort. A breach of contract can be material, total or partial. The extend of the breach determines the measure of damages. A tort is generally a civil wrong which entitles the wronged party to damages. A claim that a contractor was negligent in performing a certain act can be the basis for tort liability.
Cost Accounting Concepts Are Used In Calculating Delay Claims
Delay claims are based in part on cost accounting concepts. Construction costs can be either direct or indirect. Direct costs can be tied directly to a project (e.g. labor) while indirect costs e.g. home office overhead) maybe allocated to several projects. Construction costs can also be described in cost accounting terms as either fixed or variable. Variable costs can generally increase or decrease in relationship to amount of work (e.g. on site supervisor). Fixed costs remain the same even though the amount of work may fluctuate (e.g. home office overhead).
A delay claim is proved, in part, by comparing as-planned schedules against as-built schedules. The damages for a delay claim also consider as-bid costs versus actual costs.
The Measure of Damages Depends On The Nature Of Your Relationship To The Project
The measure of damages depend on your relationship to the project. Simply stated the project owners delay damage will be different from those sustained by the general contractor. The remainder of this article shall review each parties measure of delay damages.
Typical Project Owner Delay Claim Components Include:
When the contractor delays the project the owner can recover one of two types of damages: liquidated damages or actual damages.
Liquidated damages are typically used when a determination of actual damages would be difficult if not impossible to ascertain. The amount of and application of liquidated damages are normally set forth in the contract. Some subcontracts incorporate the liquidated damage clauses in the prime contract. The liquidated damage amount for a specific time period are determined before the breach occurred. In California liquidated damages are generally enforceable. Some contracts attempt to include both liquidated damages and actual damage clauses. When both clauses are included in the contract the liquidation damage clause maybe invalid. If the owner caused the delay the liquidated damages provision will not be enforced. If there are concurrent causes to delay which are attributable to the owner and the contractor the courts will generally not enforce the clause. However, there are cases where the court has attempted to apportion the damages.
When there is no liquidated damage provision in the contract the owner will be able to collect its actual damages. If the owner has any direct involvement in the project its actual damages can include:
- additional supervisorial expenses,
- other additional expenses actually caused by the delay,
- overhead expenses incurred during the delay period,
- if project is intended to be leased reasonable value of loss of use and the lost rents which could not have been reasonably avoided,
- if the project is not intended to be leased reasonable value of loss of use, interest expense, interest expense during the delay period and
- any other reasonably foreseeable damages the owner may have incurred including lost profits from a business.
Typical Contractors Delay Damage Components Include:
The components of a contractors delay claim include:
- indirect costs that occurred during the extended performance period,
- home office overhead that was incurred during the extended performance period,
- increased (material escalation) material direct costs that occur during the delay
- lost productivity caused by the delay and
- other damages directly related to and attributable to the delay.
Indirect costs include job site overhead (e.g. project supervision costs), extended general conditions or extended or unabsorbed overhead, job shack, portable toilet, telephone, insurance, and job site power and water.
Home office overhead for the extended performance period can be calculated using several formulas. The Eichleay formula is one method for calculating overhead. The Eichleay formula resulted from a federal Board of Contract Appeal case against the Eichleay Corporation. The formula is calculated as follows:
Overhead allocable to the contract equals contract billings divided by total billings for the contract period times total company overhead for the contract period. Daily contract overhead equals allocable overhead divided by days of performance. Amount of company overhead equals daily contract overhead times number of delay days.
The formula cannot be applied to every claim. There are cases which limit its application when there is not a total suspension of work. The formula is best used where home office overhead incurred and other jobs did not absorb the overhead. Other methods include modified versions of the Eichleay formula which are modified to fit the contractors particular delay circumstance such as:
- segmenting costs to the delayed project,
- using the same overhead percentage as that included in the bid and
- applying industry published overhead averages.
Direct costs include:
- Equipment rental costs and equipment ownership expenses (measured through rate manuals, depreciation, taxes and insurance) during the delay period
- Field labor if the scope of work is increased as a direct result of the delay or if the hourly labor rate increases during the delay period (e.g demobilization and re-mobilization expenses), and
- Increased material costs if the scope of work is increased or if the material cost increases during the delay period the contractor will be entitled to that increased cost.
Delay damages can also include a contractors increased labor hours resulting from a loss of the on-site labors efficiency. Disruption occurs when a contractor cannot achieve the productivity that was originally anticipated. Productivity can also be impacted by a delays ripple effect. Loss of productivity can be calculated using several methods. Generally, a productivity claim seeks the increased labor cost. Typically, each area of lost productivity is determined by comparing the bid to the actual cost. Once, the area of lost productivity is determined the damages are calculated for each individual item of work or task where productivity is lost. Some contractors attempt to calculate the claim on a total overrun cost basis, but such an approach is disfavored. It is thus very important to keep detailed time record when the project is disrupted. The increased labor factors can be obtained through the following: Use of learning curves and other similar models, time motion studies, expert witnesses, scientific models, and comparisons to industry unit pricing standards.
Other damages that may be recovered include:
- interest on the claim,
- lost profits on other jobs if it can be established that due to the delay the contractor couldn't get other jobs during the delay period, typically, this occurs when a contractor bonding capacity restricts further contracts until the existing work is completed.
Attorney fees are not recoverable unless there is an applicable attorneys fees provisions. If there is an attorney's fees provision the prevailing party recovers the fees, but in discretion of the judge. AIA documents attorneys fees provisions may not always allow the prevailing party to recover attorneys fees.
If the party who has been damaged fails to mitigate damages it may not be able to recover those damages which could have been mitigated. Thus it is important for the contractor to make reasonable efforts to minimize the damages it sustains as a result of a delay.
Delay claims require significant documentation. Once a delay is identified the effected contractor should earmark those costs which are due to the delay. Separate files with copies of the delay related expenses should be set-up and maintained. If there is a loss of productivity the project supervisorial personnel should maintain accurate of record of what caused the disruption and how much time was lost as a result. Generally, the more accurate and complete your delay related documentation is the more likely you will prevail when you make a claim. It is difficult and expensive to reconstruct a delay claim when there is little or no contemporaneous records which set-forth how the contractor was damaged.
*article courtesy of William C. Last, Jr.