Are You Including a Loss of Productivity Cost Component in Your Change Orders ?
Techniques for Establishing a Lost Productivity Claim
William C Last, Jr.
As all construction industry professional know, there are few, if any, projects that do not involve unanticipated events that impact the cost of the job. Unanticipated course of construction events typically result in contract change order requests for the cost incurred as a result of the additional work, delay and/or acceleration.
Unanticipated project events can have a ripple effect on the productivity of the workers on the project. Abnormal weather conditions, owner interference, design errors and ambiguities, poor project coordination, excessive change orders, limited site access and out-of-sequence work can also effect the workers' efficiency on the project. The inefficiency resulting from unanticipated events can include: (a) the workers waiting for work areas to become available; (b) increased worker project mobilizations and demobilizations; (c) a slow down in the workers pace; and (d) rework of completed work.
In order to recover the costs associated with such a loss of productivity, it is necessary to establish that the cause of the loss productivity is the action or inaction by the party, or its agents, with whom you are contracting. The cost of the loss of efficiency associated with these types of events should be a cost component of any claim. The loss efficiency or productivity is normally expressed in terms of a decrease in the percentage of the optimum efficiency that was anticipated at the time the project was bid. The commonly used terms for claims associated with the loss of efficiency include: impact claims, inefficiency claims, loss of productivity claims or disruption claims.
Due to the very nature of a disruption claim, it is difficult to timely identify a disruption claim, document the claim and prove the specific costs of a disruption claim. On many occasions, the long term effect of these unanticipated events cannot be assessed or calculated until the project is completed. However, if you understand how a disruption claim is proven it is easier to identify a disruption claim and make a timely effort to identify the resulting costs. The remainder of this article will discuss the methods for proving a disruption claim and the costs associated with the claim:
1. Cost of the Work plus a Fee Approach
The cost plus a fee approach is the ideal approach to proving a disruption claim and the resulting costs. This approach requires the contractor to make a timely identification of a disruption claim and then document how the project was impacted. In order to make an early identification of a disruption claim, the project personnel must be trained to be aware of events that can result in a disruption. Once the event that can cause disruption is identified the field personnel should be trained to provide timely notice of the problem to the home office personnel. In addition to the field personnel identifying a possible disruptive event, regular reviews of the project budget and the actual as-built costs will allow for early identification of cost overruns.
The costs associated with the disruption should be specifically identified and then billed on a time and materials plus a fee basis. Ideally, a separate folder should be kept for each event that creates disruption. The field personnel should then place the following items in the folder: (a) a description of impacted work, (b) the names of the workers who were impacted, (c) the hours spent/lost by those workers as a result of the disruption, (d) photographs and videos associated with the event, (e) a narrative of how the event affected other project tasks, (f) relevant correspondence, (g) relevant schedules and (h) any other documentation associated with the disrupting event and its effect on the remainder of the project.
2. Total and Modified Cost Approach
The total cost approach is calculated by adding overhead and profit to the difference between the estimated cost of the project and the actual cost. While the total cost is the easiest technique, it is the least accepted method for calculating disruption claims. The problem with the total cost approach is its failure to account for bidding errors and any inefficiency that can be blamed on the contractor.
The modified total cost approach attempts to consider the contractor's bidding errors and project work performance errors. In essence, the total cost is first calculated and then the costs associated with the contractors errors are subtracted. The remaining balance is the amount of the claim.
Between the total cost and the modified cost approaches, the latter is the preferable approach to calculating the disruption claim. Generally, the total cost and modified cost approaches should only be used if there are no other means for calculating the disruption claim.
3. Measured Mile Approach
The measured mile approach compares the performance that was achieved prior to the disrupting event with performance that occurred during the disrupting event. In order for this approach to be accepted certain criteria must be met. First, the cause of the decreased performance period must be due to the disruptive event. Second, the two periods must be identical in length and activities. The results of the calculations should also be compared to the estimate for the impacted work. If there is not a period when the project was not disrupted the claim evaluator can use historical data on another project and/or the original estimates for the subject project and then make a comparison to the disrupted project.
4. Industry Standards Approach
There are a number of published unit price guides (e.g. Means). These guides include expected productivity for each unit of work. By comparing the productivity for each unit of work in the guides to the actual productivity, a loss of efficiency claim can be calculated. Once again, the cause of decreased performance during the period in question must be due to the disruptive event. Since there are a number of estimating manuals, it is best to choose a manual, if one exists, that is specialized for the contractors specific trade.
There are also industry publications that set forth the impact on performance from specific events. The events include, but are not limited to inclement weather, trade stacking, overstaffing, acceleration and overtime. To be effective, the study must be specific to the contractor's trade. Generally, the singular reliance on these types of studies to prove a disruption claim is not advised.
5. Time and Motion Studies Approach
This method requires using a consultant to prepare a time and motion study that compares the workers' performance on unimpacted area of the work with an impacted area. The study can include observation and documentation of the work over a period of time and video tape analysis of the work as it is being performed. This approach is best suited when the work requires repetitive tasks and there is sufficient detailed documentation to allow for the calculation.
6. Expert Opinion Approach
This approach requires the retention of a construction industry expert. The retained expert will then obtain anecdotal statements from the field personnel relative to the disruptive event. In addition to obtaining statements from the project personnel, the expert will review the as-planned and as-built project documentation. After the expert has gathered the appropriate project information, the consultant will rely on his experience with similar projects to render an opinion as to the nature and cost of the disruption on the subject project.
In addition to the foregoing approaches to calculate the disruption, an impacted contractor should also prepare graphics that depict the loss of productivity. The graphics can include productivity charts, labor histograms, fragnets and time lines. The productivity chart and labor histogram are designed to indicate the planned project labor loading versus the actual project labor loading over the life of the project. The time lines and fragnets should be used to relate the lost of productivity to the timing of the events that have impacted the project productivity. The two types of graphics can be powerful tools for proving how the disrupting events caused a loss of productivity on the project.
While disruption claims are difficult to promptly identify, the success of such a claim will depend on the approach used to document and prove the claim. However, by understanding how a disruption claim is proved it will be easier to spot such a claim and document it. If a disrupting event is quickly identified, it is possible to document and use the cost plus a fee approach. Such an approach is the best means for proving that the disrupting event caused the additional loss of productivity costs. If you are unable to use the cost plus a fee approach, it may be advisable to rely on a combination of two or more of the other approaches in proving a disruption claim.
This article is intended to provide general information about current legal issues. The article should not be construed as advice on a specific question. If you have a specific legal question or need legal advice, you should contact an attorney. This article was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over twenty years. Mr. Last also holds a California A&B contractors license. If you have any questions, Mr. Last can be contacted at 650-425-7679. 1999