New Supreme Court Case Sets Standard On Contractor Delay Claims For Public Works Contracts

New Supreme Court Case
Sets Standard on Contractor Delay Claims
for Public Works Contracts

In a case entitled Howard Contracting, Inc. v. G.A. Macdonald Construction Co., Inc., the California Supreme Court has effectively held that a subcontractor can recover damages for cost overruns caused by delays and disruption even though a City's prime contract barred the recovery of such claims. The case is significant for several reasons. First, it emphasizes the statewide public work contract prohibition against "no damage for delay" clauses. Second, the Court's holding also emphasizes that in every construction contract, the law implies a covenant that the owner will provide the contractor timely access to the project site to facilitate performance of work. Third, the courts have concluded that, as a matter of law, a general contractor can prosecute a subcontractor's "pass-through" claims against the project owner. Fourth, a contractor can recover extended overhead for the delay, and the Eichleay Formula for determining allocation of home office overhead in contractor delay claims has been legitimized by the courts.

"No Damage For Delay" Clauses

Public works contractors who are confronted with delays caused by a California public entity should be aware of California Public Works Code § 7102. The statute provides that contract provisions in public works construction contracts and the subcontracts thereunder which attempt to limit the public entity's liability for delays it causes shall not preclude the recovery of damages by the contractor or subcontractor. The statute also provides that a public agency cannot require the waiver, alteration, or limitation of the applicability of this section. However, the statute cannot be construed to void any provision in a public works construction contract that requires notice of delays or provides for liquidated damages.

While the statute is clear, in the Howard Contracting case, the City of Los Angeles claimed that it was charter city and as such, the statute could not be applied to any contracts it entered into for public works projects. Generally, California public works procurement statutes are not always applicable to charter cities who have their own procurement ordinances. There are a number of charter cities in the state, the most notable of which are Los Angeles and San Francisco. However, the court held that the "no damage for delay" provision of the City's public works contract did not apply. Since charter cities are not always subject to state procurement statutes, if you are contracting with a charter city, you should familiarize yourself with the city's procurement ordinances.

An Owner Cannot Interfere With Your Performance

Generally, a party to a contract cannot hinder the performance of the other party unless there is a legal excuse for such action. The Howard Contracting court stated the accepted rule that "in every construction contract the law implies a covenant that the owner will provide the contractor timely access to the project site to facilitate performance of work." In regards to public works projects, providing misleading plans and specifications is treated as breach of the implied warranty of correctness of the plans. As such, the act of providing misleading plans constitutes a breach of contract rather than a fraudulent act.

Bar Charts Can Be Used to Prove a Delay Claim

In federal projects, delays that extend the activities on the critical path of activities may be compensable. In order for a contractor to be awarded delay damages, a federal court has held that the contractor must present evidence that the delay extended a critical activity. Typically, a computer generated network scheduling diagram, which is referred to as critical path schedule, is introduced into to evidence to prove or disprove that the delay impacted a critical activity. The Howard Contracting court held that a bar chart is acceptable evidence if it identifies the project's critical path and that the delays impacted that path. A critical path method scheduling matrix remains the best scheduling device. However, if you use a bar chart during the course of construction, you should delineate the critical activities on the chart. By doing so, you will be better able to prove the delays at the end of the project and/or if a lawsuit is filed.

Subcontractor "Pass Through" Claims

When a subcontractor's construction performance is altered by the acts of the project owner, the subcontractor seeks a change order from the prime contractor. The prime contractor then presents the change order or claim to the owner. The general contractor passes the changes through to the owner since the subcontractor may not have legal standing to assert a claim directly against the public agency due to a lack of privity of contract, but may have the right to assert a claim against the general contractor. The Howard Contracting court reaffirmed that as a matter of law a general contractor can present a subcontractor's claim on a pass-through basis.

Contractors Can Recover Extended Overhead and Use the Eichleay Formula

In the Howard Contracting case, there was a clear critical path delay by the City of Los Angeles. However, the delay did not cause the contractor to extend the project completion date beyond that agreed to in the contract. In the normal delay claim, the delay extends performance of the contract beyond the original completion period, thereby increasing the period of time for which overhead is incurred (hence it is sometimes called "extended overhead"). Typically, the contractor incurs overhead that is not absorbed in the original contract amount. Generally, "unabsorbed overhead" consists of time-sensitive indirect costs incurred despite construction inactivity on a project such as home office overhead, including accounting and payroll services, general insurance, salaries of upper level management, heat, electricity, taxes and depreciation.

In Howard Contracting, the City of Los Angeles argued that since the project was completed on time, the contractor was not entitled to recover extended "unabsorbed overhead." The court held that you can recover extended overhead for delays even if the work was completed prior to the contract completion date. However, such an "unabsorbed overhead" claim can only be proven by satisfying a three-part test. The contractor must establish that (1) the contractor had the intent and the capability to complete early when it entered into contract, and (2) that it actually would have completed early (3) but for government's actions.

The Eichleay formula is used to determine the dollar value of unabsorbed home office overhead damages. The Eichleay formula derives it name from a United States Board of Contract Appeals case entitled Appeal of Eichleay Corp., (CCH) (1960) ASBCA 5183, 60-2 B.C.A. The United States Board of Contract Appeals is a quasi-judicial body established by the United States of America to render binding decisions on cases concerning contracts between the executive branch and the parties it enters into contracts with for goods and services. Prior to the Howard Contracting case, the formula had never been discussed or reported in a California appellate decision.

The Eichleay formula computes the daily amount of overhead that a contractor would have charged to a contract had there been no delay and gives the contractor the computed amount of overhead for each day of delay that has occurred during performance. The formula is as follows:

Step 1: Determine the allocable overhead to the contract by dividing the total billings for the contract period by the actual contract billings and then multiply the result by the amount of the total overhead for the contract period.

Step 2: Determine the daily contract overhead by dividing the allocable overhead (as determined in step one) by the days of performance.

Step 3: Determine the unabsorbed overhead by multiplying the daily contract overhead by the number of days of delay.

It should be noted that the Eichleay formula has been criticized in several Board of Contract Appeals cases as well as federal court decisions. The cases that are critical of the formula are, in part, critical of the formula's failure to consider the amount of time spent on the project during the delay period.

Conclusion

The California Supreme Court has now outlined the standards relating to contractor's delay claims on public works projects. Accordingly, contractors should be aware of their ability to recover for such damages, and carefully document the delays as they occur.