Construction Delays: Quantification of the Financial Impact

Introduction

During the construction of a project, there are few problems which have a more adverse, financial effect on a contractor or subcontractor than project delays.  Delays result not only in increased costs to specific items of work, but also frequently have concurrent disruptive effects on base contract work resulting in a protracted project completion.  At the heart of the factual evidence required by the contractor for proof of the impact of delays to individual activities is the construction schedule.

Whether a contractor is submitting a construction claim or defending against one, the element of proof is the same:

  • What was the cause of the problem (in this instance, the delay), and
  • What was the effect (the subsequent ripple to activities within the schedule network due to the delay)?

The process of establishing such direct causation can be complex.  Delays on construction projects can be caused by either the actions and/or inactions of entities (i.e., owner, contractor, vendor, etc.) or circumstances (i.e., abnormal weather, trade embargoes, etc.).

Broadly stated, the process of definition reveals three forms of delays:

  • Excusable and compensable
  • Excusable but not compensable
  • Non-compensable and non-excusable

Methods of Proving Delay and Impact

The availability of a detailed network schedule provides the parties with a means of establishing the effects of discrete delays. Such schedule usage provides the means by which time extensions due the contractor can be assessed. Equally important is the issue of concurrent delays.  Simply defined, during the course of construction, work may be proceeding on several activities simultaneously.  One of these activities may experience a compensable delay while, at the same time, a non-compensable delay may impact a parallel activity.  The concurrent delay issue is important because in such a situation damage recovery by the contractor may be precluded.

An evaluation of concurrent delays is necessary when establishing delay claims or, for that matter, when analyzing a contractor’s delay claim on behalf of an owner.  The initial step in the process is to establish the schedule baseline.  Depending on the circumstances, either the contractor’s as-planned schedule, preferably submitted shortly after the Notice to Proceed.  Then, a comparison between the as-planned and the as-built schedules should provide valuable insight into extended activity durations and changes in network logic.

This initial effort focuses on the identification of delay types and the methods available to establish proof of delay and schedule impact.  Performing that exercise establishes the cause of delay. The next step is to identify the effect – the resultant monetary delay damages.

Contractor Delay Damages

The major elements of a contractor’s delay claim may include:

  • Direct craft labor costs
  • Escalation costs
  • Jobsite overhead costs
  • Home office overhead costs

In the majority of construction claims, labor cost overruns are often the predominant element of damage.

Labor Damages

A contractor may have compensable labor damages in several categories:

  1. Increased labor hours required to perform a given task of work.
  1. Loss of production efficiency/productivity as a result of:
  • Out-of-sequence work
  • Impact of changes/disruptions/delays to unchanged work
  • Adverse weather
  • Acceleration – overtime, shift work or increased crew size
  • Trade stacking
  • Restricted access
  1. Labor escalation caused by compensable delays which precluded the performance of work in a lower wage period.

The labor damages identified by Item 2 can often be considerable when project delays are sustained. After initially establishing the basis of recovery for reduced labor productivity/inefficiency, the subsequent step is the actual quantitative assessment of such labor productivity loss. Substantiation of labor productivity loss can often be predicated on a schedule analysis. Delayed project completion need not occur for a contractor to have sustained these labor loss elements.  For instance, an early delay on a project may be completely overcome by an accelerated work effort.  The end result may be timely project completion at the expense of lost labor productivity.

Acceleration

Generally, acceleration occurs when the contractor is required to adhere to the original schedule completion dates despite the existence of compensable or excusable delay. A contractor can employ several means of accelerating the work.

Numerous industry studies have been prepared to assess the impact that various acceleration methods have on craft labor productivity. Figure 1 is illustrative of the cumulative effect that overtime has on productivity.  The data is extracted from a Business Roundtable study entitled “Scheduled Overtime Effect on Construction Projects.”

Cumulative Effect of Overtime on Productivity

50 and 60 Hours Work Weeks

Overtime

Figure 1

 

In addition, acceleration may take the form of increased crew size over what the contractor may have planned to be its optimum crew. Figure 2, based on a Corps of Engineers report entitled “Modification Impact Evaluation Guide,” evaluates the effects of increasing crew size:

“The optimum crew size (for any construction operation) is the minimum number of workers required to perform the task within the allocated time frame. Optimum crew size for a project or activity represents a balance between an acceptable rate of progress and the maximum return from the labor dollars Invested.  Increasing crew size above optimum can usually produce a higher rate of progress, but at a higher unit cost.  As more workers are added to the optimum crew, each new worker will increase crew productivity less than the previously added worker. Carried to the extreme, adding more workers will contribute nothing to overall crew productivity.”

Effect of Crew Overloading on Labor Efficiency

Overmanning

Figure 2

 

A third method of acceleration is the addition of a second shift. Figure 3, based on “Shift Work Impact on Construction Labor Productivity,” illustrates the effect of increased shift work on craft labor productivity.

Effect of Shift Work on Labor Productivity

Shift

Figure 3

 

Adverse Weather

If a contractor sustains a compensable delay which forces more of this work into adverse weather conditions, the loss of labor productivity that follows will likely be recoverable. It has been clearly recognized that work performed during winter conditions will be less productive than the same work performed during the summer.

Industry studies have established criteria by which loss of labor productivity could be correlated to adverse weather. Figure 4, based on the National Electrical Contractors Association data, is illustrative of such a correlation.

Temperature Effect on Labor Productivity

Temperature

Figure 4

 

If all or a portion of a contractor’s work is delayed by the owner, the increased direct costs of labor and material resulting from the delay are compensable.

The data required to calculate and prove a claim for labor escalation include:

  • The planned labor loading schedule
  • The actual labor loading schedule
  • The wage rate in force at the time of bid
  • The actual wage rates paid over the life of the project.

On union projects, the wage rates can be obtained from union agreements. On non-union projects, the information must be obtained from the contractor’s payroll records.

The rationale on material cost escalation is essentially the same except that the contractor must demonstrate that the owner’s delay caused the contractor to make purchases at a later date and at a higher cost. Owner delay may also impact the contractor’s ability to purchase in bulk, the costs of storing, handling and insuring materials.


 

Extended Jobsite Overhead

During bid preparation, a contractor will anticipate (and price) the required jobsite overhead required for the contract duration. Such jobsite overhead normally comprises those necessary field expenses not readily allocated to individual bid items such as:

  • Salary and expenses of superintendents, field engineers, clerks, etc.
  • Temporary site facilities such as office trailers, storage trailers and temporary utilities, among other costs.
  • Tools and equipment allocable to the entire project.

If the project is accelerated, the contractor may also incur incrementally increased jobsite overhead costs during the acceleration period.

Extended Home Office Overhead

Home office overhead consists of those expenses necessary for a firm (construction or other) to do business. Without such organizational structure, the normal course of running the business would be impossible. Because of that, in certain settings, some portion of home office overhead may be recoverable.  For the purpose of definition herein, it is necessary to explain the difference between “extended overhead” versus “unabsorbed overhead.”  These terms have their origins in construction and manufacturing, respectively.

Recoverable extended overhead damages focus on those home office costs that are normally incurred after the original contract completion date but which have been caused by compensable delays occurring during the original project duration. Unabsorbed overhead costs occur during the original contract duration and are costs which the contractor fails to earn because he is precluded from performing the original base contract volume.