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Resolve contractor production loss claims

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Bids are developed by contractors by determining expected labor and equipment production levels. When those levels are not achieved due to unforeseeable and beyond the contractor's control events, claims for lost productivity or disruption and inefficiency must be evaluated and resolved, hopefully out of court.

Productivity can be calculated by dividing a work operation's output by its resource input. Labor productivity, for example, can be measured by cubic yards (cy) of concrete formwork placed divided by the number of hours and crew members it took, expressed as cy per labor hour.

When the actual hours exceed the estimated hours for the bid or less work is accomplished within the planned time frame, that constitutes lost productivity, also called inefficiency or disruption. Since the contractor is paid a fee based on the bid, the expense of inefficiencies will come out of profit unless it can be recovered from the project owner or someone else. It falls on the contractor to prove factors causing the inefficiency such as extended work days which were not part of the original project requirements.

The contractor must keep excellent labor and equipment productivity records in order to document entitlement, quantify impacts and calculate damages for lost productivity claims. A preferred way is "measured mile" where a baseline is
established of unimpacted productivity for comparison to the lost productivity. For a more detailed explanation of methods of calculating inefficiency damages including measured mile, comparative calculations, "industry studies", and 'total cost", read the Hill International Practical Issues pdf. Document by making notations on daily reports and communicating with the owner in writing.

In Pennsylvania in the case of James Corp. v. North Allegheny School District, 2007 WL 4208589 (PA Commonwealth, Nov. 30, 2007), work was delayed by several events--late issuance of notice to proceed, late erosion and sedimentation permit, and failure to prepare the constructions schedule until four months after the project began. With no general contractor, the construction manager recommended a time extension for the contractors. The construction manager was fired and no extension was granted. Trade contractors hired more labor to accelerate the job and calculated a measured mile claim comparing labor hours of the unimpacted time to those expended after the acceleration. The PA Appeals Court endorsed it.

Courts and Boards of Contract Appeals are usually more lenient in accepting amount of damages proof from contractors than proof of causation. In the U.S. Supreme Court case Story Parchment Co. v. Patterson Parchment Paper Co., 282 U.S. 555 (1983), the basic rule set was "there is a clear distinction between the measure of proof necessary to establish the fact the petitioner has sustained some damages and the measure of proof necessary to enable the jury to fix the amount."

Contractors must either show the owner's responsibility for the claimed loss, that the explanation in favor of the claim's recovery is more plausible than another which does not support it, or have a reasonable basis to allocate additional cost among the various factors. Read the Mechanical Contractors Association of America, Inc. Labor Factors Bulletin pdf for detailed loss of labor productivity factors.

In GII Industries, Inc. v. New York Dep’t of Transp. 2011 Bankr. LEXIS 3663 (Bankr. E.D.N.Y. Sept. 30, 2011) in Bankruptcy Court for the Eastern District of New York, Grace Industries was general contractor in road reconstruction in Manhattan. Grace encountered a pipe not included in the DOT drawings which resulted in a restaging from five stages to 14 stages. The contract was amended for a new schedule and to compensate Grace for increased overhead costs, but the parties could not agree on the restaging labor cost inefficiencies.

The Court agreed that Grace was due compensation since the restaging was a significant change causing drastic change in the methodology of construction. It was satisfied with Grace's record keeping because the parties had pursued the "agreed price approach" in negotiations, despite the DOT's stance that their Manual for Uniform Record Keeping on Construction Contracts (“MURK records”) required the "force account approach".

New York courts use the total cost method which "measures damages by calculating the ‘difference between the contract price . . . and . . . total job costs.’" The contract price instead of bid estimates must be the baseline for computing damages under this method. The Court noted in this case that tracing increased costs from restaging to specific items was difficult. Prejudgent interest and a deficient audit due to inexperienced auditors and inappropriate methodologies also became issues. Lost productivity claims in court can become quite involved.

The bottom line is that contractors should be educated in preparing change order requests for "lost" productivity issues and events, developing recordkeeping systems to document adverse productivity impact, and analysis of change order requests and inefficiency claims. Contract wording is the key to dealing with inefficiencies to prevent court time and costs. Attorneys used should be well experienced in inefficiency claim disputes and at times expert witness services may become necessary.

This is a general information article on contractor loss claims. Consult an attorney for legal advice.

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