Question. I have received a number of questions surrounding claims for delay damages from various sides of the issue. In order to provide even a cursory understanding of the issues surrounding delay damages I am devoting the November and December column. This month I will take the opportunity to explore how to value delay claims.
Total Cost Claims: The total cost claim approach is the least complex and most easily applied methodology used in calculating and presenting construction damages. It also tends to be the most frequently used general theory. In its basic form, damages are calculated by comparing the original bid to the actual costs incurred on the project. There are several disadvantages to the use of a total cost claim, including an extremely strict, legal standard of proof and the necessity to prove several underlying assumptions:
Modified Total Cost Claims: The modified total cost method quantifies damages by using the inherent simplicity of the total cost approach. Modifications are offered to demonstrate the cause-and effect relationships that exist between the costs and the events or transactions presented in the specific cost approach. The success of the approach often depends upon the extent of the modifications which demonstrate the cause and effect dynamics.
Quantum Meruit Claims: A final type of damage theory involves an analysis of the "reasonable value" of the work performed. Contractors and subcontractors are afforded protection under mechanic's liens to recover the value of labor and materials used in improving property. The theory of quantum meruit is often used in damage claims when a subcontractor does not have a direct contractual relationship with an owner but the owner has been "unjustly enriched" by work performed by the subcontractor.
Specific Identification Claims: In this approach, the importance of each event is tied directly to the cost impact of that event, such as late material delivery and the impact of idle labor time, or the disruptive impact on productivity caused by over-inspection.
Jobsite Overhead Costs: Jobsite overhead, or general conditions, are generally charged as direct costs in the job cost report for the project. In the most common approach to pricing a claim for jobsite overhead costs, the costs are generally viewed as a "pool" of costs for the duration of the project. This pool of costs is then divided by the days of total performance of the project to establish a daily rate of jobsite overhead costs. This daily rate is then multiplied by the compensable days of delay to establish the cost of the delay. This approach is viewed as relatively conservative as it establishes one rate for the entire project, taking into account the "ramp up" and "ramp down" of the project.
Home Office Overhead Claims: A contractor's home office includes the necessary costs required to run a construction business. When a project's duration extends beyond the contract completion date, a contractor's home office functions continue to support that project for a longer period than anticipated at bid time. Contractors often argue that during this delay the contract does not generate its share of gross margin, resulting in "unabsorbed" home office overhead, and/or the home office must support this project for a longer period of time, resulting in "extended" home office overhead. This unabsorbed or extended overhead is often a significant component of a deadly claim.
Equipment Costs: Time-related equipment costs consist of the fixed cost of rented equipment as well ownership costs for owned equipment. These ownership costs include the depreciation, the cost of the investment in the equipment, major repairs and overhaul, and insurance. The activity-related costs for equipment include fuel, oil, and grease, commonly referred to as FOG; tires and tracks; and minor repairs. As in other claim components, the equipment cost should be separately calculated for time-related and activity-related claim issues. Equipment rental costs. Contractors often rent a significant portion of their equipment. These rentals are often "dry." In other words, the contractor supplies all FOG and other operating costs. The rental agreement for such equipment often provides for a fixed monthly charge, with an additional charge for operating hours over an established level.
Escalation: Escalation is the price impact of providing goods or services in a later (and presumably higher cost) period than originally planned.
Measured Mile: The Measured Mile approach is a widely recognized and well received method of pricing inefficiencies related to specific events on a project. The Measured Mile approach compares the performance in the impacted period of the project to the performance in an unimpacted period of the same project. The performance measurement (e.g., work hours per linear foot) is calculated during the unimpacted or Measured Mile period.
Should Cost Estimates: In many disruption situations, the impacts are so pervasive that there are no unimpacted periods in the same project. In these cases, the so called should cost estimate methodology is one that compares actual labor costs incurred with an accurate estimate of what the labor costs should have been if no disruption had occurred.
Industry Standards: In this case, the contractor may develop a yardstick employing productivity rates that are contained in published industry sources.
Productivity Studies: Besides industry manuals, other published studies have attempted to quantify the impact of various factors such as change orders, weather crowding, and overtime on the construction process. These studies usually express this impact in terms of a percentage range.
Markup and Profit: In a claim situation, the contractor typically includes a percentage markup on the claimed costs for its markup or profit. What percentage to use is not always clear. Options include: