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COVID-19 Construction Insights: Quantifying Delay Damages on Your Project

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06 Apr 2020
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COVID-19 Construction Insights: Quantifying Delay Damages on Your Project


COVID-19 CONSTRUCTION INSIGHTS: QUANTIFYING DELAY DAMAGES ON YOUR PROJECT

 

 

 

As COVID-19 advances across the United States, various industries and nearly all aspects of the supply chain continue to be impacted, including the construction industry – and by default, skilled workers, electricians, engineers, and more. COVID-19 will likely have significant effects on construction due to mandatory work stoppages, material delivery limitations, labor shortages and reduced inspector availability, which will ultimately result in delays. A recent survey by the Associated General Contractors of America (AGC) found that 39% of respondents have already experienced halted or delayed work on construction projects. Accordingly, numerous law firms have advised that project teams review each contract separately to understand exactly what clauses may or may not be applicable to halted or delayed work resulting from COVID-19.

Delays on construction projects can lead to a cascade of negative financial repercussions for owners, contractors and subcontractors. Liquidated damages and extended general conditions are the most common damages associated with delay. However, delay damages can also include unabsorbed home office overhead, idle labor and equipment costs, de-mobilization / re-mobilization costs, labor and material cost escalation, productivity loss and many others. As COVID-19 progresses and new mandates are put in place by federal, state and local government entities, it is imperative that owners, contractors and subcontractors properly notify, document, monitor and quantify all delay damages resulting from COVID-19. Below is a listing of typical delay damages that may result from COVID-19 and quantification methods of such.

Unabsorbed Home Office Overhead

Home office overhead costs are not associated with a particular project or incurred at a project job site but are necessary to support construction operations. These costs include but are not limited to executive and administrative salaries, legal fees, accounting fees, home office rent and operating expenses, advertising, recruiting costs, general insurance, utilities and taxes. The home office is typically required to support the project longer than originally anticipated when there is an extension to the as-planned period of performance.

There are several calculation methods used to quantify unabsorbed home office overhead costs associated with a particular project, but the Eichleay formula continues to be the preferred and most accepted method. The Eichleay formula is the following:

Extended Field Office Overhead

Field office overhead costs, also known as general conditions, are incurred at the project job site and cannot be identified with a specific construction activity but support overall project construction operations. These costs include but are not limited to supervision, timekeeping and clerical work, engineering, field office rent and operating expenses, utility costs, material handling and cleanup. Field office overhead costs are typically time-related and can increase when there is an extension to the as-planned period of performance.

There are a couple of methods generally used to quantify extended field office overhead. One method is to calculate a daily rate by taking the total amount of field office overhead and dividing it by the applicable duration. The daily rate is then multiplied against the days of delay (or work stoppage) to determine the extended field office overhead. Another method is to simply add the field office overhead costs actually incurred during the period of delay (or work stoppage). Actual field office overhead costs are typically tracked in the job cost report under a specific cost code(s).

Idle Labor and Equipment

During a work stoppage delay, the contractor may incur idle labor and/or equipment costs. These costs are typically quantified by the actual costs incurred during the work stoppage period. When determining the cost incurred for idle labor and equipment, the following questions should be considered:

  • When was the labor and/or equipment idle?
  • How long was it idle?
  • What was the actual cost incurred for the idle time?

When claiming idle equipment costs, the contractor can only claim rental costs or ownership costs (e.g., depreciation, cost of facilities capital, insurance, taxes, etc.). The contractor cannot claim operating costs such as fuel, filters, oil, grease and minor repairs.

It is important that the contractor provides documentation (such as daily reports) showing that the labor and equipment were not able to perform work during the work stoppage period.

De-Mobilization and Re-Mobilization

Alternatively to idle labor and/or equipment costs, the contractor may incur de-mobilization and re-mobilization costs resulting from work stoppages. These costs are typically quantified by the actual costs incurred for de-mobilization and re-mobilization, which typically include the transportation of material, labor and equipment to/from the project job site among other costs.

Labor and Material Cost Escalation

Delays can push the performance of a contract into a period of higher labor wages and material costs. Typically, the contractor bears the risk of increased labor wages and material costs during the original period of contract performance but can claim increased costs if required due to delays.

The following calculation can be used to determine increased labor costs if they were originally planned in one (1) wage period:

Two (2) methods can generally be utilized to determine increased material costs:

  1. Direct Method – Compares the estimated cost of materials and the actual cost of materials, as purchased.
  2. Indirect Method – Uses published cost indices to illustrate the difference in material costs (e.g., ENR Construction Cost Index, Turner Building Cost Index, RS Means Construction Cost Data, etc.)

Productivity Loss

Productivity loss is experienced when work is not accomplished as originally anticipated and can be a result of work stoppages, out of sequence work, restricted site access, unavailability of manpower and other disruptions. The measured mile analysis is a widely recognized and preferable productivity loss quantification method in construction. This analysis estimates costs resulting from lost productivity by comparing scope production during the disrupted period of performance against scope production during a period of unaffected performance. The unaffected performance period represents the “measured mile”, which serves as a basis for comparing impacted labor productivity and determining lost man-hours and equipment-hours for the impacted scope of work. The procedure to implement a measured mile analysis generally is as follows:

  • Identification and tracking of impacted activities
  • Compilation and analysis of productivity data
  • Identification of measured mile
  • Productivity loss calculation

In this case, a pre-COVID-19 vs. COVID-19 scope production comparison could be made in order to determine any productivity loss. It is imperative that proper documentation is maintained to substantiate actual production and items such as work stoppages and unavailability of manpower. Additional considerations to be taken during the implementation of a measured mile analysis can include the use of erroneous or inconsistent data, the use of incorrect productivity measurement and the use of different scopes of work in comparing labor productivity.

 

The information provided above is general in nature, has been prepared for informational purposes only and does not constitute legal advice. All parties need to evaluate their specific project conditions, contract, local codes and ordinances and contact their attorney or consultant to understand and apply these and other general principles for their project. The information is intended but not guaranteed to be correct, complete, and up-to-date. No representations or warranties are made, express or implied, that this information is correct, complete, or up-to-date.

Copyright © 2020 by Spire Consulting Group, LLC. Worldwide rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Spire Consulting Group, LLC.


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