The Cost of Delay and Disruption

continuing professional development

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the cost of delay and disruption

by

roger Knowles

THE COST OF DELAY AND DISRUPTION

ADDITIONAL COSTS RESULTING FROM DELAY

Financial Losses

Delays to construction projects will invariably involve the contractor in financial losses unless these losses can be recovered from the employer. Whether they can be recovered will depend upon what events gave rise to the delay and whether under the terms of the contract the employer has taken the financial risk of them occurring. In addition the contract may set out a procedure to be followed by the contractor relating to claiming payment of the money involved. If the contractor ignores the procedure the entitlement to payment may be adversely affected.

Events Giving Rise to Losses

In most standard forms of contract losses or costs resulting from delays to the progress or completion of the works if caused by the employer his Architect, Engineer or persons for whom he responsible will be recoverable by the contractor. Standard forms of contract deal with this matter in different ways.The JCT 98 and 05 contracts for example provide an all embracing entitlement which covers costs resulting from impediments, prevention or default by the Employer, Architect, Quantity Surveyor or any of the Employer’s Persons. By way of contrast the ICE 6th and 7th Editions includes for the recovery by the contractor of costs resulting from delays caused by the Employer and Engineer in several different clauses throughout the contract. For example if the contractor incurs extra costs as a result of the Employer providing possession of the site late then clause 42 provides for the recover of these costs. Where the Engineer provides late information required by the contractor and as a result the contractor incurs additional cost clause 6 allows the contractor to be reimbursed those extra costs. The NEC has a different approach to the matter. All delays and cost matters which under the terms of the contract are at the risk of the employer are catered for in one clause and styled compensation events.

Variations/Change Orders

It is important from the employer’s point of view for the conditions of contract to include a clause which permits the work described in the contract to be altered. In the absence of a clause of this nature the employer would be unable to amend the design during the construction of the works. This could prove difficult if variations to the design became necessary due to changes in technology or legislation. Without a variations clause the contractor could refuse to undertake them even if such a change were essential. Alternatively the contractor could carry out the work on the basis that it constituted a separate contract. All standard forms of contract therefore have a variations clause. It is vital that the contract provides a definition of variation to ensure that it is clear as to the extent to which the work may be altered. The JCT 98 and 05 contracts have a wide ranging variations clause which allows the Architect to alter or modify not only the design of the works but also the hours of work and the order in which the work is to be carried out. The ICE Design and Construct Form deals withalterations to the Employer’s Requirement but there must be consultation with the contractor’s representative before the amendments can be ordered.

Variations if issued at a late stage or involve significant extra work will inevitably result in delay and additional cost being incurred.Standard forms of contract deal with this problem in different ways.JCT 98 and 05 expressly provide for the contractor to be reimbursed if a variation affects the progress of the works and as a result the contractor incurs loss or expense. The I Chem. E Lump Sum and the NEC contracts contain a procedure whereby the contractor is required to submit a quotation in respect of each variation which will no doubt include delay costs.

Ground Conditions

Many contracts particularly where a substantial amount of work occurs below ground will specifically deal with the risk of encountering difficult ground conditions. If the contract is silent on the matter the contractor, who is in most cases contractually obliged to undertake and complete the works, will bear the risk of any delay and extra cost resulting from encountering bad ground conditions. The ICE 6th and 7th Editions include the notorious clause 12 under which the contractor is entitled to recover any additional cost which results from bad ground conditions. It is not an open ended entitlement however as it only applies if the conditions encountered could not reasonably have been foreseen by an experienced contractor. The NEC contract is similar but from a contractor’s point of view more onerous. This contract allows the contractor to claim more time and money only if at the date the contract came into existence an experienced contractor would have considered that the ground conditions ultimately encountered only had a small chance of occurring.

Financial Reimbursement

Having established that the events which have lead to the delay represent an employer’s risk and that as a result the contractor has suffered delay and incurred additional cost, the question to be answered is the amount of money which under the terms of the contract will become due to the contractor. Nothing is straight forward as the standard forms of contract deal with the problem in different ways. Under ideal circumstances the contract would provide a definition, free from ambiguity, as to the contractor’s entitlement. The ICE 7th Edition is helpful in this respect in that the contractor’s entitlement is specifically referred to as additional cost which is defined as:

expenditure whether on or off the site including overhead, finance and other charges (including loss of interest) properly locatable thereto but does not include any allowance for profit

The JCT 98 and05 contracts are less helpful as they merely refer to direct loss and/or expense without providing a definition as to its meaning. One has to turn to an established text book such as Keating on Building Contracts to provide assistance. Briefly it states that direct loss and or expense means loss or expense which arises naturally and in the ordinary course of things. This type of definition is vague and leaves the gateopen to many and varied disputes when it comes down to real live situations. The NEC contract approaches the problem in a different manner. Where delay and additional cost is or is likely to occur as a result of a compensation event such as a delay caused by the employer, the Project Manager may require the contractor to submit a quotation. This will include actual defined cost of the work already done, together with a forecast of the defined cost of work yet to be done plus a fee which includes profit. The definition of cost is provided in a detailed Schedule of Cost Components included in the contract.

EVALUATING DISRUPTION

Problem Areas

One of the most difficult items to evaluate with any accuracy is disruption. The problem is usually caused by a lack of accurate records.

With the spotlight on linking cause and effect claims for disruption will come under greater scrutiny. It is unlikely that contractors and subcontractors will succeed where their claims for disruption are bases simply upon the global overspend on labour for the whole of the contract working period. More detail will have to be given which isolates the cause of the disruption and evaluates the effect.

The courts have given some assistance in the manner in which disruption should be evaluated.

Measured Mile

The most appropriate manner to establish disruption is to apply a technique known as “The Measured Mile.” This system provides for the comparison of productivity achieved on an unimpacted part of the contract with that achieved on the impacted part. This method eliminates any argument concerning underestimating and inefficient working. An example of the Measured Mile method can be seen by reference to the decision in the case of Whittall Builders Company Ltd v Chester-Le-Street District Council (1985) Difficulties were experienced by the employer in giving possession of dwellings on a rehabilitation scheme. The court found that during the period when these problems occurred the contractor was grossly hindered in the progress of the work and as a result ordinary planning was rendered impossible. However a stage was reached in November 1974 when dwellings were handed over in an orderly fashion and no further disruption took place. The court had to decide upon the appropriate method of evaluating disruption. Mr Recorder Percival QC in his judgement has this to say:

“Several different approaches were presented and argued. Most of them are highly complicated but there was one simple one – that was to compare the value to the contractor of the work done per man in the period up to November 1974 with that from November 1974 to the completion of the contract. The figures for this comparison, agreed by the experts for both sides were £108 per man week while the breaches continued £161 per man week after they ceased.”

Recorder Percival used this comparison in deciding that the disruption had the effect of increasing the labour costs in the areas where disruption occurred by one third. He then applied the one third value to all the labour cost expended during the period of disruption to arrive at a total loss on labour. He considered this to be the most realistic and accurate approach which he could have taken to arrive at a figure.

The Society of Construction Law Approach

The Society of Construction Law has produced a Delay and DisruptionProtocol dated 2002 in which they express a view concerning the Measure Mile approach to the evaluation of disruption. The Protocol explains the situation as follows:

The starting point for any disruption analysis is to understand what work was carried out when it was carried out and what resources were used. For this reason record keeping is just as important for disruption analysis as it is for delay analysis. The most appropriate way to establish disruption is to apply a technique known as the Measure Mile. This compares the productivity achieved on an un-impacted part of the contract with that achieved on the impacted part. Such a comparison factors out issues concerning unrealistic programmes and inefficient working. The comparison can be made on the man hours expended or the units of work performed. However care must be exercised to compare like with like. For example it would not be correct to compare work carried out in the learning curve part of an operation with work executed after that period.

More Measured Mile

In the case of John Doyle Construction Ltd v Laing Management (Scotland) Ltd (2004) the court was asked to express a view as to whether a measured mile approach in principle is acceptable. Laing Management was the contractor in connection with a new corporate headquarters for Scottish Widows in Edinburgh. A number of works packages were contracted out to John Doyle and disputes arose as to the entitlement under the package contract to Doyle’s financial entitlement. A part of the claim related to disruption and the evaluation was produced by comparing labour productivity actually achieved on site when work was largely free from disruption with labour productivity achieved when work was disrupted. It was decided that this method of evaluating a claim was not a total cost claim and therefore in principle was acceptable

Total Cost Claims

Contractors with little in the way of records where they have incurred losses on labour as result of action or inaction by the employer his Architect or Engineer often approach the production of a claim by comparing the actual cost expended on labour with the sum included in the tender. This method is likely to be unsuccessful as there may be any number of reasons why the labour costs were greater than the allowances in the tender. There may for example be errors in the tender, loss due to the risk undertaken by the contractor for which no proper allowance was made in the tender, inefficient working and correcting defective work. A more realistic approach although not guaranteed to be anything other than broad brush is to take as a starting point the total labour cost for the project. Deductions are then made for tender errors, unpriced risk, inefficiency and defect rectification.The labour element of any variations and changes and additional cost claims would also have to be taken into account. This would leave a sum, once the tender allowance had been deducted, which at least theoretically represented the cost of disruption. This type of claim has been successfully pursued in the USA but there seems very little enthusiasm shown for it among employers and their consultants in the UK. In the earlier mentioned case of John Doyle Construction Ltd v Laing the court was asked to review a total cost claim. It had been argued that if a total cost claim is pleaded and it can be shown that some element of the cost has resulted from fault on the part of the contractor the claim in its entirety will fail. There was sympathy express by the court as to this view but it was felt that the whole matter should be treated with common sense. The decision of the court was that if a total cost claim is to succeed the contractor must eliminate from the claim all costs that are not the responsibility of the employer. He considered that total cost claims are a risky business but nonetheless allowed proceedings to continue.

Calculation by Assessment

It may not be possible due to the nature of the disrupting matters and the complexity of the project to employ the measured mile approach to evaluation. Therefore it may be appropriate to attempt to isolate the additional hours of labour and plant which results from the events giving rise to disruption. A schedule of matters which have caused disruption should be prepared which sets out each disrupting event indicating the additional labour and plant hours expended. Schedule JRK/DS/1 which is annexed to this module can be used for the purpose.

Difficulties may be encountered in isolating the additional hours of labour and plant which result from each and every disrupting matter. The courts however have provided assistance in dealing with this problem. In the case of Chaplin v Hicks (1911) it was held:

Where it is clear that there has been actual loss resulting from the breach of contract which it is difficult to estimate in money, it is for the jury to do their best to estimate, it is not necessary that there should be an absolute measure of damages in each case.

The Canadian case of Wood v The Grand Valley Railway Co (1913) involved a dispute where accurate ascertainment of damages was proving difficult and it was held:

It is clearly impossible under the facts of that case to estimate with any thing approaching to mathematical accuracy the damages sustained by the plaintiffs but it seems to me to be clearly laid down there by the learned judges that such an impossibility cannot relieve the wrongdoer of the necessity of paying damages for his breach of contract and that on the other hand the tribunal to estimate them whether jury or judge must under such circumstances do the best it can and its conclusion will not be set aside even if the amount of the verdict is a matter of guesswork.

Another Canadian case Penvidic Contracting Co Ltd v International Nickel Co of Canada Ltd (1975) also provides some guidance on the manner in which disruption should be evaluated where anything like an accurate evaluation is impossible. The dispute arose out of a construction agreement to lay ballast and track for a railroad. The owner was in breach in several respects of its obligation to facilitate the work. The contractor who had agreed to do the work for an ascertained sum per ton of ballast claimed by way of damages the difference between that sum and a larger sum that he would have demanded had he foreseen the adverse conditions caused by the owner’s breach of contract. There was evidence that the larger sum would have been a reasonable estimate. At the hearing damages were awarded on the basis claimed but on appeal to the Court of Appeal this portion of the award was disallowed. On further appeal the Supreme Court of Canada held, restoring the trail judgement, that where proof of the actual additional costs caused by the breach of contract was difficult to properly calculateit was proper to award damages on the estimated basis used at the trial. It was considered that the difficulties of accurate assessment cannot relieve the wrongdoer of the duty of paying damages for breach of contract.

It can readily be seen from these cases that even though accurate records are not available if the claim relates to what would amount to a breach of contract by the other party them in many instances evaluation of the claimants entitlement may be the subject of assessment. It is unlikely however that the amount awarded will be any thing like as high as would be the case if accurate records had been kept.