How Do Courts Measure Damages Related to Project Disruption?October 16, 2017 – Articles New Jersey Law Journal
All of us have experienced disruption in our lives but we call it by another name. Let's meet Sally, who walks from her office to the Port Authority every day in 20 minutes. Any longer and she misses her bus. On the Monday and Tuesday of Thanksgiving week, Sally cannot walk at her usual brisk pace because the streets are packed with pedestrians who are meandering down 42nd Street at a snail's pace (slow work or starting/stopping and waiting) or stopping to talk to everyone they know (poor coordination and overcrowding). Sally misses her bus on both Monday and Tuesday. She has experienced disruption. On Wednesday, she leaves work agitated because she does not want to miss the bus for a third day in a row. Sally jumps in a cab at her building and 15 minutes and $20 later she arrives at the terminal. She has not missed the bus, she is not delayed—but it cost her an extra $20 to get there on time. Sally experienced disruption on Wednesday as well.
Sally is a feisty person, and fed up with the holiday season. Of course, she cannot sue New York City for her disruption, but what if she could? How would she go about framing a claim, and what methodologies would courts in New Jersey and the United States view most favorably in assessing such claims? Let's find out.
Unlike Sally, whose claim is based upon the cost of getting home on time due to disruption, construction contractors run into similar disruptions on their projects—which may give rise to a viable cause of action. Like Sally, we want to know how to quantify the loss of productivity, and which methodology is likely to be more positively accepted if we were to bring a claim.
Disruption occurs in some but not all construction projects. In those projects where disruption occurs, it is sometimes hidden to the casual observer and, thus, goes unnoticed. On the other hand, disruption should not be confused with delay—there need not be any extension of the project schedule. Disruption—as distinct from delay—is a disturbance, hindrance or interruption to a contractor's normal working methods, which results in lower efficiency. Delay & Disruption Protocol, 2nd Edition, January 2017. A reduction in productivity, if otherwise unrecovered, reduces profit.
Measuring Disruption, Generally
Disruption manifests itself in many ways. Disruptions include intermittent work, congestion, extended working hours, poor quality supervision, lack of communication, overcrowding or engineering errors/poor drawings or one or more of the factors indicated in the figure below. A project may finish on time but experience a reduction in anticipated labor and equipment productivity. Then, the loss of efficiency will be measured in reduced production of units of work for a given number of hours expended. We quantify disruption—the loss of productivity—by measuring the difference between the planned rate of production or completion and the actual, disrupted rate of production.
Disruption or the resulting loss of productivity may also be analyzed by rate of resource input required to achieve a specific performance output; or output for a given input. Some examples of construction labor productivity are: pounds of duct work per hours; labor hours per electrical circuit installation; cubic meters per crew per day; cubic yards of cut and fill per hour; cubic yards of excavation per shift; labor hours per linear foot of pipe installed; labor hours per square foot to set and strip formwork; square yard per man-hour of subbase; labor hours expended per housing unit; and acres of planting per day.
The following are common causes of a loss in labor productivity: crowding/trade stacking; overmanning and undermanning; manpower changes; multiple shifts; learning curve; absenteeism; fatigue; poor morale/lack of motivation; inexperienced personnel; inadequate labor pool; skill dilution; rework; labor turnover; acceleration; out-of-sequence work; suspended work; shift work; extended overtime; schedule compression; simultaneous operations; beneficial or joint occupancy; dilution of supervision; inadequate supervision; lack of coordination; underbidding; or labor relations issues.
Still other factors may reduce productivity, such as numerous changes, defective plans and specifications, slow response on requests for information (RFIs) or supply related factors—performing field work planned for the shop, late material deliveries, insufficient equipment, and shortage in materials, tools and equipment. Other site condition factors reducing productivity include unusually severe weather, lack of protection from elements, limited site access, work restrictions and site conditions.
Proof of Disruption
In order to prevail on a claim for disruption, the claimant must establish liability, causation and damages, and bears the burden of demonstrating these items beyond a preponderance of the evidence. A difficult hurdle for disruption claims is often proving causation—that the alleged act of one party resulted in disruption or lost productivity in the other. Contractors, who usually have a detailed and precise plan for the work, readily assume that changes or other events must disrupt the smooth flow of the planned effort. In a dispute, no such presumption of causation exists. Appeal of Bechtel Nat., N.A.S.A.B.C.A. No. 1186-7, 90-1 B.C.A. (CCH) ¶ 22549 (N.A.S.A.B.C.A. 1989). Many contractors have difficulty showing that adverse productivity could not or should not have been anticipated at the time of bid, due to project conditions that would have undoubtedly resulted in some measure of unproductive work. (See City of Perth Amboy v. Interstate Industrial Corp. (App. Div. May 17, 2017); Dobson v. Rutgers, 157 N.J. Super. 357 (Law Div. 1978)
There are six approaches to analyze and quantify the impact of disruption: i) Measured Mile; ii) Earned Value; iii) Modified Total Cost; iv) Total Cost; v) Productivity Factors; and vi) Visual Observation/Judgment.
A complete review of these approaches is well beyond the limited space here. For an in-depth and rigorous of these methods, seeW. Stephen Dale and Robert M. D'Onofrio, Construction Schedule Delays (Thomson Reuters 2016). Instead, we will provide a cursory review of each method as well as the overall view of courts and boards in the United State and New Jersey, based upon a 65-year study of cases in which one or more of these approaches was discussed and either accepted or rejected.
Should one use several methodologies to prove one's case? That depends. The use of multiple, consistent and confirming methods may be used to support the reasonableness of the primary method. However, if the methods used are highly subjective (such as application of productivity factors and use of a modified total cost), the value of using multiple methods is, at best, unhelpful. Alternative methods that result in different results may undermine the expert's original opinion. Further, the failure to adopt a particular approach may weaken the fact finder's view of the expert's methodology.
The Measured Mile approach compares a good period of efficiency with a bad period. During the good period, actual labor productivity of performing work is not impacted (or minimally impacted) action causing labor inefficiency. During the bad period, actual productivity rate for performing work is impacted by labor inefficiency.
Use of Measured Mile eliminates the need to prove accuracy of bid or reasonableness of contractor's plan. It is the only disruption method that touches on causation. Courts prefer the Measured Mile methodology. In fact, claimants must justify failure to use Measured Mile when quantifying loss of productivity. It is important to make impacted and unimpacted periods as similar as possible; the more comparable the project conditions during the two periods, the more persuasive is the analysis. Courts have looked askance at the Measured Mile analysis when the credibility of the expert is at issue or the analysis failed to compare equivalent work or compared work of different contractors.
The Earned Value analysis compares planned performance with actual performance over a specific period of time, to planned-versus-actual performance in a different period of time. The identification of both periods is similar to selection of Measured Mile periods, and also dependent upon an accurate bid. Earned Value is typically expressed as expected revenue to be generated per labor hour expended, compared to actual revenue generated by actual labor expended, or the percent complete per specific project line item(s) compared to labor per specific line item(s) over same period. The Earned Value analysis should use similar quantities and work tasks, and exclude change orders from hours and progress percent complete.
Modified Total Cost
This analysis is a variation of the total cost method, but less restrictive; it contemplates allowances by claimant to account for its own inefficiencies. By subtracting planned costs of performance from actual costs incurred, the modified total cost method takes a party's total cost as a starting point, rather than an end, and reduces damages from there. The validity of the modified total cost method depends upon the reasonableness of the bid and of actual costs and the contractor's selection of responsible portion of added costs. (See AMEC Civil v. DMJM Harris (D.N.J. June 30, 2009); BSC-C & C-JV v. Louis Berger Group (D.N.J. July 15, 2014)
To prevail using a modified total cost analysis, the claimant must satisfy the four requirements of a total cost claim—with adjustments made for impacts that are the responsibility of claimant:
- Impracticability of proving actual losses directly;
- Reasonableness of its bid;
- Reasonableness of its actual costs; and
- The subtraction of claimant responsibility for added costs for which it is responsible.
To be sure, the Modified Total Cost method encounters resistance from courts and boards in the United States. Due to some subjectivity over acknowledgment of a contractor's own responsibility for added costs, it may not be accepted where the claimant cannot show the impracticability of proving actual costs directly, such as by failure to keep adequate records or failure to show that a better method such as a Measured Mile could have been used.
The total cost method, the least accepted method for proving loss of productivity, is only used when no other more precise method of proof for loss of productivity is available; when only owner-caused impacts affected contactor performance; and when there is no evidence that the contractor contributed to the cost increases. The entire cost overrun is attributed to alleged delay—without directly linking damages claimed to specific impacting events. Further, there is no proof of causation.
- To prevail using this method, the claimant must satisfy the following four requirements:
- Impracticability of proving actual losses directly;
- Reasonableness of its bid;
- Reasonableness of its actual costs; and
- The lack of claimant responsibility for the added costs.
This method utilizes anticipated factors of efficiency associated with different potential causes—published by industry and academic studies or publications. This method is used when no actual costs exist and both parties must be content with forecasts of future events as rough estimates of productivity loss. Keep in mind that studies and formulas relied upon by experts must be shown to be relevant and applicable to the project, and specific evidence of the applicability of underlying assumptions must be presented.
This method involves use of an estimate for inefficiency based upon the visual observation of an expert or project participant as well as past experience with work of that type and a review of project records.
This method relies on the judgment of the individual who observed the work or reviewed the project record and weighs the impacts of changes on progress of the work. It has been accepted primarily when there is no alternative analysis. In most cases, where project personnel—rather than an expert—present the visual observation or judgment, the method has not been accepted.
The View of the Courts
The chart at the top of this article evaluates 138 U.S. court and board cases (from 1951 to 2015) utilizing a disruption method, and identifies whether each method used was accepted or not accepted in the case. SeeW. Stephen Dale and Robert M. D'Onofrio, Construction Schedule Delays (Thomson Reuters 2016).
A claim for disruption is not likely to prevail if the presentation of damages is not precise. Courts are willing to accept some degree of approximation, related to the facts and equities of the case, when responsibility for damage is clear. The case law indicates that a claimant should provide a reasonable basis for computation, and not engage in mere speculation, guess or conjecture. Further, Measured Mile is the favored approach, and the use of an expert—a credible one—is essential. Claimants should use an alternative method if it supports the Measured Mile approach or if the measure mile approach cannot be used. A substitute Measured Mile approach, such as earned value, is also accepted at a rate slightly less than Measured Mile. Acceptance of most other methods is similarly low (about 20 percent). Regardless of method acceptability, the method has to be performed accurately and must be applicable and relevant to the facts of the specific case.•
Reprinted with permission from the October 16 issue of the New Jersey Law Journal. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.