Delays, disruptions and damages:
A brief overview of construction litigation

By Randy Bonnecaze

A construction project brings together many different parties and involves an intricate sequence of interdependent transactions and events. Any delays or changes can inhibit a contractor from meeting his or her contractual obligations.

Should such a problem arise on your next job, you need to understand the costs you may be able to recover as well as how damages and profit losses are calculated.

Delays affecting job progress. Project slowdowns are common. Excusable delays may result from unforeseeable events (such as severe weather or civil unrest) that are beyond the owner's control. But delays become compensable when an owner's (or other party's) actions or inactions delay your work. Typical compensable delays include:

• Failure to grant you access to the site as scheduled
  

• Holdups caused by negligence or breach of contract
  
• Overdue, incomplete or changed design drawings
  
• Untimely or excessive field inspections
  
• Late delivery of equipment or materials

In preparing for these slowdowns, carefully review your contracts and reject overly broad "no damages for delay" clauses. Doing so is important because, absent these clauses, a compensable delay may entitle you to a time extension and a damage reimbursement. Generally, you may recover one of four cost types for a compensable delay claim:

1. Extra work expenses. To claim costs for extra work, you must first delineate the additional labor's extent. Then you need to prove that previous change orders in the contract didn't include the extra work. Last, you must calculate the added labor, materials and other costs as well as the change's effect on profitability.

2. Extended contract performance costs. If you're using rented equipment and the owner (or another party) delays a project, you're usually entitled to reimbursement of the equipment's rental cost for the additional days. So retain all rental documents for each job, because you'll need these to file a claim.

3. Increased unit prices. To win a delay claim citing increased unit prices, you must prove that the costs you incurred in later job periods had higher unit prices than those that would have existed had no delay occurred. Because most projects call for various skilled trades at a range of different wage levels, labor costs are the most commonly reimbursed unit prices.

4. Project acceleration expenses. Sometimes an owner may accelerate a job while refusing to allow you a proper time extension. In turn, you must revise the job schedule to complete the remaining activities in less time than you would have needed absent the acceleration. When this happens, you may receive compensation for additional costs such as increased manpower and overtime, as long as you can substantiate their occurrence.

Disruption of projects. An owner might disrupt your work force because of late delivery of owner-supplied equipment or materials, excessive field inspections, or delayed site access. In some cases, you may recoup these expenses by filing a claim. The four main ways of calculating disruption damages are:

1. The measured mile method. Here an analyst (typically a CPA or similar professional) compares the disrupted work's cost with the expense of similar work performed without disruption. This method's advantage is that it uses the productivity rates actually achieved on the project in question.

2. The industry standard/personal experience method. In this case, an analyst uses either industry productivity standards or your personal experience from other projects to determine damages. The analyst then must adjust the productivity measure for factors unique to the project at hand. These adjustments are often difficult to quantify, making this method less desirable than the measured mile method.

3. Engineering analysis. Sometimes the analyst may draw on research studies that analyze two similar projects and review the effects of delays and disruptions on one project to a comparable job without interruptions. He or she applies data from these studies to the disrupted job, fine-tuning his or her calculation to account for that project's specifics. Again, the disadvantage is that these subsequent adjustments may not directly correlate with the data taken from the studies.

4. The total cost method. Because it's overly broad, this is generally the least preferable option. With the total cost method, the analyst calculates recoverable damages by subtracting the bid costs plus profit from the total actual costs including profit. To be successful, you must prove that you deserve a recovery and any other calculation method would be impractical.

Damages to profits. In addition to recovering unforeseen costs, you may recoup the lost profits that you would have earned had you completed the project. But, in any claim, you retain the responsibility to act as necessary to overcome the breach of contract's ill effects. For example, if you lose an income-producing asset, such as a bulldozer, you cannot recover lost profits the asset would have produced beyond the reasonable period you should have taken to replace it.

Thus, generally, the amount of earnings you lose because of your own failure to mitigate damages isn't recoverable. But you can typically recover lost profits any time you're unable to complete a project, or a job is inexcusably delayed, because an owner (or other party) breaches the contract. Three main methods of calculating such damages exist:

1. The before-and-after method. Here an analyst compares revenues before the alleged contract breach with revenues after the breach. Assuming your operations before and after the event in question are comparable, you may contend the breach caused any reduced revenues.

2. The yardstick method. In this case, the analyst compares your earnings with those of a similar business, product or other measure. The best yardstick for a closely held construction business is another builder of similar size and specialty in the same area.

3. The "but for" method. This involves projecting your company's operations absent (or "but for") the alleged effects of the other contract party's actions. To determine the amount of lost profits, the analyst compares the profit suggested by the projection with the actual profit you realized.

Protection measures. Please note that laws vary by state. So you should consult your attorney for specifics about your situation.

Editor's Note: Randy J. Bonnecaze is a Certified Public Accountant (CPA) with Hannis T. Bourgeois LLP, Baton Rouge.