Basing a Claim on the Total Cost Approach is Likely Throwing Good Money After Bad
Construction projects never go completely as planned. Construction managers, general contractors, subcontractors and suppliers all realize that changes in the work may be required for any number of reasons. For example, an area of the site may not become available due to the lack of an easement; there may be poor communication and/or coordination between trades; plans and/or specifications may contain certain deficiencies; critical shipments may be delayed; or, as allowed by most construction contracts, the owner simply may make design changes after the commencement of the work. One or more of the foregoing situations arises on almost every project. As a result, it is expected that construction schedules will be periodically updated during a project to address where the actual performance of the work was not completed in accordance with the original schedule.
Schedule revisions are so commonplace that some specifications require construction schedules to be updated on a monthly basis with two or three-week “look aheads” provided in between schedule revisions. The goal is not to complete the work in accordance with some original plan that Nostradamus would not be able to accurately create. The goal is to complete the work by the completion date no matter what problems arise.
Most of the time, schedule revisions do not result in claims being submitted. Occasionally, however, a construction manager, general contractor, or subcontractor will believed that there was sufficient interference with its work that it is entitled to additional time, additional compensation, or both. The problem is how to properly quantify such claims.
Construction projects are not often completely shut down. A carpenter that was scheduled to install rough framing on one floor may switch to another because the owner is considering last-minute layout changes; a site contractor that encounters unsuitable material while installing drainage in one location may switch to installing a water main located elsewhere on the property; or a concrete contractor may continue forming and prepare for a much larger pour because its supplier had a production issue on a day that a pour had been scheduled. Most contractors view such problems a normal part of a job. There are occasions, however, where a contractor believes that its work has been interfered with to the point where there must be adjustments made to its contract.
A complete work stoppage is not required for a contractor to incur additional costs. When a contractor is repeatedly hindered in its planned activities to the point where its work is no longer profitable, it is likely to submit a claim for additional compensation. In the situation where, as described here, the resulting delays do not completely shut down the work, the contractor bringing the claim asserts that it is entitled to damages for acceleration and/or its lost productivity.
The simplest way for a contractor to quantify its damages for an acceleration and/or lost productivity claim is to state that any costs in excess of its original bid amount are the owner’s responsibility (or, in the case of a claim being brought by a subcontractor, the general contractor’s responsibility). Said formulation is known as the Total Cost Approach and requires a claimant “to show (1) the impracticability of providing actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs.” Elec. Contrs. Inc. v. Pike Co., 2015 U.S. Dist. LEXIS 70092, *99-100 (U.S. Dist. May 29, 2015). However, the most recent decision in this jurisdiction evidences the problems based by quantifying a claim in this matter.
In Elec. Contrs. Inc., an electrical subcontractor on a school construction project was instructed to provide additional labor after if fell behind schedule. Id. at *58-59. Although the court did not find the general contractor liable, it still explained (unnecessarily) why the electrical subcontractor failed to adequately prove its damages.
The decision’s damages analysis states that the Total Cost Approach is “disfavored … but it is not prohibited as a method of calculating damages, and in fact can be relied upon under factual circumstances in which a plaintiff sufficiently supports its claim with proof of a connection between a contractor’s wrongs and the resulting damages to a subcontractor.” Id. at *97. The difficulty that reasoning creates is that, if the claimant could sufficiently connect its damages to the alleged wrongful behavior, then it could submit a claim for direct damages and would not need to rely on the Total Cost Approach.
Another indication that prevailing in a claim based upon the Total Cost Approach is the court’s analysis of the subcontractor’s original bid. The court noted that the subcontractor’s actual hours for the unaffected phases of the project also did not match the hours it had estimated in its bid. Id. at *89. Thus, the court deemed the subcontractor’s bid suspect but that is not the standard that is supposed to be applied. The question is whether the bid was reasonable.
If the requirement becomes that a contractor (or subcontractor) must demonstrate its ability to routinely predict almost exactly how many labor hours a project will take to complete, practitioners should abandon the Total Cost Approach now. Humor is only funny when there is a little truth in it and, as the old joke goes, a bid is a wild guess carried to two decimal places. No one can predict exactly how many labor hours any project will take to complete. However, with enough experience, an estimator can come up with a number that may be the low bid and still allow the work to be completed for a profit. The question is not (and should not be) whether the bid is exactly right. The inquiry should be whether the bid was reasonable, which is an entirely different question.
Lost productivity claims are the most complicated issues to address in construction law. If you need assistance with such a situation, please give me a call.