#66: Labor Inefficiency Costs: Who Pays? How Much?
Among the possible reasons a project might cost more to build than anticipated is diminished labor productivity occasioned by unforeseen space or time constraints. If the available space for construction gets compressed, workers who are confined by a tighter site or other physical obstacles they didn’t count on, or whose anticipated lay-down or staging areas are shifted to a more distant off-site location, will become less productive. If the available time for construction gets compressed, work could be pushed into winter conditions when labor is notoriously less efficient, or acceleration could be required with its attendant overtime expenses and consequent fatigue factors making a man-hour less productive.
Sometimes this unanticipated time/space compression is the owner’s fault, in which case the general contractor/construction manager and its subcontractors will likely be entitled to increased compensation by change order or otherwise — and to a mechanic’s lien if that increase is not paid. Sometimes unanticipated compression is the result of acts of God or of third parties, in which case it is crucial to examine the contract or subcontract to see who has agreed to bear this risk. (Contractual silence on the point usually spells bad news for the party providing the labor. See Town of Bedford v. Brooks, 121 N.H. 262, 266 (1981) (“One who by contract or agreement binds himself to an obligation possible to perform must perform it, and he will not be excused from performance because of unforeseen difficulties.”)).
What if the unanticipated compression is due to poor planning or coordination by the general contractor or construction manager, affecting not only its own bottom line but its subcontractors’ as well? It is difficult to see why the owner should pay extra in such a case or suffer a lien from a subcontractor even if that sub is legitimately owed extra compensation from the GC or CM who caused the inefficiencies. But a recent case suggests that such a lien may be granted if the owner has a cost-plus or “time and materials” arrangement.
In Fraser Engineering Company, Inc. v. IPS-Integrated Project Services, LLC, No. 17-cv-102-JD (D.N.H. March 27, 2018), a subcontractor on a project at the Pease International Tradeport obtained a mechanic’s lien for almost $5 million, two-thirds of which was for labor inefficiencies after being ordered by the construction manager to accelerate and work overtime. The owner argued that it didn’t owe nearly that much to its construction manager and therefore was entitled to invoke the cap on mechanic’s liens described in RSA 447:6, limiting subcontractor liens to “the amount then due or that may become due to the contractor . . .” Because the owner’s cost-plus contract obliged it to pay its CM for “the cost of trade labor including the indirect costs, overhead and profit for all [s]ubcontractors and equipment necessary for construction,” the Court concluded that the owner could well end up owing its CM the entire amount of the subcontractor’s labor inefficiency claim, and let stand the lien amount which included that sum.
But how is that sum calculated? In Fraser, the subcontractor’s arrangement with the CM was fixed price rather than cost-plus except as to change orders and extras. Its $3,324,083.30 “labor inefficiency” number included not only its direct overtime wage expense, but also an uptick for the inefficiency of those manhours due to the fatigue, loss of morale, absenteeism and similar effects of a workforce that was working ten hours a day, seven days a week. The subcontractor relied on studies estimating such productivity losses — “Overtime and Productivity in Electrical Construction” published by the National Electrical Contractors Association being a chief one — but even that study acknowledged that “Obviously, these overtime cost calculations are unnecessary for labor-plus-material type contract situations.” Why simply paying agreed-upon overtime rates for each overtime hour would not fully compensate the subcontractor for all labor inefficiencies is unclear. (And because the case is now in arbitration, it will likely stay that way.)