Preserving and Proving Subcontractor Delay and Disruption Claims

June 2018

 

by Jim Sienicki and Creighton Dixon, Snell & Wilmer

At every step in a project—from contract negotiations to the last day on the job—subcontractors make choices that affect their ability to preserve and prove delay and disruption claims. This article explains the legal requirements for both delay and disruption claims, and steps to consider before, during, and after projects to help preserve those claims.

Helpful Resource

ASA Subcontractor’s Negotiating Tip Sheet on No Damages for Delay (ASA Members Only)

The Law

Delay and disruption claims are two similar, but distinct concepts. As the Bell BCI Co. v. United States court summarized, “Although the two claim types often arise together in the same project, a ‘delay’ claim captures the time and cost of not being able to work, while a ‘disruption’ claim captures the cost of working less efficiently than planned.”

Subcontractors have the burden of proving the same elements for both of these claims: liability, causation, and damages. The subcontractor can usually establish the requisite liability by pointing to:

  • Impacts due to errors and omissions in design documents on design-bid-build projects;
  • Impacts caused by having to perform work out-of-sequence;
  • Delays which push the project into periods of adverse weather conditions; and/or
  • Effect of excessive overtime due to acceleration.

Causation can usually be shown if the events were:

  • Unforeseeable at the time of contract or change order execution;
  • Beyond the subcontractor’s control;
  • Caused by the owner or design professional on a design-bid-build project; and/or
  • Caused by situations for which the owner or general contractor assumed contractual liability (e.g. force majeure or differing site conditions).

The damages element is distinct for the two claims. Proving a delay claim requires showing you were delayed on one of your critical path activities because of someone else’s actions, and how that delay cost you additional dollars in general conditions, standby costs, or otherwise. Typically, to obtain a time extension or additional compensation for extended performance, based on the terms in the subcontract and prime contract, the delay generally must affect overall project completion, meaning, the delay must be critical. This can be tricky as work that is critical for a subcontractor may not be critical for the prime contractor and the whole project. Additionally, recovery may be barred to the extent you were responsible for any concurrent delay, or if either contract has a valid no damages-for-delay clause.

On the other hand, loss of productivity claims are instead concerned with unanticipated increases in the costs incurred to perform any given work activity. In other words, you incurred more labor costs to get the job done because you had to work overtime, you had to use more employees than planned, there was stacking of the trades or other causes making you less efficient. It is irrelevant for loss of productivity claims whether the impacted activities lie on the critical path, although loss of productivity is often a consequence of a prior delay. While it may not necessarily require a precise calculation, proving how you were less productive typically requires utilizing a methodology recognized by the court or arbitrator. Sample methodologies include: actual cost method (if actually tracked during the project), measured mile, similar work comparison, specialty and/or general industry studies, and modified total cost method (some or all of which may require expert testimony).

Steps to Consider

With the elements in mind, you should consider reviewing and understanding the subcontract and prime contract’s terms so you can abide by them. You can start with both contracts’ definition and other pertinent sections. Focus on definitions and terms like: substantial completion/time, date of commencement, scheduling (i.e. critical path method), disruption/lack of productivity, claim provisions for delays (unexcused vs. excused delay) (compensable vs. non-compensable delays), claims and notices of claims, no damages for delay and disruption clauses, and concurrent delays. It may be worth noting if the subcontract and prime contract have conflicting terms, and what you would have to do to comply with both (essentially the more stringent term). Important provisions in the prime contract can include provisions relative to the schedule of work, the prime contractor’s ability to manage and modify its work plan, schedule and sequence and its ability to seek relief from the owner arising out of changes to and impacts upon his work plan and schedule. You may want to look to and comply with the notice and claims provisions because they will almost certainly affect the subcontractor’s claims process, since the prime contract is almost always incorporated by reference into the subcontract. When it comes to the subcontract specifically, you can look at provisions covering the same issues and delay or disruption claims caused by owner or for which owner is responsible, and delay or disruption claims caused by prime contractor or for which prime contractor is responsible.

Because they can govern how your claim will be addressed, and whether you will be able to recover, it is important to understand the prime contract and subcontract’s obligations and terms before bidding or contracting. If possible, consider negotiating around harmful terms and conditions. For example, you may want to know if the subcontract or prime contract has an enforceable “no damages for delay/disruption” clause or if it limits the subcontractor to whatever the prime contractor receives from the owner. This may prevent you from obtaining any money as a result of delays or disruption.

Because the subcontractor typically has the burden of proving how the delay or disruption impacted it, and the amount of its damages, you will want to consider how you document your project. Generally, contemporaneous notes and explanations for deviations from the work plan (including photos/videos) are most persuasive. Likewise, consider separately tracking actual costs directly attributable to the delay or disruption.

The success of a case can come down to good record-keeping. It can help if you use a uniform system of recording field labor and equipment productivity on a contemporaneous basis. Routinely comparing actual labor and equipment productivity to as-bid or as-planned can be another way to catch a problem early on. It may help to prepare and review job cost reports at least monthly. Similarly, consider documenting your time and resources by using cost codes to track hours spent on work outside the original scope or caused by delays or disruptions versus hours spent or anticipated on base contract work.

Potential Traps

Even after work has started, caution may be needed when signing documents. Change orders, payment applications, and related lien waivers and releases often contain broad boilerplate language which may waive, release, or otherwise affect all claims up through the date of the lien waiver or payment, or associated with the change order, whether or not previously presented, or paid. Be careful signing documents with waiver or release language or setting forth the amount you are entitled to through a specific date, unless it is your intent to grant one, or to be bound by such terms.

Cumulative Impact Claims

Beyond the release and waiver concerns associated with signing a change order, subcontractors should beware of—and, if possible reserve their claims arising out of, the cumulative impact. The cumulative impact is the corresponding ripple effect on the base contract and other change order work when a project requires numerous change orders. Cumulative impact problems are likely to follow:

  • Work flow disruption,
  • Out of sequence work,
  • Lack of materials,
  • Same work but different conditions,
  • Base contract work performed in adverse weather conditions, and
  • Significant overtime.

The same principles for delay and disruption claims apply to cumulative impact claims. First, consider reserving rights to the cumulative impact claim, if at all possible. If the change order requests the number of days of delay, you may want to be wary of saying “zero.” The cumulative impact should be considered and accounted for before signing the change order, or reserved in the change order. Second, be ready to demonstrate that the number of changes were excessive, and affected the costs of performing the base contract work, and that there is a link between the excessive change orders and the loss of productivity. This can be difficult, and you probably need an expert to help prove the claim, but a successful cumulative impact claim requires meeting the elements. Practically, this means you may want to document the ripple effect and associated costs of numerous change orders as soon as you identify a possible cumulative impact claim.

Claims for Which the Owner Is Responsible

When any delay or disruption claim arises out of something for which the owner is responsible, the subcontractors should prepare to work with their prime contractor to prove their claims. While the subcontractor’s interests should generally parallel the prime contractor’s interests, the subcontractor’s remedies are likely limited by the prime contractor’s obligations and responsibilities to the owner, and the prime contract. For example, the prime contractor is likely obligated to provide the owner written notice within a certain number of days of knowledge of the facts giving rise to the event for which the claim is made. There is likely a similar requirement to provide written documentation of the claim—though some states may have case law, like Arizona’s New Pueblo Constructors, Inc., that may soften these formal requirements, if the owner knows of the claim and is not prejudiced by the failure to provide timely written notice of the claim. Because the prime contractor is obligated to notify the owner within a certain amount of time, the subcontractor needs to tell the prime contractor even earlier. Likewise, the subcontractor should be aware that its remedies (e.g. time extension or dollars) may be limited by the prime contractor’s contract with the owner.

Getting the Right Help

Finally, subcontractors should consider finding the right help. Consultation with knowledgeable legal counsel and claims consultants early in the process may be helpful in analyzing potential claims. The attorney may want to keep work product and privilege protections in mind when hiring the consultant. The attorney and the consultant can analyze the relevant contracts, original work plan, impacts, costs incurred, and the likely factual and legal defenses.

When you meet, the lawyer may want to see:

  • Signed contracts and work plans;
  • Daily reports addressing labor and other resource utilization, as well as any project conditions that have delayed or impacted performance;
  • Written notices and meeting minutes regarding any delays or impacts; and
  • Proof there was follow-up in a contractually proper and timely manner to present a quantification of time and/or money sought as relief.

Before even filing a claim, a consultant can be helpful for interpreting construction plans, explaining industry usage, and offering a realistic analysis of the performance. This can help negotiate an early and advantageous settlement. If your attorney retains a consultant at the outset, the consultant may help you obtain and preserve important evidence for later use (site inspections, photographs/video, repair/redesign efforts, and damage mitigation efforts).

Preserving delay and disruption claims requires action before the work (understanding the contracts), during the work (record-keeping), and after there is a problem (working with prime contractor/attorney/consultant). Because delay and disruption claims may be difficult to meet, taking the steps before, during, and after may greatly improve your chances to succeed.

Jim Sienicki is a partner at Snell & Wilmer. Sienicki’s practice involves construction contract preparation, construction law representation and litigation, procurement law and bid protests, general commercial litigation, creditors’ rights and other litigation, alternative dispute resolution and appellate matters. He can be reached at (602) 382-6351 or jsinicki@swlaw.com. Creighton Dixon is an associate at Snell & Wilmer. He concentrates his practice in litigation. Dixon can be reached at (602) 382-6408 or cdixon@swlaw.com.

 

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