Disruption Non-Claims: Losing Stakes for the Construction Industry

Delay:  Master of Schedule Disruption Claims

According to the US Census, the 2016 US construction was estimated at USD$1.16T. If we also estimate that on average 30% of these projects finished on time, and 70% late by most measures, then we can estimate that USD$815.1B of that work was subject to negotiation of the excess time or disruption, and any costs associated with that excess, including schedule disruption claims. Most of this loss is absorbed by the building industry.

It’s difficult to say exactly how much because there is no single or reliable source for data in an industry that is by its nature quite diverse fragmented, and for that reason schedule disruption claims are difficult to quantify. What’s more the vast majority of delay impacted trades simply don’t maintain the kind of records needed to inform and prepare a delay claim, or to quantify actual losses.

“The term ‘compensable delay’ is an oxymoron; when is the last time you heard of a specialty contractor getting paid for being delayed?

Assessing the drag on industry efficacy of schedule disruption claims points to an inexact process that leads to a sizable black-hole. The burden created by extended general conditions, overhead, equipment leasing, and reduced margins, is primarily and unfairly borne by general contractors, and secondarily their specialty contractors: iron-workers, framers, fitters, electricians, plumbers, tin-knockers, carpenters, masons, etc. It also affects the notorious negative productivity rate of the industry on a global scale.

As productivity rates decline, more projects fail. As more projects fail, risk factors get tweaked, and the increased cost of bonding and insurance is again borne by the industry, as smaller contractors get wiped out, and others try to remain competitive without losing too much skin. In other words, the construction industry is unfairly saddled with risks that were created by other parties – SHs and AEs.

What Cost Disruption?

Although no central repository of data exists, we can make some basic assumptions as to how losses are manifested through schedule disruption claims. It’s not going to be to the nickel, but let’s be open-minded:

General Conditions Bleed: the trades man the site regardless of work being carried out, or the rate at which it is being carried out. There will always be minimum presence of site personnel. On average, contractors include a 10% general conditions fee. But this 10% is merely an estimate. Some work will require a 10% general conditions rate, and others – 5 or 15%, depending on the nature of the work. When a project is in delay, and there is a push to accelerate, contractors will experience higher general condition costs. Accordingly, overhead and insurance are also extended in delay paths. For that reason, general conditions claims almost always accompany schedule disruption claims.

Total 2016 US Construction Spending (estimated US Census)

 $1,164,471,000,000

Assume 30% Turnaround Date Compliance (70% late)

 $1,164,471,000,000 * 70% = $815,129,700,000

Total Subject to Delay

 $815,129,700,000

Assume 10% General Conditions, 5% Overhead, 3% Insurance = 18% to facilitate delay

$815,129,700,00 * .18 = $146,723,346,000

GCs + OH + Ins = $146,723,346,000

$146,723,346,000 – $9,100,000,000 (Toshiba Vogtle loss) = $137,623,346,000

Total Industry Loss ST (-Toshiba) =  $137,623,346,000

Compensable, or Expected Recovery:  $137,623,346,000 * 10% = $13,762,334,600

$137,623,346,000 – $13,762,334,600 = $123,861,011,400

Total Estimated Loss Borne By Building Industry $123,861,011,400

Yet, this sum is does not represent  other criteria, some of it quantifiable, some not:

  • Loss in productivity: labor overage, or taking exponentially longer to do a set scope of work than is customary
  • Zero profit on extended general conditions
  • Revenue loss, inability to put maximum work in place
  • Losing competitive edge
  • Disrupting other resource needs
  • Demoralizing to crews (productivity-kill)

For argument’s sake, let us say that builders operate at 70% efficiency under delayed or disrupted timelines. Therefore, another 30% labor effort is required to produce the same product. Thus, an additional 30% labor component must be derived from, and added to $137,623,346,000. That labor component will vary.

Finally, all things being equal, it should be assumed that each party – SHs, AE, and contractor, share exactly ⅓ culpability for delays. Thus, although each party has a more or less equal share of the blame, the building industry foots the bill for all but 10%.

SHs experience their own losses for delays caused by AEs and/or contractors, such as carrying costs, construction loan interest, and overhead. They will argue that the building industry hits back by inflating costs. They will also complain that they have been underserved by the industry as a factor of poor performance, and many of them seek damages.

Historically, neither general contractors, nor their trades, have been particularly good at sustaining their project control programs during build out. Accordingly, the TIA (Time Impact Analysis), and its corresponding critical path tracking that substantiates compensable delay is their Achilles Heel, which helps us understand why compensable delay claims are so rarely prosecuted. Perhaps the reason they do poorly at tracking delays is because 75% of general contractors use untrained personnel – such as project managers to coordinate schedules. As for specialty contractors, it is the exception that a schedule is being maintained by them at all.

Advantage: SHs

And that’s the way AEs and SHs like it. AEs like it, especially when they are at least partially to blame by their constraining the flow of project information and deliverables to the builders. SH are always surprised to be served with a coherent delay claim, and routinely dismiss most delay claims they see out of hand, compensable, or not.

General contractor’s delay and disruption claims have considerably different ramifications than do their sub-contractors. A GC working directly for SHs has a better chance of being awarded a compensable delay, than he does when a construction manager is in the way.

It is the rare occasion that a GC will present a disruption or delay claim from one of his subcontractors to SHs, for a number of reasons. I suppose some contractors assume or agree to the odious ‘no damage for delay’ clauses public agencies delight in enforcing, and the thought of a sub’s delay claim would never occur to them. The quandary for GCs is that if there is a legit critical path delay, it may affect more than one path and more than one trade working under concurrent delays, any of which may make a claim for demob/remob (mobilization): but the likelihood that they will is extremely small.

After a couple of bad experiences, small specialty contractors come to me to get them out of jams with owners. Typically, they are ‘strung-out’ on a job far longer than they expected, and are losing both face and money. SHs bully them into compression because they can. Invariably, it turns out that it was in fact SH’s decision making delays that caused schedule extension, or disruption, as a consequence of AE errors and omissions, fragmented and untimely deliverables, and these should be compensable. Sometimes they are surprised that schedule disruption claims were even possible.

On a good day, the contractor has meticulous records of all design transactions, notice of delays, for Time Impact Analysis (TIA), and productivity rates for measured-mile analysis as back-up for his schedule disruption claims. But then if they kept such records and incorporated them into the schedule they wouldn’t need me in the first place.

#project_delay #project_disruption #construction_claims

Written by

Derek Graham is a Primavera 6 scheduler and schedule oversight consultant for public and private sector projects with four decades of construction industry experience. He has been an active construction expert witness in over 30 cases - both nationwide, and Federally, since 2006, when his book Managing Residential Construction Projects, was published by McGraw Hill