Let’s talk about how I go about evaluating allegations of inefficiencies on a construction project.
First and foremost, the evaluation of any request for additional compensation is a three-step approach. These three steps are:
Measure the Impact
Quantify the Damages
The entitlement step of an inefficiency or lost productivity analysis starts with the contract. We must ask the question:
Does the contract support the recovery of additional costs that result from the inefficiency?
Before performing any evaluation of the project data, the contractor must demonstrate that the contract affords the contractor the ability to request additional compensation for the alleged change that occurred.
Then, after establishing that the contract provides the contractor with the ability to seek additional compensation for the alleged change, the contractor must then establish that there was, in fact, a direct cause and effect relationship between the alleged change and the alleged inefficiency.
What we find in a lot of instances is that many claims, especially those with inefficiency or lost productivity components, fail to establish this cause and effect relationship between the alleged change and how the alleged change affected or impacted the efficiency of the contractor’s operation.
One thing to remember here is that, while inefficiencies can cause additional costs; the inverse is not true. Just because a contractor’s operation experienced additional costs, that does not mean that the increased costs was caused by the
Now that we’ve talked about and identified some sources of inefficiency, let’s really drill down and gain a clear understanding of what the essentials of productivity and inefficiency are. These two terms are NOT interchangeable.
Let’s start with productivity. What is it? Productivity is the ratio of the work performed to the resources expended to complete that quantity of work. This succinct definition of productivity requires us to further define the phrases “work performed” and “resources expended.” The “work performed” component of the ratio should always be a measurable quantity of work, like 200 cubic yards of concrete or 15,000 linear feet of pipe, that represents the portion of the operation that is being evaluated. The “resources expended” component of the ratio should be the documented effort expended to complete the quantity of “work performed.” It should be described in terms of labor hours or crew hours, or some other relevant measure of resources. An example of productivity would be cubic yards of concrete installed per labor hour.
The quantity of work performed and resources expended are the preferred project information to be used when measuring productivity. All too often, when attempting to demonstrate instances of lost productivity, contractors, owners, and analysts compare planned and actual costs or rely on an operation’s percent completion. Contractors, owners, and analysts should avoid the trap of using cost-related
Let’s talk about the potential sources of inefficiency. There are many. They can include, but are not limited to:
- Extended periods of overtime
- Unanticipated inclement weather
- Revised means or methods instituted to overcome a delay (owner or contractor caused)
- The experience (also called learning) curve of each operation, you don’t always achieve the planned level of productivity on day one
- Equipment breakdowns
- Additional shifts (requiring additional labor and, potentially, additional management and coordination)
- The number, magnitude, and timing of changes
- Labor shortages (the contractor might be unable to obtain the required level of skilled labor)
- Poor management
- Site conditions and site access (differing site conditions or lack of access to the project)
- Increase or decrease in crew size
- Site organization or access (a contractor’s productivity may be reduced because the owner did not provide the contractor with access to the project site as stated in the contract)
- Trade stacking
- Erroneous or ambiguous drawings or specifications
- Out-of-sequence work
As you can see, there are many potential factors that could cause the contractor’s operation to be less efficient.
When we talk about inefficiency, the party responsible could be the owner, the contractor, or a third party. Therefore, understanding the reason for the contractor’s lost productivity and the party responsible determines whether the contractor will be entitled to additional compensation for the inefficient operation.
Mark Nagata is a Director/Shareholder of TRAUNER and is an expert in the areas of critical path method scheduling,
More and more of the construction claims that we review, evaluate, or prepare include a lost productivity or inefficiency component.
What is Inefficiency?
When a contractor alleges that one of its operations is inefficient, it typically means that the contractor did not achieve his or her anticipated level of productivity and, thus, incurred increased costs in the performance of that work item.
Why is a Contractor’s Planned Level of Productivity an Essential Part of its Bid Price?
Well, productivity on construction projects became a concern the instant contractors became interested in making a profit, which is probably right after the shovel was invented.
It really comes down to this. When a contractor submits its bid, its price is based on achieving a particular level of productivity on each of the work packages that comprise the entire project. The contractor’s ability to achieve or exceed that level of productivity has a significant impact on its profit margin/bottom line.
For example, if an item of work is not completed within budget, then one of the reasons for the increased cost could be that the contractor did not achieve its planned level of productivity. This lost productivity or inefficiency is caused by expending more labor or equipment hours than planned to complete the work item. This expenditure of additional hours can lead to real, significant, and unanticipated
The Notice to Proceed clearly marks the start of construction. If nothing else, it determines when the clock starts ticking, counting off the time to the contract completion date. At the other end of the project, however, the demarcation is often not so clear, resembling more haze than light at the end of the tunnel.
The construction start date is easier to determine and more clearly defined because it is measured objectively. On most projects, the contract states that the project start date is the Notice to Proceed date. At the other end of the tunnel, however, most contracts rely upon a subjective evaluation to determine the project’s completion. Couple this subjectivity with the ways of defining completion and the source of the haze becomes apparent.
What Is Substantial Completion?
Usually, completion is defined two ways. The first measure is substantial completion. AIA Document A201 defines this phase as follows:
9.8 SUBSTANTIAL COMPLETION
9.8.1 Substantial Completion is the stage in the progress of Work when the Work or
designated portion thereof is sufficiently complete in accordance with the
Contract Documents so the Owner can occupy or utilize the Work for its
Note the words “sufficiently complete”. On many projects, sufficiently complete cannot be defined objectively. It cannot be measured with a yard stick. It is not usually identified by the completion of a single activity or
In the last Ideas & Insights, we discussed field and home office overhead and gave you some overhead cost examples. I think the next question is, well, how does a contractor bid these costs? How do they include these costs in their contract?
Home office costs are often bid as a percentage. If you were looking at a contractor’s bid, that percentage might be called G & A, “General and Administrative, or G, A, & M, “Administrative and Marketing.” It’s a markup percentage, or maybe a lump sum amount, that is applied to the contractor’s bid price to account for the amount of money that this project needs to generate in terms of revenue to help cover the costs of the home office.
Field office overhead costs are usually bid quite differently. They’re usually estimated, like any cost, and included in the overall price of the project based on that estimated cost. The estimator figures out how may project engineers they’re going to need and how many superintendents they’re going to need and how many non-working foremen they’re going to need. They figure out what their likely salaries are and they multiply by the number of hours or amount of time they’re going to be on the project. That becomes their estimated price for project managers and superintendents and non-working foremen. They do the same for the trailer. They do the same for Porta-Johns. At the end of the day, a contractor has priced, by estimating, what they think field office
Let’s talk a little bit about two types of overhead costs contractors might include in construction claims.
Field Office Overhead Costs
The first is field office overhead. We probably all easily recognize what field office overhead is. They are the costs the contractor incurs to maintain operations in the field, but typically they’re not costs associated with any one item of work.
Good examples of this would be the field office, the trailer, and if the contractor is renting a field trailer or office space specifically for a project. This field office cost isn’t associated with any particular item of work. You can’t attribute it only to concrete work or excavation or even drywall installation.
In order to efficiently manage the work, however, you must have a field office. You need a place to put your project manager and your project engineer and their clerical support. The field office is a common field office overhead cost, or site overhead cost.
Utilities to support that office and the performance of work are other examples. Let’s not forget the project managers themselves, the superintendents, the Porta-Johns, the computers, the paper, and all of the things that we need to maintain an office and presence in the field. None of these things are specifically associated with any particular item of work. Thus,
Hint: It doesn’t involve a Delorean!
You should use the time impact analysis approach I wrote about in the last Ideas & Insights as a technique to measure delays that haven’t occurred yet. You are contemplating a change. You haven’t actually executed the change. The contractor hasn’t performed the change work. You’re just trying to figure out if that change might delay the project. It would be part of the change, or the proposal, or change order request.
What do you do if the project has already been delayed? What if you’re looking in hindsight? Like, for example, say you’ve experienced a weather-related delay in construction like one that Superstorm Sandy may have caused in late October 2012. Use a contemporaneous analysis when evaluating delays that have already occurred.
A contemporaneous analysis is exactly what it sounds like. It’s an evaluation of the contemporaneous project schedules, tracking the critical path from update to update, identifying each and every critical delay, and thus being able to identify how something like Sandy may have affected your project. That’s a contemporaneous analysis.
You don’t analyze delays in a contemporaneous analysis by modifying the schedule. When doing a contemporaneous analysis, you analyze delays by looking at the history of the project and how the project work is unfolding. You’re tracking the critical
Scott Explains Time Impact Analysis in this YouTube video
Time Impact Analysis (TIA) is a common approach to analyzing delays on a project. You develop a fragnet, which is a fragmentary network for the issue (i.e. the change). It’s like a little mini-schedule for the change. You take that fragmentary network, you drop it into contemporaneous schedule, and then look to see how it affects that schedule. That’s the TIA analysis.
If you’re looking at delays prospectively, in other words, before they’ve occurred (you’ve got a change and you’re trying to figure out how this change you’re contemplating would affect the project) a TIA approach is the approach you’d use to evaluate the delay. Use the TIA to identify and measure critical delays that have not yet occurred.
This is the approach you use before the delay has occurred. Unless required by the contract, do not use this method to evaluate delays that have already occurred. Don’t use it to look behind you.
We’re not going to go through the step-by-step of the TIA. That’s beyond the scope of this particular Ideas & Insights. If you’re interested in knowing the steps, just send me an email at <firstname.lastname@example.org>.
One other thing, if you’re looking for a source that describes probably the closest thing that exists to an industry-wide standard with regard to how you would conduct a TIA analysis, I could point to the Recommended Practice for Forensic Schedule
Here’s a question. What do you do if the Construction Manager micromanages the contractor’s schedule and withholds approval so the project proceeds for months without a schedule and, as a consequence, the contractor has their own in-house schedule that is different? Can the contractor use their in-house schedule as a basis for measuring the delay?
The short answer to this question, in my opinion, is yes. Ultimately, the right answer is whichever schedule is best. In other words, if the CM’s position is that the schedule is tragically flawed, and the reason for their rejection of the schedule was this tragic flaw, and because of this flaw the schedule is not an accurate representation of the contractor’s plan for completing the work, the CM has a point.
I often say, at least to my staff, use the contemporaneous project schedules to measure delay, but don’t hold tight to those schedules and jump off a cliff with them. The point I’m trying to make is that nobody believes the right way to measure a delay is to use a schedule that is truly, deeply flawed.
I think if the contractor has developed a workable, reasonable, sensible schedule that truly and honestly sets forth the contractor’s plan for executing the project, the contractor keeps that schedule updated, and