(You may be interested in our previous series on inefficiency, with three separate articles on “Quantifying Inefficiency: Comparing Comparisons.” While it is not necessary to read these all in order of publication, those other three posts provide some context for some of the terms discussed here. You can find links to those first three blog posts HERE.)

In our previous articles about quantifying inefficiency on construction projects, we focused on measuring inefficiency by comparing productivity ratios. The difference among the previous three methods was the source of the baseline productivity value used in the calculation. The baseline productivity value used in the previous calculation methods were: 1) the achieved productivity on the same project; 2) the achieved productivity from a different, but similar project; and 3) the planned productivity from the contractor’s bid.

However, often in construction projects, depending on the work being performed, the circumstances in which the work is performed, or the documentation maintained, it may be impractical or even impossible to track productivities such that a measured mile analysis, which compares the work performed over the resources expended, can be performed. So, in these situations, in lieu of using the measured mile analysis, a fourth approach can be utilized.

This fourth approach is a method that combines elements of both an earned value analysis and a measured mile analysis. It utilizes the contractor’s actual revenue earned for a construction project and calculates the contractor’s inefficiency by comparing its revenue in a manner similar to a measured mile approach. Instead of comparing the quantity of work performed to the labor required to complete that work, this method compares the revenue earned for a specific scope of work completed to the actual labor required to complete that same scope of work. For example, instead of utilizing cubic yards of soil excavated to quantify the quantity of work performed, this approach uses the revenue earned for the excavation of the soil. Instead of linear feet of pipe installed, this approach would use the revenue earned by the contractor to install that amount of pipe. When utilizing this approach, the dollar amount earned for a particular scope of work is a proxy for the quantity of work in a particular work scope for the purposes of analyzing lost efficiency on construction projects when it is impractical or impossible to measure work performed.

As you may recall from previous articles, productivity is the ratio of work performed by resources expended to complete that amount of work. Typically, productivity is represented as a quantity of work performed divided by some form of labor, such as crew hours, or individual labor hours. By dividing the revenue earned in completing a particular scope of work by the actual labor hours expended to complete that scope, we can create a proxy ratio to represent the productivity of a contractor on a specific scope. This same analysis can then be performed on another, similar scope of work. We can then use those ratios in exactly the same way as the measured mile analysis.

As discussed in previous posts on quantifying inefficiency, the measured mile approach uses a simple formula. This formula is unimpacted productivity minus impacted productivity, all divided by unimpacted productivity. That formula then gives us a percentage, or “inefficiency factor,” for our analysis. In this hybrid approach, we utilize the same formula, but instead we compare two separate ratios of revenue earned for labor by the actual labor hours expended to earn that revenue on two similarly situated scopes of work.

Inefficiency Figure

Labor Only Example

It may be helpful to look at an example to illustrate this analysis approach. Let’s consider a residential building that has five total floors. For a simple example, let’s assume that each of these five floors is nearly identical. An electrical subcontractor is performing the rough-in electrical work on each of the five floors of the residential building. Given the similarities from floor to floor, the work scope and complexity of electrical rough-in work on each floor is nearly identical. As expected, the electrical contractor will rough-in the electrical work following the completion of framing. In this example, note that the electrical contractor’s schedule of values is split between labor and materials/equipment on a floor-by-floor basis. The electrical contractor’s schedule of values identifies $100,000 per floor for labor only.

In this example, the framing contractor completes the first floor when it was expected to and on schedule such that the electrical subcontractor can also begin on schedule and without impact. This progress continues on the second floor as well. To complete these two floors, the electrical contractor expended 2,000 labor hours. Thus, the electrical contractor earned $100/labor hour ([2 floors × $100,000 per floor] ÷ 2,000 labor hours = $100/labor hour).

However, starting with the third floor and continuing through the fifth floor, the framing subcontractor worked slowly and sporadically, and did not complete framing work as scheduled, causing delays and disruption to successor trades, including the electrical subcontractor and its rough-in work. As a result, the electrical contractor expended 4,000 labor hours to complete these three impacted floors, earning $75/labor hour ([3 floors × $100,000 per floor] ÷ 4,000 labor hours = $75/labor hour).

Thus, we have a clear comparison of unimpacted work on the first two floors to impacted work on the third, fourth, and fifth floors. However, because of the way the electrical subcontractor tracks its work on the project, it is unable to clearly identify specific quantities of work performed for purposes of a typical measured mile analysis. Therefore, using the earned revenue and the labor hours expended to earn that revenue, this hybrid earned value/measured mile approach identifies a lost productivity of 25% during the impacted period ([$100/labor hour − $75/labor hour] ÷ $100/labor hour = 25% inefficiency).

Non-Labor Only Example

While the above example relies on a contractor separately tracking earned revenue for labor only, that is often not the case for many contractors and their schedule of values on project. Often, each schedule of values line item includes not just labor, but also equipment and materials. In these instances, the same analysis can be performed, but it must be guarded against skewed results from imbalances in the comparison that may be attributable to the inclusion of equipment and materials in the earned revenues amounts used.

For example, let’s use our same project, but this time the electrical contractor has not isolated labor revenue in its schedule of values, but instead its schedule of values is simply broken down by floor and is inclusive of labor, materials, and equipment. In this scenario, the electrical contractor’s schedule of values identifies $200,000 per floor, which again includes all costs. Because each floor is nearly identical, differences in material or equipment costs between floors would be de minimis. Therefore, in this circumstance, it would still be appropriate to perform the same hybrid analysis as we did earlier. Using this hybrid approach, the electrical contractor earned $200/labor hour ([2 floors × $200,000 per floor] ÷ 2,000 labor hours = $100/ labor hour) for floors 1 and 2 but only earned $150/labor hour ([3 floors × $200,000 per floor] ÷ 4,000 labor hours = $75/labor hour). Just like the previous labor-only example, the analysis identifies a 25% inefficiency factor due to the impacts on floors 3 through 5 ([$200/labor hour − $150/labor hour] ÷ $200/labor hour = 25% inefficiency). As expected, because of the similarities in the scope from floor to floor, which resulted in equal material and equipment amounts between the floors, the inclusion of the material and equipment costs in the schedule of values did not change our result when compared to the labor-only analysis above.

Considerations

As with any productivity analysis, the analyst must account for certain variables, issues, and considerations to ensure the veracity, reliability, and accuracy of this hybrid inefficiency methodology. One issue that should be considered is the composition of the earned revenue amounts used in the analysis. If, for example, the amounts include revenue for non-labor items, such as materials or equipment, the results of the analysis may be affected if those non-labor items are imbalanced between the comparison ratios. However, if the revenue includes only labor, if scope of work is the same or similar, or if equipment and material quantities are consistent between the unimpacted and impacted periods, then the analyst may be able to satisfy any concerns. Other considerations include the veracity of the payment applications, the quantity and quality of documentation related to the labor hours identified, and any scheduling information or other contemporaneous project documents that are relied upon. Regardless of the issue, a key goal of the analysis should be to guard against the earned revenue amounts not being a suitable proxy for the actual work performed.

Summary

Ultimately, if the documentation and earned revenue are validated sufficiently by the analyst, this hybrid approach of using earned revenue in a measured mile methodology provides for a more reliable analysis than many other inefficiency quantification analyses. This analysis approach represents an effective and efficient way for an analyst to quantify inefficiency experienced by a contractor on projects in which the manner that the contractor tracked its completed work prevents the analyst from pursuing a measured mile approach. This earned value/measured mile hybrid approach provides an “apples-to-apples” comparison, much like the measured mile analysis, to allow for a direct identification of the effect that it impact experienced on a project has on a contractor.

Bill Haydt is a Principal of TRAUNER. His expertise lies in the areas of construction claims preparation and evaluation, development and review of critical path method (CPM) schedules, delay analysis, training, and dispute resolution. He directs and performs all types of analyses, from schedule delay analyses to inefficiency analyses and the calculation of damages.

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