Are You Losing Idle/Standby Equipment and Labor Costs?
As discussed in previous “Your Critical Path Blog” postings, contractors are only able to recover their extended field office overhead and extended/unabsorbed home office overhead costs as a result of a critical project delay that extends the project’s duration. However, there are other delay-related costs that are not dependent on the existence of a critical project delay.
A contractor’s idle or standby equipment and labor costs, often incurred during a suspension, are an example of delay-related costs. When an owner suspends a project, or a portion of a project, the contractor can incur idle equipment and labor costs. The contractor’s ability to recover its idle equipment and labor costs is dictated by its construction contract, the magnitude and type of the suspension, and the parties’ actions.
For example, if an owner suspends the entire project for a specific time period, the owner may request that the contractor keep specific equipment on site to enable the contractor to resume work immediately after the suspension order is rescinded. In this situation, the contractor would be entitled to recover not only its extended field and home office costs, but also its idle or standby equipment costs. Additionally, the contractor may also be entitled to recover its idle labor costs, if the owner requested that the contractor maintain onsite tradesmen waiting for direction to restart the work.
However, when an owner suspends only a portion of a project, which does not result in a delay to the project’s critical path or the project’s completion date, the contractor may still be entitled to recover its idle equipment and labor costs if they were incurred because of the owner-directed suspension. Just because the project wasn’t delayed doesn’t mean the contractor wasn’t damaged by an owner-directed suspension.
It should be obvious that the owner-directed suspension must be due to an owner-caused issue, not the result of a contractor issue or deficiency.
In some instances, when a project or a portion of a project is suspended, the owner may direct the contractor to demobilize equipment. When this occurs, the owner is responsible for the contractor’s costs to demobilize and remobilize the equipment back to the project site. Also note that when an owner directs a contractor to demobilize equipment to avoid idle or standby equipment costs, the owner runs the risk of the equipment not being available immediately after the suspension is rescinded.
When requesting compensation for idle or standby equipment and labor, contractors must demonstrate that its equipment and labor were actually on the site and unable to perform any work due to an owner direction. Additionally, the contractor should substantiate its request for idle equipment and labor costs, with supporting project documentation, such as a stop-work or suspension order, and relevant project daily reports. If the owner did not issue a stop-work order or a direction to suspend the work, then the contractor needs to provide documentation that demonstrates how and to what extent its specific operation was effectively suspended by a lack of information, access, or direction from the owner.
If the owner does not retain its own set of project daily reports, the owner may be at a significant disadvantage if it elects to challenge the contractor’s request. For this reason, both the owner and the contractor should diligently maintain daily documentation of labor and equipment on the project site.
In response to a contractor’s request for its idle equipment and labor costs, the owner should question why the contractor was unable or unwilling to shift those workers to other tasks, other projects, or lay them off. Additionally, the owner should reference contract-specific language that specifically establishes the circumstances when the contractor is entitled to be reimbursed for suspension-related costs.
The calculation of idle labor costs is typically based on the contractor’s actual cost documentation for the suspended period. Idle equipment is usually not priced at its full operating cost, and contracts often provide guidance on how to price idle equipment costs.
For more on this or any other topic, please call me at 215-814-6400 or email me at mark.nagata@traunerconsulting.com.
