When a project is delayed, contractors are often exposed to increased costs that were not anticipated at the time of bid. Higher fuel and energy costs are some of these unanticipated increased costs, and they can have a significant impact on whether a contractor is profitable on a project or not. With energy prices soaring and analysts forecasting no relief any time soon, now more than ever, contractors need to be aware of the impact these costs can have and how to recover for those increases when a project is delayed. This article discusses the impact that rising fuel and energy costs may have on a contractor as a result of project delays, what is required to establish entitlement to recover those unanticipated costs, and what documentation is generally required to substantiate a request for higher fuel and energy costs.

The Impact of Project Delays on Fuel and Energy Costs

When a contractor is required to perform on a project longer than it originally anticipated, it may be exposed to increased time-related costs. These costs can include costs associated with operating equipment, providing temporary facilities, running generators, or fueling vehicles during a time period in which increased fuel and energy prices are much higher than was contemplated in the contractor’s bid. This type of delay-related damage is often referred to as “escalation” costs, and these escalation costs can have a significant impact on a contractor’s bottom line. Importantly, these increased costs are not from a change in the contractor’s means or methods, but simply from the fact that it was forced to perform its work later than it originally anticipated and at a time when those costs are more expensive.

Fuel and Energy Effects on the Cost of Materials

While rising fuel and energy costs have a direct impact on a contractor’s profitability, they can also indirectly increase the cost of construction materials. Many materials like steel, concrete, and asphalt are energy intensive to manufacture, transport, and deliver. When a contractor experiences a delay that forces it to procure or fabricate materials in a period of higher energy costs, not only is the contractor paying for its own fuel and energy costs, but also for the escalated fuel and energy costs of its vendors and suppliers. While these energy-caused material escalation costs may feel more attenuated than the contractor’s own fuel purchases, they are still a direct result of the work being performed at a later, more expensive time. These increases are not speculative; they are a direct result of the project being delayed into a more expensive pricing environment.

How to Recover Energy-Related Escalation Costs

However, just because a contractor experiences increases in its costs associated with rising fuel and energy prices does not automatically entitle them to recover for those costs. Before anything else, contractors seeking to recover for escalated fuel and energy costs should consult their contract. Often, contracts contain specifications related to the recovery of delay-related costs. It is incumbent on a contractor to know what their contract requires in order to recover these costs. However, generally speaking, if a contract is silent, then a contractor will only be able to recover for damages associated with fuel escalation if it can establish that there was: 1) an excusable and compensable delay that 2) pushed the contractor’s work into a period that it did not anticipate working in, and that 3) escalated costs were experienced during that period. Thus, entitlement hinges on demonstrating that the delay increased the overall project duration, not merely that costs increased during the job. Because only delays to the critical path can delay a project, this means that a contractor must establish that a critical path delay occurred for which the contractor was not responsible (an excusable delay). Additionally, the contractor must also establish that the critical path delay experienced is either defined as a compensable delay under the contract or, if the contract is silent, that the owner was responsible for the delay. This demonstration usually requires a forensic analysis of the CPM project schedules, and assistance in producing a persuasive and analytically correct analysis may be required.

The Critical Role of Documentation

Finally, it cannot be stressed enough that documentation is essential to any contractor’s hopes to recover its delay-related damages. While the contract or industry-accepted practices may allow for the recovery of these costs, and a schedule analysis may determine that an excusable and compensable delay occurred, without adequate documentation substantiating that an increase in fuel, energy, and material costs occurred, a contractor’s claim for these damages may fail. The best demonstration of these costs is through contemporaneous records substantiating what the contractor anticipated paying for fuel, energy, and material in its bid, and what it actually paid for those items. This documentation includes bid information, material quotes, project schedules, cost records, invoices, receipts, and other evidence showing what costs would have been absent from the delay. The most compelling cost escalation claims are supported not only by the contract and project schedules, but through thorough documentation and substantiation of the costs incurred.

Conclusion

When project delays extend the performance period for a contractor, it may often be exposed to cost impacts related to rising fuel and energy prices, including the impact of those commodities on critical project materials. This cost impact is all the more significant during times of volatility in the energy sector, like we are experiencing now. Thus, it is vital for contractors to understand not only the impact that these rising prices can have on their profitability, but also how to recover for those costs. Without a comprehensive understanding of how fuel and energy prices can lead to increased costs, how contracts or industry-accepted practices allow for the recovery of those costs, or how to appropriately document the existence of these increased costs, even well-founded escalation claims are unlikely to succeed.

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