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Quantifying Inefficiency: Comparing Comparisons Part II

In Part I of our blog series on “Quantifying Inefficiency: Comparing Comparisons,” we introduced the fundamentals of inefficiency and detailed the most reliable way of analyzing and quantifying the impact that work performed inefficiently can have on a construction project: the measured mile analysis. As discussed in Part I, the measured mile analysis compares the productivity in an unimpacted period of performance and an impacted period of performance of the same operation to quantify the contractor’s inefficiency using the simple formula below:

Formula for calculating inefficiency

However, when an impacted project has no period of performance that can be classified as unimpacted or nearly unimpacted, then there is no reliable and easily identifiable “unimpacted” period of performance on that project to use as the baseline period of productivity. Thus, the version of the measured mile analysis described above that uses the “impacted” and “unimpacted” periods of performance from the same project cannot be used to accurately quantify the contractor’s inefficiency. This is because the formula in this scenario, by relying on the achieved productivity of the same operation on the same project, in most cases will underestimate the contractor’s lost productivity.

Consider the following example. Project A, originally planned to begin in late summer with site excavation work, has its notice-to-proceed (NTP) delayed by circumstances outside the Contractor’s control. The Contractor on Project A doesn’t actually receive its NTP until late December and must

Quantifying Inefficiency: Comparing Comparisons Part I

As discussed in the introductory post to this series on inefficiency, when a contractor’s operation experiences a reduction in productivity the result is usually the expenditure of more labor and/or equipment hours than it originally estimated. These additional labor and/or equipment hours, in turn, can result in significant losses that will negatively affect a contractor’s profitability. Often, the impacts responsible for contractor’s inefficiency were not within its control and, as such, the contractor may be entitled to recover its additional costs resulting from the inefficient operation.

The contractor’s ability to recover its additional costs resulting from the inefficient operation can be determined by the contract. If the contract is silent, then typically the contractor would have to determine who or what was responsible for the impact that caused its operation to be inefficient. Typically, if the impact was a force majeure event, then the contractor may not be able to recover additional costs from the owner. However, if the contractor can demonstrate that the impact and its expenditure of additional labor and/or equipment costs was caused by the owner or could be attributable to the owner, then the contractor should be able to recover its additional costs.

However, in order to determine the extent to which its operation was inefficient and to calculate the additional costs that it may be entitled to recover, it is crucial to understand how to measure inefficiency. Again, to measure inefficiency, we use a simple formula which serves as a comparison of achieved productivities between unimpacted

Understanding Lost Productivity or Inefficiency in Construction

For contractors, profitability is the utmost concern on most, if not all, projects. Whether or not a contractor is profitable, and just how profitable they are, depends on how they perform in comparison to their bid. One of the most significant portions of a contractor’s bid involves the amount of manhours and, if applicable, equipment hours necessary to complete its scope of work for the project.

To estimate the number of manhours and/or equipment hours that are necessary to complete its scope of work, a contractor must first determine the planned rate of production it believes it is able to achieve. This requires the contractor to calculate how many manhours and/or equipment hours that it needs to expend to complete a specific quantity of work. The contractor will then multiply its planned rate of production across the quantity of work in its scope for the particular project, in order to calculate its budgeted manhours and/or equipment hours to complete said scope of work.

For example, a contractor is building a 200’ long, 4’ high CMU retaining wall. Assuming standard 8”x16” block is being used, the contractor knows that they need at least 900 blocks to construct the wall. The project also requires that the wall be built in 3 workdays. Therefore, the contractor knows it must lay at least 300 blocks per day to accomplish the scope within the project time period. Using this information, the contractor knows the project will require two masons each laying 150 blocks per day for the

How to Identify a Concurrent Delay, Part 2

In our previous Concurrent Delay posts, we defined concurrent delays and described how the identification of concurrent delays depended on the definition of the “critical path.” In this second part of our “How to Identify a Concurrent Delay” series, we will discuss the two different concurrent delay theories.

AACE International’s Recommended Practice No. 29R-03, Forensic Schedule Analysis, identifies these two types of concurrent delay theories as literal concurrency and functional concurrency. The basic difference between the two is the “timing” of the alleged delays. Under the literal concurrency theory, for two delays to be considered concurrent, the alleged delays must delay the project’s critical path and the forecast completion date at “the same time.” Said another way, the two delays must occur simultaneously.

Under the functional concurrency theory, the alleged delays must only delay the project’s critical path within the same analysis time period, which is typically between consecutive schedule updates, and are not required to have actually occurred on the same days.

In terms of quantifying the concurrency of two alleged concurrent delays, a literal concurrency adherent would argue that the project schedule enables the parties to identify the initial critical path work activity on a daily basis, thus enabling the parties to likewise identify the days during the schedule update period when the alleged concurrent delays were literally concurrent. A functional concurrency adherent would argue that the project schedule can only identify the initial critical path work activity on the data date of an update. Because of this perceived

How to Identify a Concurrent Delay, Part 1

In previous posts, we discussed why owners and contractors often argue for the existence of concurrent delay and how concurrent delay is defined. This post will be the first of two posts that will tackle how to identify a concurrent delay. As detailed in the previous post, in order for two delays to be concurrent and for one delay to offset one party’s responsibility against another’s, the delays must be concurrently critical. This means that both delays must be capable of delaying the project’s completion date.

As such, the first piece to the puzzle of identifying concurrent delays is related to how the “critical path” or “criticality” is defined. It is generally uncommon for construction contracts to define the term “critical path,” and this lack of a contractual definition means that we’re left to industry standard definitions to fill the void. Arguably, there are two industry standard definitions of the critical path: (1) the longest path, and (2) all activities with total float values of zero or less. However, there’s a clear trend that the longest path definition is the more readily accepted definition of the critical path, as the total float value-based definition can sometimes produce unreliable results.

These two definitions of the critical path also provide drastically different opportunities to make concurrent delay arguments. To compare how these definitions of the critical path result in significant different concurrent delay results, consider the following example:

Assume a project is forecast to finish 60 workdays late. When the critical path is defined as

Concurrent Delay: What Is A Concurrent Delay?

As discussed in the previous posting introducing the concept of concurrent delay, owners and contractors often argue for the existence of concurrent delay on their construction projects.  Sometimes these arguments make sense; sometimes they don’t. Most times there is a lot of money at stake in the form of delay damages.    These delay damages include the contractor’s extended general conditions and unabsorbed home office overhead costs that might result from an owner-caused delay that delayed the project’s completion or an owner’s assessment of liquidated damages that might result from a contractor-caused delay that delayed the project’s completion.

One common mistake is to conclude that concurrent delays need only be “concurrent” to be significant.  In other words, some assume that simply because the other party’s delay happened as the same time as the delay you caused, that the other party’s delay negates yours in some way.  To be truly concurrent, however, and to bar on the recovery of delay damages or the assessment of liquidated damages, the delays have to be more than just concurrent.  Unless the contract provides otherwise (the topic for another post), the delays also have to be critical. 

These days, a well-written construction contract provides clear and complete definition of the critical path.  However, even in this day and age, too many construction contracts do not define the critical path.  One of the many negative consequences of failing to define that term is that it may enable the parties to make questionable concurrent delay arguments.  In essence, it may allow a party to make an argument that a delay that was not critical is

Concurrent Delay Intro.: What Does a Concurrent Delay Argument Look Like and Why Is It Made?

Both contractors and owners often argue for the existence of a concurrent delay to negate the granting of a time extension or payment of delay damages. Concurrent delays are discussed ever more frequently due to the increased cost of construction. It is essential to understand the concept of concurrent delay when evaluating delays on a construction project. Concurrency is relevant, not just to the identification of critical delays, but, more importantly, to the assignment of the party responsible for the critical project delays. This is due to the fact that the assignment of critical project delay responsibility directly determines whether a time extension should or should not be granted to a contractor and whether one of the parties may owe the other delay-related damages.

An owner may cite the existence of a contractor-caused concurrent delay as a reason for issuing a time extension without additional compensation or even as the reason for not issuing a time extension at all. For example, assume the owner issued a change order adding new scope to a project. If that added work delayed the project’s critical path and the project’s completion date, then the contractor is typically entitled to a time extension equal to the delay caused by the additional work, as well as corresponding delay damages. To avoid granting the contractor a time extension or paying the contractor its resultant delay damages, an owner may argue that the contractor also delayed the project and, as a result, the contractor

Delay Damages: What Are Liquidated Damages?

Just as contractors incur and are entitled to recover extended general condition and home office costs due to owner-caused project delays, owners likewise incur and are entitled to recover additional and unanticipated management and carrying costs when the contractor delays the project’s completion date.

The owner’s delay damages are represented as either liquidated damages or its actual damages. The reason that owners include a liquidated damages provision in their contracts is due to the fact that it is difficult or practically impossible for owners to accurately determine their actual damages before the contract is executed. Owners rely on liquidated damages to recover a reasonable estimate of the damages that they will incur if the project is delayed by the contractor.

Typically, liquidated damages are calculated at a daily rate. Similar to both extended field overhead and unabsorbed home office overhead, the owner’s recovery of liquidated damages only results from instances when only the contractor causes a critical delay to the project. Owners should rely on advice from counsel when calculating the appropriate amount of liquidated damages to ensure jurisdictional compliance. However, some of the costs that an owner should consider when preparing an estimate of liquidated damages are as follows:

  • Costs for project inspection
  • Costs for continued design services
  • Costs for the owner’s staff
  • Costs for maintaining current or temporary facilities
  • Costs for additional rentals
  • Costs for additional storage
  • Lost revenues
  • Costs to the public for not having beneficial use of the facility
  • Additional moving expenses
  • Costs for escalation
  • Costs for financing

More importantly, when a project nears the contract completion date and is

Delay Damages: What are Escalation Costs?

In most fixed-price contracts, the contractor is responsible for the risk for fluctuations in its labor, equipment, and material costs between when it estimated the project costs and when it actually completed the work and incurred those costs. However, contractors can incur damages if it had to pay higher costs for its labor, equipment, or material because it performed the work later than it originally planned. This increase is called price or cost escalation.

A classic “escalation” example is when a contractor is forced to pay its tradesmen a higher hourly rate than planned because the owner delayed the performance of its work into a time period covered by a new labor agreement that required the contractor to pay a higher amount for tradesmen’s hourly wages and benefits than planned.

Typically, owners and contractors only think escalation costs can occur when work is performed after the project’s completion date. However, this is not always the case. For example, assume a contractor is constructing a multi-year project and the owner significantly delays the project’s critical path, and the project completion date, during the first year of the project. Let’s assume that, as a result of the owner’s delay in the first year, the project is delayed an entire year such that the work that was planned to occur in year 1 is delayed to year 2, the year 2 work is delayed to year 3, and so on. When this occurs, the contractor may have to pay

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