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IMPACT AND
ACCELERATION: THE HIDDEN CHANGE ORDER COST
Introduction:
When things go
wrong, they go very wrong. That’s not just a pessimistic outlook: on a
construction site, it is a fact of life and the reason is simple: work
between the trades and within a particular trade are interrelated and a
ripple in your own job schedule causes a ripple throughout the entire
construction project affecting trades you might not even know are on the
project in ways that might not be obvious to the novice in construction.
All of us are aware
of the “Critical Path Programs” by which builders determine what trades
come and go when, when materials are delivered, how the trades interact
and, above all, when the owner may assume passing of inspections, use of
the structure, and paying off the lender. Anyone who has seen such a
program will quickly note that an alteration in one trade’s path
directly affects all the trades sooner or later.
And what that means
to anyone on a job site is that as good as you may be in doing your
portion of the work, someone else’s error or bad luck can quickly make
your own task not only delayed, but much harder and much more costly.
Assuming you are an electrical contractor, your task is often subject to
the plumbing contractor finishing their trenching. If you do dry wall,
you are dependent on almost every other trade completing, etc, etc. As
one client put it, “I have fifty other people making decisions on every
job site that will decide if I make or lose money on the job.”
Does that make every
job a complete gamble in which you have to hope that everyone does a
decent job and has good luck or you face economic loss?
Not if you
understand, account for, and contract for such possibilities in your
construction documents. Not if you do your job in creating a contract
that takes into account the effect of delays on the project, alterations
in the Critical Path Program, and IMPACT AND ACCELERATION and how they
affect your profitability.
The reader should
first review several other useful articles related to this field on our
web site. The articles on
Mechanics Liens and Stop Notices,
Arbitration,
Contracts
and, finally,
Change Orders
should all be read before proceeding below.
This article shall
outline some of the basic issues each professional and owner on a
construction project must consider in assessing the appropriate contract
documents to fairly handle the common event of delays, whether
intentional or not, on the project. No matter how good you are at your
particular craft, if you do not create the right contract documents, you
face significant loss on every project absent close adherence to some
basic approaches described below.
1. Scheduling
on the Job Site
A chef once told the
author that the secret of making a good breakfast is timing. “You have
to have the bacon begun before the eggs, but all coming out the same
time along with hot toast and butter. Mess that up, and you have cold
eggs, burnt toast and rubbery bacon. You get fired.”
Timing is how
general contractors earn their living. Their “meal” is a construction
project with often two dozen trades, an architect, engineer, lender and
owner all looking over their shoulder, with such matters as weather,
illness, unions and material suppliers all having a hand in the schedule
created.
It is thus no wonder
that volumes of books and dozens of computer programs have been created
to allow them to create flexible and effective critical path and related
programs to develop appropriate methods to handle the common problem of
delays and changes in the job path. Such methods include Bar Charts,
Critical Path Programs, “LJ” Methods, Precedence Diagramming Methods,
Progress Curves, Production Curves, and a host of other concepts and
plans.
From the
professional and legal point of view the issue comes down to whether
the effects of delay will be compensated and adjusted for or will
certain persons on the site have to “stomach” the results without
compensation. That usually comes down to two factors: whether such
effects are truly recognized and understood by the people on the site;
and what contract terms and the law requires if such effects are
recognized.
What do we mean by
“recognized?” Many changes do NOT have much effect on the job.
Installing conduit in one building or another first often does not
require much more than asking your workers to set up a hundred feet from
where they were planning in any event. Altering the order of
installation often makes no difference to certain trades at certain
times.
But other delays can
be catastrophic. A trade which must finish before you can start suddenly
files bankruptcy and is delayed for three months; another trade failed
to order materials and you cannot put on dry wall since no conduit is in
the wall; the engineer fails to provide accurate or timely plans and
thus the specifications have to be altered mid way through installation:
the variations are endless and the impact can be significant for the job
and the various contractors.
And then the typical
argument begins. Owner and General argue that the change is “neutral” in
terms of economic loss and that it is a simple and unimportant
alteration in minor scheduling. The subcontractors or material men argue
that it is catastrophic, will triple their cost to do the job and
disrupts their schedule not only on the project but on the next three
projects they are contracted to perform, etc, etc.
Unless you have
contracted such relief away (and at times, even if you did) it is
possible, especially in arbitration, to get fair compensation for the
effects of delay and alterations in the schedule not caused by your own
negligence. Ideally, the scope of such additional compensation will be
spelt out in detail in the contract. If not, equitable principals may
apply with “fair and appropriate” compensation being awarded.
2. Impact and
Acceleration
The two theories of
impact and acceleration simply describe two of the effects of
changes of scheduling on a job site. Impact describes how the
change can cause damage due to alterations in labor costs, equipment
costs, material costs, bonding costs, subcontractor costs, overhead
costs and effect on other projects. (For example, the need to use
overtime to make up for delays; the need to extend a bond or hold
materials and store same, etc. etc.) Acceleration relates to the
lost productivity one encounters when one is forced to utilize overtime
and shuffle workers in and out in a desperate effort to finish a job on
time when others have caused a delay in the start or a cessation in
work.
Many studies have
scientifically analyzed the effect of longer hours, stress and overtime
on productivity of personnel. There are precise graphs indicating how
the per hour out put of an individual worker declines as overtime is
increased and when one is facing overtime of weeks or more, the
productivity can decline to truly significant levels. Additionally,
errors on the job, accidents, and relationship between management and
employees can be strained due to the long term effect of continued
increased hours.
The damages are far
from illusory and even the increased rate for overtime seldom fully
compensates management and employees for the overall effect of the need
to increase performance. The writer well remembers one client who lost
his best foreman due to the pressure of one seemingly endless period of
overtime since the heated exchanges of that over charged atmosphere led
to recriminations and ill feeling that made further working together
nearly impossible. The owner of the company sadly commented that no
increased compensation could have made him whole after that horrendous
disruption.
Other companies
almost thrive on the high pressure atmosphere of a job that has been
accelerated in time performance due to events on the site-so long as
they are adequately compensated for it, of course. Indeed, some
companies bid government jobs precisely because they anticipate massive
change orders which will form the bulk of their profits from the
project.
As discussed in the
appropriate section below, the key is to both anticipate and provide
appropriate fair compensation that takes into account not only the
increased hours needed for the change order or other alteration in
performance required, but the long term effect of impact and
acceleration
Most direct costs
are easy to quantify. Increased bonding costs, material man penalties or
shipping cost increases, etc, etc. can usually be verified. It is the
indirect costs…the increase in absenteeism, lack of productivity,
disruption of other jobs, that is harder to demonstrate especially when
one seeks to place a monetary amount on the damages caused. For example,
in order to complete an accelerated job on time, one client assigned his
best people to a particular job, performed as required and earned good
extra compensation for the task. However, the other projects his company
was working on all suffered and he later advised the writer that a
subsequent piece of litigation for breach of warranty of good
workmanship on another project stemmed directly from his assignment of
his best people to a different job. How does one factor that element of
cost into one’s project or claim for damages?
In short, the
effects of acceleration are not only immediate in resulting lost of
productivity and quality of work, but long term in the effects on other
projects, labor and management relationships, reputation in the field,
etc.
4. Contractual
and Other Protections
As discussed in
other articles on this site (See
Change Orders)
alterations on jobs are common in the industry and most construction
agreements have long provisions relating to how change orders are to be
handled. Most such clauses are designed to give some protection to the
parties and to allow some type of additional compensation to the builder
who faces change orders that increase duties on the project. (As stated
in the other article, the builder would do well to carefully read the
standard provisions which are often one sided and designed NOT to
provide true compensation for such alterations: proper attention to
correct clauses is needed by all parties.)
Many contracts and,
indeed, many owners do not fully account for the true impact and
acceleration effects on the job site, assuming that some increase in
overtime or general compensation on the project will suffice. What they
fail to understand is the proven cumulative effect of increased
requirements of performance and speed of performance in terms of lost
productivity.
Typical contractual
change order risk shifting provisions involve granting the owner the
right to suspend work for limited periods of time; allow shifts in
scheduling; provide no damages for delay and provide no damages for
alterations beyond the control of the owner. Very few contractual
provisions allow compensation for impact and acceleration.
Luckily, in
California and many other states, the law implies duties in all
contracts, including construction agreements, and such relief as
mechanics liens and stop notice claims, which are equitable, can allow
arguments for damages which allow such types of claims.
The implied duties
include:
a. Duty
not to hinder, delay or interfere with contractor’s performance.
b. Duty
to cooperate
c. Duty
to act in good faith and to demonstrate fair dealing;
d. Duty
to provide Site Access
e. Duty
to Review Submittals in a timely manner.
Especially in such a
forum as arbitration, with construction professionals often acting as
triers of fact, equitable principles can overcome even contrary
contractual protections and this writer has seen arbitrators impose the
general California law of allowing impact and acceleration damages even
when the contract seemed to mitigate against such damages.
It is vital to have
a good contract with fair provisions, but relief may be available if a
good case of equitable entitlement to relief can be demonstrated.
Typically, if the owner acted in a manner to make efficient running of
your part of the project possible, and this caused significant delay and
impact, one can normally seek relief.
5. Burdens of
Proof
Whether or not based
on contract, the person claiming damages has the burden of proof to
establish the amount and rationale for the damages. See our article on
Contracts. This necessarily
includes damages predicated on impact and acceleration. Essentially, the
claimant must demonstrate that the need for increased performance was
not predicated on factors created by the claimant’s own negligence or
breach of contract or by factors beyond the control of the owner or
general contractor.
Typical factors that
are beyond the control of the owner include “Acts of God” which
are usually defined by the Courts or arbitrators as disasters such as
earthquakes, fire, weather, tsunamis, etc. Acts of terrorism, labor
strikes beyond the control of owner, governmental acts, etc. are also
considered beyond the control of the other party. Often the trier of
fact will grant extra days for the claimant to perform if such acts
occur, but not grant damages against the other party who, after all, did
not breach the contract.
If seeking
compensation, the claimant has the continuing duty to demonstrate by a
preponderance of the evidence that the other party caused the events
which constituted the need for acceleration and impacted performance and
that said causes were either negligent, violated the implied duties, or
were a breach of contract. Then the claimant must also demonstrate the
actual damages incurred, often using experts with the various graphs and
studies to demonstrate the extent of the acceleration damages.
Clearly adequate and
complete record keeping is vital for any party in any such proceeding,
demonstrating with as much precision as possible the extent of the
disruption and the degree of extra costs incurred. Legal advice is vital
to determine what damages may lie: for instance, certain indirect costs
such as set overhead (Home Office overhead) is often rejected for the
simple reason that such overhead was not impacted by the alleged breach.
A good law office can specify in detail what damages may apply in a
particular situation.
And recall that the
owner or general contractor may have powerful counter arguments to
advance and usually do not have the burden of proof. Assuming the
claimant’s own delay contributed to the overall delay of the entire job,
the trier of fact will be faced with the need to allocate responsibility
and, if in doubt, will find against the claimant who, after all, has the
burden of proof.
6. Types of
Inefficiency Damages
It is clear from the
above analysis that a good deal of the damages sought in such cases
involved the increased inefficiency caused to the claimant by the
various alterations in the project. It is necessary for the claimant to
demonstrate that not only does such inefficiency occur frequently when
acceleration of a project occurs but that it actually occurred in the
particular case. This necessarily requires attention (and proof) that
some combination of the following factors caused measurable loss on the
job. This list is far from exhaustive: it merely gives a sample of the
types of damages that may be proven and some combination of these must
be proven or no damages will lie.
1. Out
of Sequence Work
2.
Crowding and Stacking of Trades Causing Disruption.
3.
Overtime was required with the resultant increase in cost and decrease
in efficiency of the worker
4.
Restricted Site Access may have occurred not only on the site but in
public transport to the site due to timing of work
5.
Inefficiency may also have been caused by manpower shortages, e.g. there
simply were not sufficient people to do the work efficiently regardless
of the offer of over time.
6.
Disruption of office planning and material deliveries; extra costs for
materials
7. Need
to provide additional security on the job site for both materials and
personnel
8. Need
to compensate in some manner other customers due to delay and disruption
to their needs.
Proof of the above
damages is normally accomplished by expert witnesses who have made
studies of quantification of the results of impact and acceleration and
whose testimony is usually found convincing by triers of fact. However,
to make their testimony credible requires accurate and complete records
being kept by the claimant, and effective cross examination of such
witnesses will usually focus on whether the claimant can sufficiently
demonstrate cause and effect and the actual results of the changes on
the job.
7. The Contract
Terms
As discussed in
other articles on this Web Site, the typical construction contract seeks
to limit or waive such claims by complex change order requirements or,
more simply, blanket waivers of any right to these damages. These
provisions must be carefully considered before executing the contracts
and if the contract is already executed, carefully analyzed to determine
if the equitable principles available in most construction disputes and
arbitration can surmount the limitations inherent.
Quite often one
discovers that the trier of fact will find some way to “do what is right
and fair” and one encounters the odd fact that some clauses, which are
so extreme as to be absolutely unfair, so annoy the arbitrator that they
are simply ignored. Our office has found that balanced and fair
provisions have a far better chance of being effective and enforceable
than the almost vicious provisions so beloved of attorneys who have
never had to actually try such a case. Fairness, not unadorned power, is
the hall mark of a good construction agreement but the person signing a
contract or seeking to enforce it must be aware that some courts do
enforce strict waiver provisions and it is vital to have good legal
counsel review the contract before assuming its obligations. If you have
already signed such a contract and face repercussions much more extreme
than you first imagined, do not immediately assume there is no relief.
Keep in mind that equitable considerations may allow relief and such
relief may include the impact and acceleration damages described above.
Conclusion:
It is true that one
of the skills in becoming a construction professional is learning to
juggle the numerous and varied elements in a construction project and
“roll with the punches” that occur in even the best construction
project.
Nevertheless, the
simple fact is that the effect of someone’s breach of their obligations
and the resultant change order is not the simple immediate increased
direct costs on the job but more subtle but still important medium and
long terms costs. It is vital for anyone in construction to recognize
that simple fact, integrate it into construction documents and
contracts, and plan for the same when a job must be speeded up…to finish
on time. |
