Given the complexity of contemporary construction projects, delays in the completion date are common. This is attributed to a myriad of factors such as the acquisition of permits, availability of personnel, procurement of materials, deployment of machinery, execution of various activities, and the potential for design changes. The challenge lies in orchestrating these elements during unpredictable circumstances. These conditions have made finishing projects on time and at cost extremely complicated.
The substantial resources demanded by construction projects make delays a source of significant cost overruns. The allocation of these additional costs often becomes a point of conflict between the parties involved, leading to tensions and disputes. Such disputes may manifest in the form of penalties, alterations to the project scope, or the implementation of recovery and acceleration plans.
In situations where the responsibility for a delay lies beyond the contractor’s control, it becomes imperative for the contractor to initiate a claim. This strategic action serves a dual purpose: first, to absolve the contractor from predetermined penalties, and second, to pursue compensation for the additional expenses incurred. There are several types of claims, each designed to address the diverse situations and delay events encountered by the contractor.
1. Prolongation claim
If an agreement is not reached, in projects in which a critical delay has occurred caused by some event or situation beyond the contractor’s control, a claim for extension or prolongation must be made. This specific type of delay claim seeks to secure exemption from penalties and compensation for the increased costs incurred while remaining on-site.
To support such a claim, documentation and evidence must be provided, clearly supporting the causes of delays and associated costs during the project extension. The key to ensuring a favorable court ruling lies in a comprehensive delay analysis, which quantifies and thoroughly explains the experienced delays. This analysis must be supported by project records, progress reports, correspondence between the parties, and any other documents that support the position of the party involved.
It is worth noting that extension claims are subject to the specific terms and conditions outlined in the contractual agreement between the parties. Contractors and subcontractors should carefully review contractual provisions relating to delays, extensions of time and rights of compensation to understand the requirements and procedures necessary to submit a valid extension claim.
In the area of complex construction claims, experts with specialized knowledge of delay analysis, cost estimating, and construction management play a crucial role in impartially quantifying extension costs. Their experience provide credibility to costs claimed in legal disputes. Effectively communicating the methodology, analysis, and conclusions in a clear and concise manner is vital for the successful resolution of such disputes. However, having the best delay analysis equipment is of no use if you do not have records and documentation to support the analysis.
2. Disruption claim
Situations may arise where a Contractor suffers losses as a result of the employer’s actions in areas not critical to the project. These delays would not entitle the contractor to an extension of time, nor would they affect the contractor’s indirect costs but rather his direct costs.
However, as the contractor’s compensation is tied to the work performed, it can be difficult to understand why certain events lead to claimable losses. Disruption claims frequently emerge in international construction arbitrations, often alongside extension claims. Disruption is defined as the disturbance, hindrance, or interruption of a contractor’s regular work methods, resulting in decreased productivity or efficiency. A loss of productivity implies that the work is being carried out less efficiently than initially anticipated in the contract.
To understand this definition, it is essential to correctly interpret the terms “production (output)”, “productivity”, and “efficiency” and their importance in pricing construction contracts.
- Production refers to the amount of work completed, encompassing manufacturing, installation, construction, or design related to the project.
- Productivity, on the other hand, is the amount of work produced within a given time. For instance, if an installer can lay 50 m2 of roofing in one hour, the productivity is 50 m2 per hour.
- Efficiency is a percentage relationship between inputs and outputs. It allows measuring production with respect to the resources (materials, time, energy, machinery…) required to achieve that production.
Construction work is priced based on production, productivity and efficiency. For example, the price of the roof of an industrial facility would be quoted as follows:
Covered installation/m2 = Cost of materials/m2 + equipment/m2 + labor/m2
Material cost corresponds to the price of materials needed to build one square meter, while labor cost is calculated by multiplying the time needed to place one square meter by the hourly rate of that specific labor. Similarly, nonlabor cost is calculated based on the time it takes labor to construct one square meter multiplied by the hourly cost of the equipment.
By assuming a fixed level of productivity, the contractor also presumes a set level of efficiency. Consequently, improved efficiency leads to increased productivity, indicating better performance compared to the fixed rate. On the contrary, if the contractor’s efficiency decreases, his expected performance with respect to the fixed rate will be reduced.
Disturbances affecting productivity can arise from an infinite number of sources, including, but not limited to, excessive changes in work, changes in the sequence of work, site access problems, different site conditions, weather, overtime, rework, workforce morale… It is also possible that productivity is lower than expected because the contractual baseline has foreseen unrealistic productivity.
Example
For example, if a contractor assumes that 30 m2 of curtain wall can be installed per day, with labor costs and machinery/material rentals totaling €15,000, resulting in a cost of €500 per m2. However, due to a disruption (e.g., an uninstalled elevator due to a design fault, necessitating manual material transport up stairs), only 15 m2 can be installed per day, leading to increased direct costs for labor and machinery rental.
Contractors typically price their offerings based on an optimal level of efficiency. Any deviation in the work sequence or a temporary work stoppage tends to decrease efficiency and, consequently, productivity. Through a disruption claim, a contractor aims to recover the additional direct costs incurred due to the loss of productivity. Given that direct costs significantly outweigh indirect costs, good records of the contractor’s activities, regardless of project progress, becomes crucial.
While calculating productivity loss may seem straightforward in principle, the challenge lies in maintaining detailed documentation and records that enables a thorough and demonstrable calculation of productivity loss. Unfortunately, disruption claims are considered only after the opportunity to create those records during the course of the project has passed. Practical difficulties further complicate these claims, such as the need to establish a causal link between alleged disruptive events and claimed losses, as well as the verification of the actual losses suffered.
Accurate and complete documentation is a fundamental element to support the connection between disruptive events and subsequent losses, thus allowing for a robust and convincing foundation during the arbitration process.
To mitigate these challenges, a skilled planning engineer can contribute from the project’s early stages. They can assist in establishing a realistic contractual baseline, analyze timing and sequences, organize data to support a claim, create schedule delay events for later analysis, and perform delay analysis to facilitate friendly agreements.
Difference between disruption and prolongation claims
Frequently, claims for interruption or disruption are mixed with claims for extension arising from delays. It is easy to visualize a scenario where disruptions lead to delays, prompting the need for an acceleration plan to overcome these delays. Paradoxically, this acceleration plan can introduce further disruption, resulting in additional costs for both the contractor and the employer.
It is crucial to discern between prolongation and disruption claims, recognizing that direct and indirect costs are valued and compensated differently. Price and payment for actual work are based on the volume of work performed (production), while indirect costs are primarily based on time.
Disruption claims seek compensation for a decrease in the expected productivity of labor and/or equipment. This efficiency loss contributes to an increase in the direct costs of the project. Furthermore, disruption can originate from both critical and non-critical events.
On the other hand, only critical delays are relevant for extension costs and can give rise to compensation (indirect costs). The contractor’s entitlement to compensation depends on whether the delay event was caused by events that are the contractual responsibility of the employer.
What is required to be successful in a disruption claim?
The SCL Delay and Disruption Protocol broadly outlines that proving disruption involves the application of analytical methods and techniques to establish both the productivity loss resulting from disruptive events and the subsequent financial implications. To succeed in disruption claims, contractors typically need to demonstrate the following key elements:
- Identification of Disruptive Events: Clearly identify the disruptive events that fall outside the contractor’s responsibility.
- Affected Activities Identification: Pinpoint the specific activities impacted by the disruptive event or events.
- Feasibility of Initial Plans: Demonstrate that the anticipated production figures, planned resources, and time required for completing the interrupted activities, as outlined in the tender, were realistic and feasible.
- Efficiency Loss Calculation: Calculate the loss of efficiency incurred due to the identified disruptive event.
- Recorded Hours for Interrupted Operation: Identify the actual number of hours recorded for the interrupted operation.
The purpose of disruption analysis is not limited to simply highlighting disparities between actual occurrences and the contractor’s original plan. Rather, it seeks to establish the real loss of productivity and additional expenses that the contractor would have incurred due to the disruptive events, for which the employer is responsible.
As with delay analysis, maintaining detailed project records is essential for disruption analysis. The burden of proving that the interruption resulted in financial loss falls on the contractor, under most laws. Contractor must not only quantify the claim’s amount, representing the cost of productivity loss but also demonstrate that these costs were genuinely incurred in executing the affected activities. This task, in practice, is not easy to demonstrate, which explains why disruption claims have a higher failure rate.
3. Global claim
Global claims, also referred to as “total cost claims” or “composite claims,” involve contractors submitting claims without attempting to substantiate the cause-and-effect relationship of the events that occurred. This type of claim, despite being favored by project management, is the least indicated, as it lacks an explanation of the causal link between delays or productivity losses and the relevant project events.
Global claims arise from difficulties in proving causation in complex projects with many interrelated events. Consequently, the claimant does not aim to attribute a specific loss or delay to a particular situation or event. Instead, numerous events outside the contractor’s responsibility are generally identified, justifying the project’s delay or increased direct costs.
Only in projects in highly specific circumstances is it advisable to make a global claim:
- Many events have occurred clearly beyond the contractor’s responsibility as stipulated in the contract.
- An accurate or reasonable allocation of the claimed compensation caused by the identified events cannot be made.
In those rare cases where a global claim is justified, the SCL recommends proceeding in two stages:
- Quantify the elements of the claim for which the causal link between the event and the claimed losses can be established on an individual basis.
- Seek compensation for the remaining elements as a collective entity.
By following this approach, the claimant can maintain transparency and credibility, aligning with best practices even in situations where a global claim is deemed necessary.
Summary
Extension or prolongation claim
An extension claim emerges when a project encounters a critical delay beyond the contractor’s control. Delays in completion may stem from various events, such as alterations in the scope of work, changes in project specifications, unforeseen site conditions, or delays attributable to the owner or external factors. Extension requests primarily seek additional time, postponing the application of penalties, and addressing indirect costs incurred due to the prolonged presence on the site.
Interruption or disruption claim
A disruption claim arises when the contractor’s work productivity or efficiency is significantly affected, resulting in increased direct costs. Similar to an extension claim, interruptions can be triggered by a diverse range of factors. Disturbance claims often focus on proving specific impacts on productivity, efficiency and costs incurred by the contractor as a result of the disruptive events. Contractors pursue compensation for the extra expenses incurred because of the disruption.
Global claim
A global claim arises when many events have occurred outside the contractor’s responsibility and the cause and effect of the events that occurred cannot be substantiated.
Global claims focus on the identification of numerous events, providing a reasoned explanation for how these occurrences impacted the project. However, due to its complexity it is impossible to quantify each of them in isolation.