Various methods calculating damages in construction claims

I am posting various methods of calculating damages in the UK and US, which is part of preparing the dissertation for MSc Construction Law and Dispute Resolution at KCL

Summary

There are three essentials to plead in any construction case: (1) duty; (2) breach; and (3) damage. Proper linkage should be made, without the proper connection among them, a claim will fail. Too often calculating and proving damages are overlooked(normally focus among practitioners is on entitlement) and the entitlement of the claim are sabotaged. Some consideration should be made when calculating and proving damages. These include: (a) contractual requirements (b) legal requirement of causation (b) contractual mechanism (c) common law principle of measuring damages, and (d) cost accounting records (e) complexity and size of the project and associated claim

There are two categories of the calculation method for on-site overheads claim, which suggested by Dr Champion, one is a value-based method and the other is a cost-based method.

Value-based methods include (1) agreement of adjustment (2) Use of pre-determined formula (3) pro-rata (4) Average amount per week of the overheads in the contract price. The value-based mechanism should have the contractual agreement. Otherwise, the cost-based method preferred in the courts in the US and UK. This can be rationalised by the general principle of damages for breach of contract.

(It is submitted) Cost-based method as to on-site overhead claims can be categorised into three: (1) total cost method or modified total cost method including Daily overhead rate-based method (2) disruption analysis including (a) measured mile, (b) EVM, (c) programme analysis, (c) A/B estimate, (d) industry studies (e) nominal sums, etc (3) quantum meruit.

Total cost method is problematic regarding causation in the context of a global claim. This method is highly unlikely to be allowed in the courts save for the exceptional circumstances, for example, the project was entirely suspended.

Disruption analysis is suited for (1) when causation is but-for or apportionment in concurrency situation; (2) when there is an only partial delay; (3) calculation of the impact of variations and (4) calculation of the cumulative impact of variation. The disadvantages are cost and difficulty, which requires (1) CPM programme (2) resource plan (3) cost accounting (4) detailed record as to cost or resources. (it is submitted) The US is leading this field, and disruption analysis is replacing delay analysis, and the UK seems to join this exercise recently.

The detailed elaboration of calculation is not the scope of the paper. The below will focus on (1) application of various methods and (2) the court’s view (including commentator’s view) on the various methodologies in the UK and US.

Method of calculating claims

“In order to develop an effective construction claim, it is essential that the claimant establish not only liability but also damages.”[1]

Wilmot-smith[2] emphasis on the importance of connection among three essential elements:

“There are three essentials to plead in any construction case: (1) duty; (2) breach; and (3) damage. But overarching all three is linkage between them. Pleading all three is normally no problem in the theoretical sense. But without the linkage between them a claim will fail.”

Kelleher[3] emphasised on the importance of principle of damages:

“The issue in construction disputes that generally receives the most attention is liability. But the issue of damages (or cost flowing form the events giving rise to liability) is no less important. Too often calculating and proving damages takes a back seat, with little precision or scrutiny applied until late in the dispute resolution process. That approach can result in an entirely misguided claim effort, missed opportunities for settlement, and loss at trail or in arbitration. The inability to prove damages with a reasonable degree of certainty may prevent the claimant from recovering the full amount, or even a substantial portion, of the damages to which it may be entitled.”

Considerations

Some consideration should be made when calculating and proving damages. These include: (a) contractual mechanism (b) legal requirement of causation in fact (b) contractual mechanism (c) common law principle of measuring damages, and (d) Cost accounting records (e) complexity and size of project and claim

(a) Contractual mechanism

Claim under the contract and breach of contract should be distinguished. Under the JCT and FIDIC, the valuation of variation and the loss and expense operate separately. NEC utilises the Defined Cost under compensation events which does not deal with loss and expense and variation discretely.

 (b) legal requirement of causation in fact

“In order to prove damages, the claimant must establish a causal link between the event that gave rise to the claim and the increase in project costs. The claimant can use a number of pricing methodologies to establish that causal link.”[4]

The basic principle as to causation in relation to breach of contract is ‘but-for’ test or burden of proof in the UK. Causation in fact is the most critical issue, linking liability(cause) to damages(effect). Amongst others, (a) global approach, (b) apportionment, (c) burden of proof needs to be examined with availability of records and contractual and legal requirements.

(c) common law principle of measuring damages

Bailey stated that: “Aside from contractual prescription, where a contractor is delayed as a consequence of an owner’s breach of contract, and the contractor suffers resultant loss or damage, the general rules concerning the measure of damages, including the principles of causation, remoteness and mitigation, all come into play.”[5]

Wilmot states: “The position in English law is that the normal rules of contract law apply to construction contracts in relation to damages which are recoverable for breach of contract”.[6]

The general rules of damages are described in Hudson and Keating and Bailey.

Hudson[7] states:

An award of damages is compensatory. Once a party has established an entitlement to be compensated for a loss, the question arises as to the basis on which that loss is to be calculated or measured. This assessment involves identification of the correct measure of damages in any particular case.  Which of these “measures” or approaches to the assessment of the loss is the correct one to adopt will depend on a number of factors, which are considered below. The starting point in any consideration of the measure of damages is the well-known principle formulated in the nineteenth century which has been consistently adopted, not only in the Commonwealth but also in the US:

“The rule of common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”[8]

In regard to tort, the principle was similarly formulated by Lord Blackburn in 1880, when describing the measure of damage in tort as:

“… that sum of money which will put the party who has been injured … in the same position as he would have been if he had not sustained the wrong for which he is now getting his compensation.”[9]

Keating[10] States:

A breach of contract which has not been excused gives the injured party the right to bring an action for damages. If the injured party merely proves the breach, but no loss, it is entitled to nominal damages, e.g. ￡1 or less.4 If it proves actual loss, it is awarded substantial damages as compensation.

Damages are awarded to put the claimant as nearly as possible:

“…in the same position as he would have been in if he had not sustained the wrong for which he is now getting compensation or reparation.”[11]

Accordingly, the approach to assessing damages for breach of contract, where the wrong is a failure to perform an enforceable promise, differs from that in tort, where the wrong is damage caused by a breach of duty.

“Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with regard to damages, as if the contract had been performed.”[12]

In tort the measure is the loss caused by the wrong and a greater sum is sometimes recoverable.”

Bailey[13] states:

“(i) Introduction

13.09 Contractual damages may be characterised in a number of ways, depending upon the type of loss that the claimant has suffered as a consequence of another’s breach of contract. Two categories of damages are considered below. The first is expectation damages, and the second is reliance damages.

(ii) Expectation Damages

13.10 Expectation damages are damages representing the economic benefit that a claimant would have or could have expected to derive had the defendant performed the contract and not breached it. Under a construction or engineering contract, the contractor’s expectation is that the owner will permit the contractor to perform all of the contract works, and that it will be duly paid by the owner for performing that work. This means that where, say, the owner repudiates the contract, and the contractor accepts the repudiation and thereby terminates the contract, the contractor will be entitled to receive as expectation damages an amount calculated according to what it would have been paid by the owner had the contract been fully performed. In other words, the contractor’s expectation is to be paid the contract price. However, given that the objective of an award of damages is to put the innocent party in the position it would have been in had the contract been performed, account must be taken, in calculating the contractor’s recoverable damages, of the amount the contractor would have expended in earning the amount it would have been paid for performance of the works.18 A contractor’s net financial expectation would therefore be to finish up with a sum in its pocket equal to the contract price less the cost of completing the works. It is this amount that the contractor is entitled to recover; that is, its loss of profit (or perhaps the amount of a loss it otherwise would have avoided), as opposed to a straight loss of revenue.

(iii) Reliance damages

13.11 Reliance damages refers to expenditure or cost actually incurred by a party in the performance of its contractual obligations. Reliance damages may include the expenditure of one party which becomes wasted due to the other party’s breach of contract. Such damages may be recovered in circumstances where there is no loss of profit suffered by the innocent party due to the guilty party’s breach of contract, provided that the expenditure would have been recovered by the innocent party under the contract had it been performed and not broken.”

Core clause 20 of SCL protocol[14] states

“… The objective it put the Contractor in the same financial position it would have been if the Employer Risk Event had not occurred.”

(It is submitted) Hudson and Keating state that the expectation loss will apply to a breach of contract and reliance loss will apply to a breach of duty in tort. Hudson and Keating refer to Robinson v Harman (1848) in case of a breach of contract and Livingstone v Rawyards Coal Co (1879–80) regarding a breach of tortious duty. Hudson further submitted that these principles as to expectation loss and reliance loss apply to the US. Bailey suggests that reliance damages can apply to a breach of contract. This view is supported by SCL protocol. Reliance loss is retrospective focusing on cost actually incurred and expectation loss is prospective approach to estimate the contractor’s financial position when the contract is dully performed. FIDIC and JCT seems to adopt the reliance damages.

FIDIC 1.1.4.3 “Cost” means all expenditure reasonably incurred (…) by the Contractor, (…) Cl.20.1 The Contractor shall keep such contemporary records as may be necessary to substantiate any claim. (…) the Engineer may, after receiving any notice under this Sub-Clause, monitor the record-keeping and/or instruct the Contractor to keep further contemporary records (…) The Contractor shall permit the Engineer to inspect all these records, and shall (if instructed) submit copies to the Engineer.

JCT 4.20.1 If in the execution of this Contract the Contractor incurs or is likely to incur any direct loss and/or expense (…) He shall, subject to clause 4.20.2 and compliance with the provisions of clause 4.21 be entitled to reimbursement of that loss and/or expense.[15](…)such information as is reasonably necessary to enable the Architect/Contract Administrator or Quantity Surveyor to ascertain the loss and/or expense incurred. 4.21.3 The Contractor shall (…) update the assessment and information at monthly intervals until all information reasonably necessary to allow ascertainment of the total amount of such loss and expense has been supplied. 4.21.4 The Architect/Contract Administrator or Quantity Surveyor shall notify the Contractor of the ascertained amount of the loss and/or expense incurred.

(d) Cost accounting records

The importance of cost accounting is growing in the US and UK. Many contracts in international construction projects requires cost accounting for project management purpose. The FIDIC and JCT also implicitly requires the cost accounting for loss and expense claim.

Kelleher[16] states:

“The availability of proper cost accounting techniques when the claim is identified can substantially reduce the problem of calculating and proving damages. In fact, utilizing such techniques consistently may even help in the early identification of a potential claim if the actual recorded costs vary from the anticipated costs. Accounting measures can be established to segregate and carefully maintain separate records. If such a procedure is followed, proof of damages may be reduced to little more than the presentation of evidence of separate accounts.”

MCDONALD and HILDEBRANT analysed the US case law relating change order accounting: “Change order accounting refers to the accounting procedures that a contractor uses to segregate its costs to perform the work identified in a particular change order from the other costs it incurs to perform the contract. (…) Change order accounting benefits both the contractor and the government. For the contractor, change order accounting reduces the costs the contractor would incur to substantiate its change order claim by contemporaneously documenting the contractor’s increased costs. For the government, insisting on change order accounting requires the contractor to use its actual costs, rather than estimates of suspect reliability” (…) Case law indicates that if the clause is in the contract and the CO requires change order accounting, the contractor will be required to support its claim with actual costs

 (…) Case law shows that a contractor who fails to comply with the clause regarding a particular change may forfeit its claimed price adjustment for lack of proof. For example, in Phoenix Control Systems, Inc.[17], the contractor’s $400,000 claim for differing site conditions (conditions the government agreed existed) was denied in significant part because the contractor failed to account for the actual costs incurred as a result of the changed condition, as required by the contract.”[18]

(e) complexity and size of project and claim

A contractor cannot be likely to keep an army of quantity surveyors on site to measure disruption and the costs and resources devoted to proving disruption in some small-sized projects. On the other hands, mega projects frequently require resource loaded CPM technique, management of variation order accounting, contractually. If the contract requires those management, failing to do so will diminish the credibility of the claims.

Price/value

It has been long debate whether the value-based method and cost-based method should be adopted for the prolongation claims?[19] Dr Champion[20] made a distinction between value-based method and cost-based method.

Agreement to the effect that no adjustment to the price

Agreement to the effect that no adjustment to the price should be made in the event either of specific delays events or of any delays.[21]

Use of pre-determined formula (LD)

Use of pre-determined formula, whereby the amount payable to the contractor for delays caused by defined circumstances is an agreed sum per day or week A formula approach, conceptually, is unsound because the extent of loss arising from a cause may differ significantly depending upon the stage of progress of the works, number of subcontractors involved at the time etc. A delayed start to the project may involve negligible cost; a delay mid-project, however, may directly affect a multitude of subcontractors and works across the entire site. Notwithstanding this, provisions for payments at agreed rates- a liquidated amount that the contractor proposes within his tender- can be found in some standard forms; See, for example, clause 10.7(Delay Costs) of Ireland's Public Works Contract for Building Works designed by the Employer[22]

Addition for overheads, calculated as a percentage of the value of additional work carried out

If additional work is required, the contractor might be paid at cost for those additional works with an additional percentage allowance for site overheads, etc. This approach, taken alone, provides no adjustment to the price where the delay is caused by matters other than additional work. Notwithstanding this, reimbursement of amounts for overheads on a percentage basis is evident in some forms. Under the NEC3/ECC form, for example, the assessed value of compensation includes, as part of the calculation, a percentage uplift on staff and other costs to cover overheads and a further percentage uplift, referred to as the Fee, which is deemed to include all off-site overheads.[23]

In the case of variations, in principle, if the contract prices are themselves likely to include overheads and profit, price-based variation valuation clauses should require reasonable (site) overheads and profit to be included in any cost adjustment or “fair valuation provision.[24] this issue was considered in Weldon Plant v Commission for the New Towns[25] and Judge Humphrey Lloyd QC considered the “fair valuation” provision in Cl.52 of the ICE conditions stating

“a fair valuation should include an element on account of profit,… (site-overhead) will only be recovered if there is proof that they were in fact incurred or increased as they will be or will have been recovered from valuations of the work executed, … it would not be fair if the valuation did not include an element on account of such contribution (from head office).” [words in brackets added for ease of reference]

In the J D Wetherspoon plc v. The Commissioners for Her Majesty’s Revenues & Customs[26] decision allowed a pro-rata recovery of preliminaries (and overheads) where they could properly be attributed to measured items of work.

It is worth to note that in Weldon Plant the judge declined a pro-rata recovery of off-site overheads. It was said that

“(…) there was no principle that a contractor can always recover a percentage up-lift in relation to a head office and off-site overheads on varied work.”

JCT SBC/Q 2016 cl. 5.6.3.3. provides the ground for the recovery of on-site overheads stating “allowance, where appropriate, shall be made for any addition to or reduction of preliminary items”. JCT DB 2016 cl.5.4.4 also stipulates “Any valuation of work under clauses 5.4.2 and 5.4.3 shall include allowance for any necessary addition to reduction of the provision of site administration, site facilities and temporary works.”

Average amount per week of the overheads in the contract price (BOQ)

“Valuation of additional site running costs based on the average amount per week of the overheads in the contract price (also known as ‘Preliminaries’) for each qualifying week of delay. The term 'Preliminaries' refers to the section of a bills of quantities or tender price build-up reserved for indirect costs such as site overheads, profit and head office costs. The amounts in the Preliminaries section of the Bills are part of the contract price. Calculation of site running costs based on the prices for preliminaries provides a convenient shortcut to assessment of additional costs likely to have been incurred by the contractor as a result of the delays. This traditionally was the approach adopted by quantity surveyors to calculation of prolongation costs on modest claims, understood as a rule-of-thumb approach despite the contract's provisions requiring a more detailed cost-based assessment. On the other hand, there is a risk that the amount paid per week may bear little relation to, and may exceed by a considerable margin, the contractor’s additional costs incurred arising from those delays. Going the other way, the preliminaries- based calculation might be said implicitly to contain no allowance for subcontractor's delay costs or other specific losses of the types listed above.”[27]

Dr champion states: “It is now well-established that valuation of site overheads based on a weekly average of the preliminaries (discussed in xx) is unlikely to be accepted by a court where a valuation based on actual cost is required such as JCT, FIDIC forms.” [emphasis added]. In the context of the general principle of damages, it is wrong to use preliminary unless there is contractual agreement.

Keating[28] states: “Claims for increased preliminaries are frequently made and for convenience allowed upon a calculation which uses amounts in the contract bills proportioned to the length of the delay compared with the original contract period. For a claim under the contract, such a calculation may be justified by the terms of the contract. It is suggested that for a damages claim it would be wrong in principle, although sometimes not perhaps seriously so in practice. For damages, the calculation should be of the actual additional costs.”

 In Ascon contracting v Alfred Mcalpine Construction Isle of Mand [29], counsel for the defendant suggested that the prolongation cost might be calculated based on the average weekly amount derived from the contract preliminaries, but that approach was described by Judge Hicks QC as 'rough and ready' and was not accepted. The court favoured a cost-based calculation for measuring loss.[30] 

Cost

The actual cost method is preferable in the US. The U.S. Court of Appeals for the Federal Circuit explained this preference[31]:

 “Clearly, the actual cost method is preferred because it provides the court, or contracting officer, with documented underlying expenses, ensuring that the final amount of the equitable adjustment will be just that – equitable – and not a windfall to either the government or the contractor.”[32]

Analysis of the additional costs incurred by the contractor as a result of the delays incurred

“This approach is adopted under the JCT forms, which provide for recovery of 'direct loss and/or expense'; and FIDIC forms, which permit recovery of 'all expenditure incurred on and off site not including profit'. Under the NEC forms, a hybrid approach is used. Under Clause 63.1 the assessed value of a compensation Event is the difference between the Defined Cost before the event and the estimated Defined Cost after taking account of the Compensation Event in question, plus a percentage Fee.”[33]

The total cost method/global claims

“A technique traditionally used for measuring disruption (and still practiced today) is one which, in its simplest form, comprise a comparison of the planned spend to the actual spend, and claiming the overspend on labour as the loss experienced due to disruption. In this situation a contractor seeks simply to recover the difference between anticipated and actual labor costs. Total cost claims are often packaged as something other than global claims. Nonetheless, whichever form it is presented in, this approach is generally known as a global or rolled up claim. One form of the total cost claim which is attempted when apportioning losses discretely to each event or factor is a ‘cumulative effect’ claim. This is also known colourfully as the ‘death by a thousand cuts’. When applying this form, a contractor may receive 100 instructions which varied the work, and had the effect of disrupting the work each time a new instruction altered the works, and so increased the overall volume of work. The disruptive effect of each one of these 100 variations, in isolation, may have been minimal. If a global assessment is attempted, the contractor would simply make a single claim for the total of the increased costs, alleging that all of the increase was due to the combined effect of the 100 changes, rather than claim for each individual variation.[34] A more sophisticated application of total cost claim has been developed and is referred to as a ‘top down’, or ‘modified total cost claim’.

Daily overhead rate-based method

One kind of total cost method, however frequently used in many claims are the conventional daily overhead rate-based method.[35] Daily cost except the fixed cost can be broken down into appropriate weekly costs and then applied to the prolongation period.[36]

When using this method, question arises whether the cost is measured for the period when the delay occurred or the project is extended.

Kelleher states: “One recognized means of calculating costs for extended field overhead is to compute an actual daily rate by dividing total labor supervision and administration costs on the project by the total days of contract performance and then multiplying the result by the number of days of compensable delay. This same method also may be used during the project by dividing expected field overhead costs by expected total days of contract performance to obtain per-day rate then multiplying that number by the number of days performance is extended.”[37]

Dr champion[38] suggests that “The decision in Costain helped settle some confusion as to whether, when a delay to completion is provided, the resulting loss is measured at the point when the delay event occurred (usually mid-project) or at the end of the project in the 'extended period? (…) After debate, the courts in Ascon accepted valuation of the loss at the point of the delay. the claim in Costain was also made on this basis, and experts agreed amounts on the same basis, without apparent criticism from the court. Hence, although occasional references in decisions are made to costs 'in the extended period' it is suggested that quantification of the loss should best be carried out at the date of the delay, when the additional costs were incurred.”

Professor Ibbs[39] suggest the ‘schedule window analysis’ to calculate separate daily overhead rate for each delay event rather than uniform daily overhead rate for each delay event.

(It is submitted) this method is problematic in terms of causation in the context of a global claim. This method is highly unlikely to be allowed in the courts save for the exceptional circumstances, for example, the project was entirely suspended.

In Costain Ltd v Charles Haswell & Partners Ltd[40], Richard Fernyhough QC, sitting as a deputy High Court judge held that

“[181] They have also agreed that, at that time, those works were on the critical path of the project so that, all other things being equal, and if no later mitigation measures were taken, those delays would ultimately delay the completion of the project as a whole. But the experts have not considered the effects of the delays to the foundation works on all the other activities taking place on site during the relevant period nor have they carried out any investigation, (…) [185] But no evidence has been called to establish that the delaying events in question in fact caused delay to any activities on site apart from the RGF and IW buildings. That being so, it follows, in my judgment, that the prolongation claim advanced by Costain based on recovery of the whole of the site costs of the Lostock site, fails for want of proof.”

Disruption analysis

Disruption analysis is suited for (1) when causation is but-for or apportionment in concurrency situation. (2) when there is only partial delay (3) calculation of impact of variations. (4) calculation of cumulative impact of variation. The disadvantages are cost and difficulty, which requires (1) CPM programme (2) resource plan (3) cost accounting (4) detailed record as to cost or resources. (it is submitted) The US is leading this field and disruption analysis is replacing delay analysis, and the UK seems to recently start this area.

(It is submitted) The disruption analysis is very convincing approach when it is combined with the segregated cost method. This is possible when there are detailed records, cost accounting. Otherwise disruption analysis will become a global claim.

Keller[41] commented on the segregated cost method of pricing claims

“The segregated cost method of pricing claims is more difficult to use than the total cost method or the modified total cost method, but it is usually a more accurate, reliable, and persuasive way of presenting damages. Under this approach, the additional costs associated with the events or occurrences giving rise to the claim are segregated from those incurred in the normal course of performance of the contract. For example, on an extra work claim, the pricing would reflect an allocation (actual or estimated) for the additional, labor, materials, and equipment used in performing the extra work. If the project was delayed, cost of added (or extended) field overhead and home office overhead would also be calculated. The use of this cause-and-effect methodology most often yields an accurate, well-defined, and defensible presentation of damages. It may, however, be extremely difficult to accomplish in the absence of detailed and contemporaneous job cost record keeping and sophisticated cost-control systems that segregate changed or impacted work. This method tends to have added credibility when the person presenting the damages shows the sum of all specifically identified damages does not equal the total difference between the bid cost and total cost (i.e., the total cost method). The difference remaining represents the costs related to contractor-caused events that have been excluded from the claim.”

It is submitted that the disruption analysis can be useful methodologies to segregate the delay liabilities, especially for the on-site overheads.

 SCL protocol[42] states:

“The primary focus of a disruption analysis will be on the direct labour and task-specific plant resources said to have been disrupted. However, there may also be an impact on indirect resources, such as supervision staff or standing plant (i.e. where such resources are increased rather than merely extended), leading to additional costs. In demonstrating that the disruption events also caused additional costs for indirect resources, the contractor will need to demonstrate the correlation between those costs and the loss of productivity in the direct resources.”

Measured Mile

Measured mile methodology is regarded as the most reliable disruption analysis methodology by the courts and commentators in the US and UK.[43] The Measured Mile method compares productivity between an un-impacted period and an impacted period of work, and the incremental loss of productivity, which requires detailed contractor’s cost or productivity records[44] it is submitted that the application of this methodology to on-site overheads claim, especially for indirect staff is due to the requirement of (a) unimpacted/impacted period productivity of indirect staff (b) difficulty to measure the indirect staff productivity thus it still needs further study for the applicability of this method to the on-site overheads claim.

Earned Value Method (EVM)

Measured Mile method, in which the contractor’s actual performance (during a specific period) is used as the basis for comparison, the Earned Value analysis relies upon comparisons with the contractor’s plan or budget.[45]The inefficient man-hours are calculated as the difference between the actual man-hours expended and the actual man-hours earned (based on the plan or budget) for the period of the impact[46] Where details of planned and actual man-hours are not available, an earned value analysis might focus upon cost.[47]

Resource loaded CPM Programme analysis

SCL protocol describes this method as following:

“This utilises resource-loaded programmes created using specialist software, which provide the means to allocate and track resource including labour, plant, cost and quantities over the life of the project. based upon the inputs provided, the specialist programme software assists in calculating periodic percentage completion and earned value for impacted activities. It is therefore a variant of earned value analysis”[48]

Burr commented[49] on the protocol

“the Protocol advises that, (…), schedules should be prepared as a properly worked out CPM network, preferably resource loaded and supported by a method statement.”

What is CPM?

Julian Bailey[50] described the CPM programme

“11.115 A critical path is a concatenation of activities identified in a construction programme, delay to which will have the effect of causing delay to the completion of a project or a milestone. The very last item that needs to be carried out before completion will always be an item on the critical path, no matter how large or small that activity may be. At any one point in time there may be more than one critical path for a project and, furthermore, a critical path may change during the course of a project. Non-critical activities are those the delay to which will not have the effect of causing delay to the completion of the project or to a milestone. But, if sufficiently delayed, a non-critical activity may become critical activity (ie, if that activity’s float is consumed).

11.116 Critical path method (“CPM”) is often used in construction and engineering projects and disputes to analyse the temporal effects of events occurring during the project. CPM involves the consideration of the effect (if any) of relevant events upon a contractor’s critical path during the course of a project. The use of CPM in the demonstration of the cause and delaying effect of an action or event has attracted some judicial approbation, largely because, when properly implemented, CPM may provide a persuasive explanation as to the causes of delay to completion of a project. It also provides a method of isolating the events during a project that caused delay to the project (ie, the ones that were on the critical path) from ones that did not (ie, items that were not on the critical path, and “in float”). Hence, it may be a defence to a claim for an extension of time (or delay-related costs) that the activity that is alleged to have caused delay was not on the critical path.

11.117 Although CPM may be useful in assessing the impact of events on a project, it is by no means essential that a party deploys such an analytical technique in the presentation of its claim, unless this is a specific requirement of the relevant construction contract, or there is a direction by a court or tribunal that such a technique be used. Indeed, it has been said that, to a certain extent, the use of CPM still requires “some level of impressionistic assessment” of the actual causes of delay and the extent of delay. Furthermore, it has been observed that “in the type of programme used to carry out critical path analysis any significant error in the information that is fed into the programme is liable to invalidate the entire analysis”. These statements emphasise that the proper analysis and assessment of delay is not usually governed by rigid, inflexible concepts, which pay little or no regard to the actual course of events on site, or to matters of common sense.357 Furthermore, there may be projects where CPM methodology does not proffer a satisfactory way of analysing delay so that some other method (eg, based on resource levels) is more appropriate.

11.118 There are at least two respects in which CPM may be deployed in relation to a construction dispute. The first is in identifying the critical path of a project at a given point in time, so as to see which activities were driving delay at that time. The second is in reviewing the course of the works in a completed project, as part of a retrospective analysis, to determine which activities caused the project to be delayed.”

Cocklin[51] states:

“ In contrast, in the US, this approach has been described as 'the most significant technological change affecting construction litigation in the latter half of the twentieth century', enabling an alternative to a strict 'winner takes all' approach to causation. It reflects the parties' responsibilities for critical delay identified, segregated and allocated via a network or CPM schedule. It is a more scientific technique deemed to be the 'best evidence of the critical path and of causation of time impact.' There is a judicial preference in the USA for this approach, given the advanced capacity of the courts in matters of delay causation.

It can be seen, therefore, that CPM offers an alternative to apportionment. Where CPM is not applied, the US recognition and acceptance of apportionment presents a stark contract to the approach of the English courts in that the US courts view apportionment as a parallel approach to 'time but no money'. Apportionment is treated as a method of assessing liability provided that the claimant is able to segregate its liability form that of the respondent. If the Claimant is unable to apportion with clarify then the default 'time but no money' applies.”

What is Resource planning?

Burr summarised[52] the importance of resource planning citing CIOB Guide:

“Resource-based planning may well be an advantage in even the simplest of construction projects. However, in major land clearance, some civil engineering, pipe-work and similar projects it is an essential management tool. The CIOB Guide advises:

“Work which can be carried out in defined sequences, over brief periods, requires a different approach to time management than work containing activities which may take several months to complete. The former can be managed by reference to the activity start, work in progress and completion date. However, the latter can only be managed from day to day by reference to the applied resources and productivity achieved.

Resource-based planning will thus be necessary wherever productivity is more likely to affect completion than logical sequence. Typically this can be applicable to such activities as earth moving in large-scale projects, piling on open sites, pipe welding on large process plants and other linear projects. In this form of time management, the unit productivity of each resource is interpolated as the works proceed to provide the data for calculating the time which the activity will take to complete.”

In such projects, whilst there may be a logic to the sequence of activities, the activities themselves extend over large areas and, within broad limitations, can be carried out virtually anywhere, so long as they are carried out efficiently. The CIOB Guide advises:

“Although in building construction, work on site will generally follow activities of short duration in discrete areas which are, to a great extent, subject to a critical path and thus subject to critical path network, time modelling of complex major projects will often include a number of other construction works, some of which will be in the nature of civil engineering and/or mechanical engineering and will not necessarily be subject to the same type of time control.

For example, in major land clearance, or cut and fill of land profiles, work may continue over a long period and may usefully follow some sequence (land will be dug out before depressions are filled), but not necessarily a sequence which is cogently linked from beginning to end of the operation as a whole.”

What is resource loaded CPM?

What it names implies, it is a combination of CPM and resource planning in a specialist software programme. Ibbs commented on the methodology:

“The analytical approach (…) takes into account the timing of delays and the degree of suspensions in quantifying FOH [Field Office Overhead] damages. It realistically allocates FOH into schedule activities. FOH delay damages, if any and/or allowable, are calculated based on activity-speci?c FOH. When being integrated with schedule-window analysis, the proposed approach is able to produce a reasonable damage computation in a real-time manner. For that reason, this approach can be used very effectively in the forward-pricing practice and the negotiation of delay compensation. Finally, it can also be a practical and systematic approach that enables equitable apportionments for concurrent delays. When the proposed method is applied to the case-study project, its result differed noticeably from that of the daily rate method. The case study illustrates that the daily-rate-based method may cause double payments since the recovery probably covers some parts of FOH already included in the as-bid price. This new approach is useful for both practitioners and researchers. It facilitates systematic apportionment analysis in delay claims. Practitioners are more proactive in measuring and presenting delay damages. Researchers should bene?t from exploring insights into its application and implementation in the real world.”[53]

Many international projects now contractually require the resource-loaded CPM schedule and management, thus failing to do so will sabotage the claim. In Advanced Engineering & Planning Corp case, ASBCA found that AEPCO was entitled to a 23-day time extension based on an analysis by the Navy's scheduling expert, but that such time extension would run concurrently with the periods made available for AEPCO-responsible work. The board in denying the contractor’s disruption claim for lack of causation, cited the contractor’s failure to use a resource-loaded CPM schedule as required by contract:

“In this connection, we have found, had it submitted and updated a “resource loaded” CPM as required by Standard Item No. 009-60, AEPCO could have tracked disruptive impact through the schedule…”[54]

Professor Ibbs[55] states this method will provide the reliable method for when there are concurrency:

“This new approach also enables the application of the comparative negligence doctrine when concurrent delays occur by fairly sharing delay damages between the project parties (…) Kelleher (2005) noted that apportionment analysis may yield fairer results than non -apportionment analysis. The approach presented here enables such equitable apportionments. FOH delay damages are now calculated at the schedule activity level. Thus a project party may only be responsible for activities wherein he/she causes critical delays. (…) Finally, it can also be a practical and systematic approach that enables equitable apportionments for concurrent delays.”

Industry Studies

In the US, there are many studies to quantity the disruption/impacts of project changes. These can be categorised by (a) formulaic approach and (b) factor approach. formulaic approach is focused with impact and/or cumulative impact of variations,[56] and factor approach is focused with impact by disruption events (including variations).[57] This method may be in assistance to make a claim, but it is subject to criticism being theoretical.

SCL protocol 2nd ed. cl. 18.18 states:

“Where there is insufficient contemporaneous documentation to support a project-specific study or project-comparison studies are not available, a productivity-loss estimate using data developed from studies based on industry-wide research may be of assistance, though only if these studies are relevant to the working conditions and types of construction that applies to the disrupted project.”

Keane states: “A number of industry studies have been carried out and published by various organizations providing standard losses which can be expected for various disruption factors.”[58]

This method should be used with caution. SCL protocol 18.20 states: “Industry studies of these kinds, particularly where unsupported by corroborating data from the project in question, are however liable to be criticised as being theoretical and so should be used with caution.” Keane suggests that “A contractor must establish the relevance of these studies if they are to be used for claiming losses due to disruption, prospectively or forensically.”[59]

Despite the criticisms, there are substantial case laws as to industry studies when calculating the impact or, especially, cumulative impact of variations in the US.

Court’s General View of Formulaic Approaches

In Aetna Casualty & Surety Co[60]., the board stated that formulaic approaches (cumulative impact studies) are generally viewed with scepticism:

“Formulaic approaches to proving productivity losses are viewed with skepticism by the courts. Studies, formulas and other information relied upon by experts must be shown relevant and applicable to the Project at issue. As explained in McGee Landscaping, Inc…in order for a formula, study, textual material or handbook to be used to determine lost productivity, there must be specific evidence of the applicability of the manual’s underlying assumptions to the situation at hand. Where this necessary evidence is not presented, a claim will be rejected for insufficient information to calculate the loss, even if the trier of fact believes that there was some loss of productivity.”

The use of cumulative impact studies is not the most favourable method to estimate productivity loss. However, Professor Ibbs has written that he has successfully used both Leonard and his own studies in mediation, arbitration, and court settings.[61]

Court’s View of factor Approaches

U.S. courts and boards have accepted the use of MCAA factors when they are supported by credible expert witness testimony.[62] In Clark Construction Group[63], the board, when determining the contractor’s damages under the Jury Verdict method, applied the MCAA factors (even though the contractor did not present these factors), stating, “We will utilize the productivity factors from the MCAA Manual as the best method to arrive at the percentage estimates of…undeniable productivity losses.”[64] Keith Pickavance commented that “there does not appear to be any comparable set of figures in the UK or common wealth jurisdictions, let alone any record of their being considered in a judicial forum.”[65]

It is submitted that the application of industry studies should be exercised with caution. There are not little studies as to disruption of indirect staff. Most of the studies focuses on the direct labour disruption. The application to on-site overhead claims should be further studied.

A/B Estimate[66]

The A/B estimates approach is based on establishing a claim value through the development of independent estimates of damages. The “A” estimate is for an original element of work; the “B” estimate is for the element of work as changed.[67]

The A/B estimates approach identifies the cost of the additional works in comparison to the cost of the works that should have been incurred. The “A” estimate is the cost of the work as tendered and the “B” estimate comprises the tendered costs plus the unplanned costs arising out of period “A”.[68]

It is submitted that NEC4 assessment for compensation events has a similarity to this approach. The NEC4 Contract cl. 63.1 and 52.1 together provide for Compensation events to be assessed by reference to calculated changes to the “Defined Cost” and “Fee”.

“63.1 The change to the prices is assessed as the effect of the compensation event upon

?       The actual Defined Cost of the work done by the dividing date,

?       The forecast Defined Cost of the work not done by the dividing date and

?       The resulting fee.”

Defined cost “includes only amounts calculated using rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices with deductions for all discounts, rebates and taxes which can be recovered.”[69] and “is the cost of the components in the Short Schedule of Cost Components.” [70] Short schedule of Cost Components includes People, Equipment, Plant and Materials, Subcontractors, Charges, Manufacture and fabrication, Design, Insurance.

The “A”/“B” Estimate method is generally utilized in cases where the additional work and the cause of the delay or disruption is fairly straightforward. The approach is advantageous because of its simplicity, but is difficult to use where several different factors affecting the contractor’s performance are part of the job. Its conclusions may be deemed speculative, and care must be taken to avoid absurd damage results. Care must also be taken to ensure that the estimates are reasonable and consistent in method.[71]

Nominal Sums

The application of nominal sums to on-site overheads in the English law is made in Walter Lilly case,

Akenhead J stated at [486(c)] that “there is no set way to prove these elements and that it is open to contractors to prove them with whatever evidence will satisfy the tribunal to the requisite standard of proof. It is open to contractors to prove these three elements with whatever evidence will satisfy the tribunal and the requisite standard of proof. There is no set way for contractors to prove these three elements. For instance, such a claim may be supported or even established by admission evidence or by detailed factual evidence which precisely links reimbursable events with individual days or weeks of delay or with individual instances of disruption and which then demonstrates with precision to the nearest penny what that delay or disruption actually cost.”

Akenhead J at [490] accepted an approach that involved listing the relevant events relied upon, describing in prose form what additional or extended resources were deployed, and linking them to the causes of delay or disruption relied upon. All the additional or extended resources were costed in a detailed analysis which picked up allocations of time for staff and resources at particular times and applied to those allocations costs obtained from the contractor’s computerised record keeping system.[72]

Essentially what WLC did in the Voluntary Particulars was that, for each item of claim, it listed the relevant events relied upon and then sought in the back-up documentation, in prose form, to spell out what additional or extended resources were deployed and to seek to link them to the causes of delay or disruption relied upon. All these additional or extended resources were then costed in a document called the Detailed Analysis of Loss & Expense. This comprises about 80 mostly A3 sheets of detailed analysis which pick up on allocations of time for staff and resources at particular times and applies to such allocations costs obtained from WLC's "COINS" computerised record keeping system. This was all supported by reliable evidence from WLC's witnesses, particularly Mr McMorrow, much of which was not challenged.[73]

He further accepted the application of nominal damages in the case of uncertainty or errors, that: 

 “I should emphasise that where I make allowances or adjustments from the sums claimed I have if anything erred on the side of caution and in favour of DMW and the Mackays. I will refer to realistic or reasonable minimums or other allowances in terms of percentages of resource or cost to be allowed where appropriate, where these represent the best that I can do on all the available evidence.”[74]

In Cleveland Bridge UK Ltd v Severfield-Rowan Structures Ltd [2012] EWHC 3652 (TCC) Akenhead J [156] considered that where the court is satisfied on a balance of probabilities that some (more than de minimis) disruption must have occurred as a result of the contractor’s breaches, then the court can and should make a reasoned assessment albeit based on the minimum probably so attributable.[75]

“What the Court can and should do in circumstances where it is satisfied on a balance of probabilities that some (more than de minimis) disruption must have occurred as a result of CBUK's breaches is to make a reasoned assessment albeit based on the minimum probably so attributable.”

[1] Cushman, R.F. & Carpenter, David A., (1996). Proving and pricing construction claims, (2nd ed) New York: Wiley Law Publications. 1.12

[2] Wilmot-Smith, R. (2014). Wilmot-Smith on construction contracts (Third ed.). OUP 14.123

[3] Kelleher, T. J. and Walters, G. Common sense Construction law Smith (4th ed). New Jersey. John Wiley & Sons 461

[4] Cushman, R.F. & Carpenter, David A., (1996). Proving and pricing construction claims, (2nd ed) New York: Wiley Law Publications. 1.12

[5] Bailey, J. (2016). Construction law (2nd ed.). London: Informa Law 11.132

[6] Wilmot 12.01

[7] Dennys, N., Clay, Robert, Hudson, Alfred A., & Atkin Chambers. (2015). Hudson's building and engineering contracts (13th ed.) London: Sweet & Maxwell 7-005

[8] Robinson v Harman (1848) 1 Ex. 850, 855

[9] Livingstone v Rawyards Coal Co (1879–80) L.R. 5 App. Cas. 25, HL, 39.

[10] Furst, S., Ramsey, Vivian, & Keating, Donald. (2017). Keating on construction contracts (10th ed). London: Sweet & Maxwell 9-002, 9-003

[11] Lord Blackburn in Livingstone v Rawyards Coal Company (1880) 5 App. Cas. 25 at 39, HL.

[12] Robinson v Harman (1848) 1 Ex. 850 at 855, said by Lord Pearce to be “the underlying rule of the common law”;

[13] Bailey (n 5) 13.9 13.11

[14] Society of Construction Law Delay and Disruption Protocol 2nd ed. 2017

[15] Furst & Ramsey (n 9) 20-349;20-362

[16] Kelleher (n 3) 461

[17] IBCA No. 2844, 96-1 BCA ? 28,128

[18] Publication downloadable from https://www.ncmahq.org/docs/default-source/default-document-library/articles/cm0808---pages-42-49

[19] John Battersby Michael Charlton John Molloy (2004) Prolongation Claims in Construction Contracts – Cost or Value? Hongkong SCL paper 28

[20] Champion R (2011) Prolongation costs: Where now after Costain v Haswell? SCL paper 170

[21] Champion (n 20)

[22] Champion (n 20)

[23] Champion (n 20)

[24] Dennys (n 2) 683

[25] [2000] BLR 496

[26] [2007] UKSPC SPC00657

[27] Champion (n 20)

[28] Furst & Ramsey (n 9) 9-050

[29] Ascon contracting v Alfred McAlpine Construction Isle of Mand (1999) 66 Con LR 119, (2000) 16 Const LJ 316 (TCC)

[30] Champion (n 20)

[31] Long. R, Carter. R, Buddemeyer .H, (2014) Cumulative Impact and Other Disruption Claims in Construction, Texas, Virtualbook.com 5.2.3

[32] Dawco Constr., Inc. v. United States, 930 F.2d 872, 880, 882 (1991). 382

[33] Champion (n 20)

[34] Keane, P.J. & Caletka, Anthony F, 2015. Delay Analysis in Construction Contracts 2nd ed., Somerset: Wiley.

[35] Lankenau, M., 2003. Owner caused delay - field overhead damages. Cost Engineering, 45(9), pp.13–17. “The courts have clearly established the requirements to use a total cost claim damage methodology for direct costs. However, field office indirect or field overhead costs are often not treated with the same scrutiny, despite the fact that the same concepts are evident. The total actual indirect cost to date is often used to calculate delay damages, despite inclusion of bid errors or omissions and lack of complete owner causation.”

[36] Wilmot (n 2) 14.89

[37] Kelleher (n 3) 474

[38] Champion (n 20)

[39] Ibbs, W. & Nguyen, L., 2007. Alternative for Quantifying Field-Overhead Damages. Journal of Construction Engineering and Management, (10), pp.736–742.

[40] [2009] EWHC 3140 (TCC)

[41] Kelleher (n 3)

[42] SCL 2nd ed 18.14

[43] SCL Protocol 2nd ed.18.16, Keane, P.J. & Caletka, Anthony F, 2015. Delay Analysis in Construction Contracts 2nd ed., Somerset: Wiley 3.4.5; Bell BCI v US

[44] Long (n 30) page 30, 33, Clark Construction Group Inc (2000) VABCA No 5674, 00–1 BCA 30,870.

[45] Long (n 30) Page 60

[46] See Nguyen, Long D. and Ibbs, William, “Case Law and Variations in Cumulative Impact Productivity Claims,” Journal of Construction Engineering and Management, ASCE, August 2010, p. 830.

[47] SCL Protocol 2nd ed.18.16

[48] SCL 18.16

[49] Burr A. (2016) Delay and Disruption Construction Contracts (5th ed). London. Informa UK 10.023

[50] Bailey (n 5)

[51] M. Cocklin, International approaches to the legal analysis of concurrent delay: Is there a solution for English Law? SCL Paper 182

[52] Burr (n 48) 17-020, 17-021

[53] Ibbs (n 38)

[54] Advanced Engineering & Planning Corp., ASBCA Nos. 53366, 54044, November 2004, at 104.

[55] Ibbs (n 38)

[56] Leonard, Charles A., “The Effects of Change Orders on Productivity,” M.S. Thesis, Concordia University, Montreal, Quebec, 1988 and related article; Moselki, Leonard & Fazio, “Impact of Change Orders on Construction Productivity,” Canadian Journal of Civil Engineering, Volume 18, 1991; Construction Industry Institute, “The Impact of Changes on Construction Cost and Schedule,” Publication 6-10, April 1990; Hester, Weston T., John A. Kuprenas, and T.C. Chang, “Construction Changes and Change Orders: Their Magnitude and Impact,” Construction Industry Institute, SD66, October 1991; Project Change Management Research Team, “Quantitative Effects of Project Change,” CII Publication 43-2, May 1995; Ibbs, C.W. & Walter E. Allen, “Quantitative Impacts of Project Change,” CII Source Document 108, May 1995;

[57] MCAA factors; NAVSEA Guidelines

[58] Keane, P.J. & Caletka, Anthony F, 2015. Delay Analysis in Construction Contracts 2nd ed., Somerset: Wiley.

[59] Keane, P.J. & Caletka, Anthony F, 2015. Delay Analysis in Construction Contracts 2nd ed., Somerset: Wiley.

[60] Aetna Casualty & Surety Co. v. George Hyman Construction Co., U.S. Dist., LEXIS 22627 (E.D. Pa. 1998), pp. 273–274

[61] Ibbs, W. & McEniry, G., 2008. Evaluating the Cumulative Impact of Changes on Labor Productivity-an Evolving Discussion. Cost Engineering, 50(12), pp.23–29.

[62] See, e.g., Clark Construction Group, Inc., 00-1 BCA ? 30,870, VABCA No. 5674 (April 2000); Clark Concrete Contractors, Inc. v. General Services Administration, 99-1 BCA ? 30280, GSBCA No. 14340 (1999), Fire Security Systems, Inc., 91-2 BCA ? 23,743; and Stroh Corporation, GSBCA No. 11029, 96-1 BCA ?28,265

[63] Clark Construction Group Inc (2000) VABCA No 5674, 00–1 BCA 30,870

[64] Clark Construction Group, Inc., 00-1 BCA ? 30,870, VABCA No. 5674 (April 2000), at p. 42).

[65] Keith, Delay and Disruption in Construction Contracts, 3rd ed., T&F Informa (UK) Ltd., London, 2005, pp. 569–572, paragraph 17.118

[66] Burr, Long, Keith

[67] Burr (n 48) 20-058

[68] Burr (n 48) 20-059

[69] Cl. 52.1

[70] Main option A and B 11.2 (23)

[71] Long 5.2.5

[72] Keating 8-075

[73] [490]

[74] [508]

[75] Keating 8-075

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