A Unique Extended Duration Context: Defending Construction Delay ...

Construction L aw

A Unique Extended Duration Context

By Robert A. Meynardie and

Defending Construction Delay Claims

Kamyar Molavi

What is a delay and

Time is money. Nowhere is that adage more apt than on a construction project. The largest construction disputes—and those that are the most complex to prosecute or defend—are claims related to time or delay.

how can a claim be proven/defended?

Although delay claims involve complex issues related to overlapping causes of delay and sophisticated scheduling techniques, they are at their core contract claims, and therefore in many ways, the defense of a time-related claim in a construction dispute is no different than any other contractbased claim. As with any contract-based claim, the starting point of any analysis must be the contract itself. This article will start with a brief explanation of what delay is in the context of construction disputes, then offer a brief survey of the typical construction contract clauses that may provide either a partial or complete defense, and, finally, discuss the current state-of-the-art methods related to proving and—by implication—defending a delay claim. What Is Delay? Although the term delay seems self-explanatory, in the context of construction claims not all delays entitle the contractor to an ex-

tension of time or additional compensation. In common parlance, delays are events or occurrences that affect the time required to complete a particular task. However, in the context of construction claims, an extension of time or additional compensation is justified for a delay only if it impacts the critical path or the actual end date of the project. Morrison Knudsen Corp. v. Fireman’s Fund Insurance Co., 175 F.3d 1221, 1232 (10th Cir. 1999) (“[a] contractor is not entitled to relief upon the mere occurrence of an event that qualifies as an excusable delay. The contractor must show that the event caused delay to the overall completion of the contract.”). A well-written construction contract will require this type of justification. The rationale for this distinction is that delays to specific activities that have no effect on the overall duration of the project will have a minimal financial impact on either the owner or the contractor. It is not possible to understand the defense

  Robert A. Meynardie is a partner in the Raleigh, North Carolina, office of Nelson Mullins Riley & Scarborough, LLP, where he concentrates his practice on complex commercial and construction litigation. Mr. Meynardie is a member of the Construction Section Council of the North Carolina Bar Association and Chairman of the Construction Committee of the North Carolina Association of Defense Attorneys. Kamyar Molavi is a partner in the firm’s Atlanta office. Mr. Molavi is a former contractor and provides legal advice and litigation services, focused primarily on the construction industry. n

62    For The Defense    August 2007 n

n

© 2007 DRI. All rights reserved.

of such claims fully, therefore, without an understanding of construction scheduling, and the current state-of-the-art scheduling method: the critical path schedule. Before turning to the basics of construction scheduling and the analysis of delay claims, it is important to note that this paper addresses claims for extensions of time or additional costs associated with those extensions, i.e., time-related costs. The practitioner should be aware that delays often lead to a variety of additional claims for damages. It is not unusual for the claimant to assert that it incurred damages in excess of the “extended duration” claim in the form of either a loss of productivity or additional costs for accelerating performance to compensate for the delay. Either or both of these types of claims can be independent of the extended duration claim or they could be inextricably linked. There are complex theoretical and legal requirements to justify these claims, but that is beyond the scope of this paper. The Construction Schedule In order to plan and organize the intricate networks of activities that are required to complete a construction project, contractors and construction managers use complex computer software to plan the sequence of activities. These activities are linked by logical connections that instruct the computer as to which activities must be started before others, which must be completed before others are started, and which activities cannot be started until some other activity is finished. Some of the logic is a matter of choice; some is a matter of necessity. The software then uses the durations of all these activities and their logical connections or restraints to determine the critical path. The “critical path represents the longest chain of interrelated activities (in terms of time)… from the beginning to the end of the project. Since this chain of activities will take the longest to complete, it is ‘critical’ to the completion of the project.” Wickwire and Smith, The Use of Critical Path Method Techniques in Contract Claims, Public Contract Law Journal, Vol. 7, No. 1 (Oct. 1974)] By definition, a delay to an activity on the critical path will delay the overall completion date. Although there is usually only a single critical path at any given point in time, that

critical path may change as construction progresses. Activities or chains of activities that are on the critical path at one point in time may not be on the critical path at another time. There are a variety of reasons why the critical path may change over time. For instance, an activity on the critical path may be accomplished faster than planned and reduce the length of the previous critical path, thereby making some other path longer and, therefore, by definition, critical. Construction Defenses The first step in the defense of a construction delay claim, like any other contract claim, is to consult the contract. Well considered construction contracts, including the most frequently used industry forms, contain a number of clauses that may provide a complete or partial defense to the delay claim. The most common clauses that may provide defenses or shift the common law allocation of risk fall into several broad categories. Notice clauses require the claimant to serve, within a specific time after the event that gave rise to a delay, written notice of the occurrence. Often these clauses require the submission of documentation supporting the length of delay and the quantum of the claim together with the notice or shortly thereafter, and sometimes the contract will expressly state that such documentation must include a schedule analysis. Courts often excuse strict compliance with notice requirements if constructive or actual notice is present. Therefore, one cannot be certain that a notice clause will operate to exculpate the defending party unless the clause expressly states that failure to comply with the notice requirement will constitute waiver of any claim arising out of the underlying delay, and even that may not be enough. See, e.g., E.C. Ernst v. General Motors Corp., 482 F.2d 1047 (5th Cir. 1973). Another common clause that affects the allocation of delay risk is one that makes one party responsible for certain events or conditions, such as concealed or unknown conditions. For example, if the contract is written in such a way as to make the contractor responsible for discovering underground soil conditions, the owner will argue that no adjustment of the contract is justified in the event that rock, organic

materials, other unsuitable soils, or excessive groundwater are discovered in the course of construction. Other clauses may yield similar results with respect to defects or deficiencies in pre-existing structures, components, or substrata that are not furnished by the contractor, but which the contractor is contractually required to inspect. The latter class of provisions often will be

Parties are often excused from liability for delays caused by force majeure. accompanied by language to the effect that failure to inspect the existing component properly will constitute waiver of any claim arising out of defects in the component, including a delay claim. Parties are often excused from liability for delays caused by force majeure. Most construction contracts contain separate clauses that address delays due to poor weather conditions. In addition to notice and documentation provisions, the contract may define weather conditions that are considered “normal” for the geographic location of the project, or set forth the number of days that are expected to be lost due to weather conditions, and are thus incorporated into the project schedule. In those instances, no excusable or compensable delay will have occurred if the progress of work is impacted by such normal conditions. Rather, only “unusually severe” weather, i.e., that which should not be reasonably anticipated, can be excusable delay. A more expansive type of exculpatory clause is often referred to as a “no-damages-for-delay” clause. These clauses typically provide that, in the event of any delay for which the owner is responsible, the contractor’s sole remedy shall be an extension of time, and it shall be entitled to no compensation for costs directly or indirectly resulting from the delay. Similar clauses may be present in subcontracts. In some jurisdictions, damages for delay clauses are not enforceable. An increasing number of states restrict or ban the enforcement of no-damages-for-delay clauses. For The Defense    August 2007    63 n

n

Construction L aw

Courts presented with the issue have generally declined to declare no-damages-fordelay clauses to be void as against public policy, but state legislatures have not been so reticent. At least 15 states have statutes that affect the enforceability of no-damages-for-delay clauses. The most common restriction makes the clauses unenforceable or restricts their enforceability on pub-

Virtually any risk can be allocated according to the agreement of the parties. lic projects. California, for example, has declared them unenforceable in that context if the delay is unreasonable and not within the contemplation of the parties. Cal. Pub. Cont. Code §7102. In addition, judicial decisions have established several exceptions to the enforceability of no-damages-for delay provisions. The most common exceptions are: 1. The delay was caused by fraud, misrepresentation or other bad faith; 2. The delay was caused by active interference; 3. The delay amounts to an abandonment of the contract; or 4. The delay was not of the type contemplated by the parties. Some courts have adopted some, but not all, of these exceptions and added others. South Carolina, for example, does not recognize the last general exception listed, but adds an exception relating to instances where the delay was caused by gross negligence. U.S. f/u/b/o Williams Electric Co. v. Metric Constructors, 480 S.E.2d 447 (S.C. 1997). The only exceptions recognized under Florida law are cases of fraud, concealment or active interference. United States f/u/b/o/ Seminole Sheet Metal v. SCI, 828 F.2d 671 (11th Cir. 1987). The General Conditions of the contract for construction proposed by the American Institute of Architects, which is the most commonly used contract form, includes a mutual waiver of consequential damages. AIA Document A201-1997 contains the following clause:

64    For The Defense    August 2007 n

n

§4.3.10 Claims for Consequential Damages. The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes: .1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and .2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work. This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 4.3.10 shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents. Because the largest elements of most extended duration claims are consequential damages, the mutual waiver of these damages will have a significant impact on the value of any claim. Finally, if the owner is the party seeking delay damages, the presence of a liquidated damages clause will determine and limit the contractor’s exposure. In order to be enforceable, a liquidated damages clause must provide for payment by the contractor of a reasonable estimation of damages that the owner will incur, and not a sum that may be viewed as a penalty for the delay. Delay Claims Analysis Absent a contractual silver bullet, the defense of a construction delay claim is similar in form to the defense of any other civil claim. The delay claimant must prove the liability of the defendant, that it incurred damages, and that the liability of the defendant was the cause of the damages. Although the elements of a claim are familiar, the specific causes of delay liability, as well as the unique methods of proving both causation and damages set delay

claims apart. Therefore, competent defense of the claim requires a thorough understanding of all three. The analysis of the delay claim begins with the identification of the alleged causes of delay to the project. This process often requires detailed forensic analysis, including detailed review of daily reports, correspondence and pay applications, as well as interviews of on-site personnel. Legal responsibility for any potential cause should be explicitly allocated between the parties in the construction contract. With the exception of liability-shifting provisions related to personal injury or property damage, which are unenforceable in many jurisdictions, see, e.g., N.C.G.S. §22B-1, virtually any risk can be allocated according to the agreement of the parties. Construction projects require numerous participants, including the owner, one or more prime contractors, one or more subcontractors, material and equipment suppliers, governmental oversight authorities and a designer, to name the most common. In addition, construction projects are usually performed at the mercy of the weather and sometimes unknown subsurface conditions. For all of these reasons and others, the causes of construction project delays are numerous and varied. It is not within our scope to catalog all of the causes of delay that can occur on a construction project. However, in order to understand a contractor’s potential entitlement, it is important to understand the categories into which all delays fall. Generally, all construction delays fit into one of three types of delays defined by the contract. The three types are referred to as excusable, non-excusable and compensable, which is a subset of excusable delays. Although the categorization of specific delays is generally up to the parties in their agreement, usually delays within the control of the contractor or that should be reasonably anticipated by the contractor are considered non-excusable and will entitle the contractor to neither an extension of performance time nor additional compensation. These include contractor-caused delays, subcontractor-caused delays and reasonably anticipated (i.e., normal) weather. Events that are outside the control of either party, such as abnormal weather, are generally considered excusable, but not compensable. Excus-

able delays will entitle the contractor to an extension of time, but not additional compensation. Compensable delays are those that are within the control of the owner and entitle the contractor to both an extension of time and additional compensation for duration-related costs. Chicora Construction Co. v. United States, 252 F. Supp. 910 (E.D.N.C. 1965) (It is well settled that an owner who interferes with, delays or prevents performance of a construction contract is liable to the contractor for the costs and expenses incurred by the contractor). Causation—Schedule Analysis Once the cause or causes of delay to a project have been identified and categorized as excusable or not and compensable or not, an expert analysis of the schedule is required to determine the issues of criticality and concurrency. Typical construction contract language requires the contractor to demonstrate that the event or occurrence delayed the progress of the work in order to be entitled to either an extension of time or additional compensation for delay, or both. Some more elaborate provisions may even require specific forms of scheduling analysis in order to prove entitlement. In any event, it is generally held that these provisions require the contractor to establish that the event or occurrence impacted the critical path. In other words, the delay affected the project completion date. Even if the claimant can show delays that were both compensable and critical, it is possible to avoid liability by demonstrating that there were concurrent delays. Concurrent delays are “two or more independent causes of delay during the same time period.” Bramble and Callahan, Construction Delay Claims §1.01[D] (3rd ed. 2000). Although the simplest illustration is two delays with independent causes that occur simultaneously or overlap in time, many cases have held that the events do not have to happen at the same time if they have a concurrent effect on the critical path. See McDevitt & Street Co. v. Marriott Corp., 713 F. Supp. 906 (E.D. Va. 1989), aff ’d. in part, 911 F.2d 723 (4th Cir. 1990). Proof of a concurrent delay will preclude compensation, but will not affect entitlement to a time extension. Cline Construction Co., ASBCA No. 28600, 84-3 B.C.A. (CCH) ¶17,954 (1984). Of course, a concur-

rent delay that is also compensable will not bar recovery on the initial delay. In order to understand the tools for allocation of these potentially very large financial risks attendant to construction delays, it is important to isolate and understand the impact to the critical path of each delaying event. With the stated objective of any schedule analysis to quantify the actual impact to the construction of various delays, scheduling experts use a variety of critical path method (CPM)-based techniques. Although a CPMbased analysis may not be required unless the contract explicitly makes it a requirement, it is clear that the CPM-based analyses have gained widespread acceptance from the courts. See, e.g., Al Johnson Construction Co. v. United States, 854 F.2d 467 (Fed. Cir. 1988). Some methods of CPMbased analysis have gained more acceptance than others because they more accurately accomplish the stated purpose. None of the accepted methods is without theoretical flaws and these flaws present opportunities for the defense of these claims. Regardless of the method used, at a minimum every legitimate scheduling analysis must: • Establish a reasonable and attainable baseline or planned schedule (that is a schedule that demonstrates a reasonable plan for completion of the work based upon a realistic assessment of the resources available); • Identify each action, event or occurrence that caused delay to the schedule, regardless of cause; • Identify what activities were impacted by the delaying event; • Apply the delays to the schedule as they actually occurred; • Contain an accurate analysis of the actual construction sequence; • Document all of the events or occurrences, including the length of any resulting delay. As Planned vs. As Built

This method compares the original plan to the actual sequence of events as built. In general, it is simple to perform and simple to understand. This is its greatest strength and its greatest weakness. Although there are variations to the methodology, in its simplest form, it compares the length of time the contractor planned to use to con-

struct the project to the actual time used. Because the analysis reviews only two points in time, the beginning and the end, the analysis is heavily subjective and rarely provides accurate verifiable impact information. For these reasons this methodology is not favored by the case law. Adjusted As-Planned

Like all CPM-based analysis techniques, this method begins with a reasonable and attainable schedule. Instead of comparing the beginning and ending schedule, the adjusted as-planned method isolates those events or occurrences that the expert believes are attributable to the owner and inserts those delays—and only those delays—into the as-planned schedule. A new CPM schedule is then computed and the project completion date is compared to the original completion date. The difference is the time extension to which the contractor claims entitlement. The advantage of this methodology is its simplicity. It utilizes the state-of-the art scheduling technique—the CPM schedule—and, therefore, appears to represent actual delays. This is deceptive, however. Its greatest flaw is this deception because, in fact, the technique does not attempt to allocate actual delays and, by definition, ignores all delaying events that do not justify a contractor extension. In the real world, the impacts of overlapping or even consecutive delaying events cannot be isolated by responsible party. At the same time the delays attributable to the owner are occurring, other delays are occurring that may be the responsibility of the contractor or may be no one’s fault. All of these events will have an impact on the final completion date and should be analyzed in order to assess responsibility accurately. Collapsed As-Built/But For

The Collapsed As-Built schedule starts at the end; that is the analysis starts with the as-built schedule. The analyst identifies all delay events, both owner-caused and contractor-caused. The owner-caused delays are then removed from the schedule and the completion date “but for” the ownercaused delays is established. The difference between this date and the actual end date is the period of compensable delay. The method assumes that no contractorFor The Defense    August 2007    65 n

n

Construction L aw

caused delays had any concurrent effect or any effect on the critical path. Without analysis, this assumption is not valid and the method is, therefore, unreliable. Time Impact Analysis

Time Impact Analysis (TIA) is a technique for analyzing delays based upon the critical path method of scheduling a project. The advantage of TIA analysis is that it assesses actual delay based upon the schedule in effect at the time of the delay and calculates the real impact of a delay on the contractor’s performance. The disadvantage is that it is complex, expensive and utterly valueless if the contractor fails to maintain the schedule. A TIA involves the preparation of a fragnet (a network of activities) for the sequence of new activities or alterations to activity durations and/or interdependencies required as a result of the delay. Placing this fragnet into the contemporaneous schedule—or impacting the schedule— will result in a new project completion date, indicating the isolated effect of the delay. This new schedule is then substituted for the contemporaneous schedule as the new baseline for subsequent delays. Although the TIA analysis provides an accurate reflection of actual impact, it is not perfect. The method calls for the chronological use of impacted schedules to analyze subsequent delays. Unless these impacted schedules are prepared at the time of the impact—which is rare—subsequent impacts may be inaccurately assessed because they are being analyzed based upon a schedule that was not being used by the contractor at the time of construction. Therefore, impacts subsequent to the initial TIA may not accurately reflect real world conditions. Windows Analysis

A Windows Analysis places the impact of individual or cumulative delays on a contemporaneous or near contemporaneous schedule. Unlike the TIA, however, the analyst does not apply subsequent delays cumulatively to a previously impacted schedule. Instead, the analyst determines an appropriate interval and uses the contractor’s actual construction schedule from time periods at that interval and applies the delay to the closest schedule in time. This analysis cures the major flaw of the TIA in that every delay is analyzed based upon

66    For The Defense    August 2007 n

n

how it impacted the actual schedule. The potential exists, however, to manipulate the analysis by choosing intervals based upon the desired result rather than some other more appropriate criteria. It is also possible that the contractor’s construction schedule was skewed by not realizing and incorporating delays as they occurred. Notwithstanding this potential flaw, Windows analysis is generally considered the best method for reaching an accurate result. Who Owns the Float? Total float has been defined as the difference between the maximum amount of time available to perform an activity and the scheduled duration of the activity. In simple terms, if an activity can start 30 days before it must be completed, but will only take twenty days to complete, the activity is said to have 10 days float. By definition, any activity that has float in a CPM schedule is not on the critical path. However, the entitlement to use free time can be a hotly contested issue. Absent a contractual provision assigning the right to float to one of the parties, it is generally held that float belongs to the project. See, e.g., In re Blackhawk Heating & Plumbing Co., GSBCA No. 2432, 76-1 BCA ¶11261, aff ’d on reconsideration, 76-1 BCA ¶11649. That is, float is allocated on a first come, first served basis. If an owner-caused delay impacts an activity prior to a contractor delay that impacts the same activity, the owner-caused delay is entitled to the float. Because no delay entitles the contractor to an extension unless it causes a critical delay, the use of float may have a significant impact on entitlement. The Contractor’s Right to Finish Early Is a contractor’s claim for delay damages ever cognizable if it finishes early? It has been held that where the contractor demonstrates that it planned to finish the project in a shorter time period than required by the contract, delays to the shorter than required critical path can be compensable. This means that the longest or critical path is shorter than the length of time permitted under the contract to complete. Absent a contractual limitation, the contractor has the right to complete the project early and any delay to the original planned schedule is recognizable. Green Builders,

Inc., ASBCA No. 35,518, 88-2 BCA ¶20,734 (1980). In Green Builders, the contractor prepared an initial schedule reflecting its ability to complete a twelve month project five months early. The owner refused to approve the schedule and required the contractor to re-schedule the project to reflect the use of the entire contract period. Under protest, the contractor complied. Although the contractor completed the project two months early, it sought delay damages for the three months it claimed the owner had delayed it. The court held that the contractor was entitled to delays because the original schedule was reasonable, the contractor had disclosed its intention to finish early and the owner had delayed completion. Cf. RobGlo, Inc., VACBA Nos. 2879, 2884, 91-1 BCA ¶23,357 (1990) (where contractor did not disclose its intention to finish early, contractor was not entitled to finish early without notice and perhaps approval of the owner). The right to finish early is by no means absolute, however, and it certainly may be restricted by the express terms of the contract. The contractor’s right to finish early is subject to the rights of vendors, other contractors or the designer who rely upon the contract completion dates and who cannot be forced to accelerate to accommodate the contractor’s planned early completion. Damages The calculation and proof—and, therefore, the defense—of construction damages in general, and even the more narrow topic of extended duration damages, are worthy of a separate article and the topic is certainly too complex to address in detail here. However, because the discussion of the defense of any civil claim would not be complete without some mention of the potential to reduce or eliminate the claim because of the claimant’s failure to meet its burden of proof on damages, this article will conclude with a brief foray into the special categories of damages that arise in extended duration claims. Once the duration of the delay is proven and liability for causing the delay is established, some components of the “increased cost” resulting from the delay, such as increases in the direct costs of work (e.g., extended use of rented equipment, field supervision, temporary facilities, etc.) are eas-

ily calculated and proven, assuming they are not barred by the contract. Proof of other components of extended duration damages can be difficult and technical, especially as to indirect or consequential costs. For example, virtually every extended duration claim includes a claim for “unabsorbed” home office overhead costs. These home office costs are by and large fixed costs that cannot be associated to specific revenue sources. The entitlement to recovery of unabsorbed home office overhead is premised on the fact that a contractor may have to forego or delay subsequent projects if the current project is delayed. A future revenue to pay this overhead will be reduced. Perhaps nothing is more familiar to the construction lawyer than the well known, and often criticized Eichleay formula. Eichleay Corp., ASBCA No. 5183, 60-2 BCA (CCH) ¶2688 (1960), aff ’d on reconsideration, 61-1 BCA ¶2894 (1961). The formula attempts to allocate home office overhead based upon the ratio of the revenues of the delayed project to the overall reve-

nues of the company. The formula enjoys fairly widespread acceptance and the calculation itself has the benefit of understandable logic. In Capital Electric Co., 729 F.2d 743 (Fed. Cir. 1984), the Federal Circuit, in reversing the Government Services Board of Contract Appeals, reaffirmed its endorsement of this element of damages and the Eichleay calculation itself. Other indirect costs, such as a contractor’s loss of bonding capacity and an owner’s additional financing costs or loss of business opportunity, are often sought as elements of delay damages, with predictable results. For instance, in Najla Associates v. William L. Griffith & Co. of Va., 480 S.E. 2d 492 (Va. 1997), the contractor claimed damages for its loss of bonding capacity and the higher cost of subcontracting in the future because the delays on the instant project had forced it to delay payment to subcontractors. The court held that these types of damages were not reasonably foreseeable damages and, therefore, not recoverable.

The Role of Proactive Management This article largely focuses on the contractual defenses and the forensic analysis of time-related claims. Project management techniques that shape those facts are not addressed here. At the risk of stating the obvious, however, there is no better way to defend a delay claim than by avoiding delay, and there is no better way to avoid a delay than to have clear communications that accord with the claims road-map to which the parties have agreed in advance. Conclusion In summary, the defense of extended duration claims share many common characteristics with other contract claims. However, the peculiar nature of a contract for the purchase or sale of something that is not yet built, that will require many parties with potentially competing interests, and whose success will depend in some part on the vagaries of nature, makes construction related extended duration claims unique. 

For The Defense    August 2007    67 n

n