Lost Productivity Claims: Coming to an Owner's Defense

By Mark Guevara, Esq., CFCC, PMP, PSP
Sometimes referred to as loss of efficiency or inefficiency, lost productivity claims are usually complex and are therefore difficult and time-consuming to resolve. Whether the claimant submits a measured mile, industry study or total cost method, project owners are usually left to muddle through a tangle of documents, cost data and information.

On most construction projects, a contractor bids a fixed-price (assuming a set level of productivity), but due to unplanned events, the claimant's plans become disrupted, productivity slumps, and project costs escalate dramatically.

Notwithstanding the fact that Courts accept the legitimacy of inefficiency claims, proving and estimating the damages is not an easy or straight-forward task. Often claimants fail to clearly connect the dots for a variety of reasons and distrust ensues. Settlements stall as parties give into frustration, denial and "the blame game". The protracted disputes that follow rarely benefit anyone, and often require costly, time-consuming discovery, mediations, panels, arbitrations and trials.

How can project owners avert or at least minimize their exposure when facing lost productivity claims?  After going through the basics of inefficiency, this article discusses the most common issues and practical steps that project owners should consider to better defend their interests. A checklist is provided at the close of this article.
In its simplest form, productivity refers to the amount of work expended per units produced.

Productivity is not merely production (output). It is the ratio of input (man-hours) to output (units produced).

Typically, productivity is used interchangeably with efficiency; lost productivity with inefficiency.

To illustrate, here is a typical highway construction project.

The graphic (right) illustrates productivity as the relationship between input (vertical axis) and output (horizontal axis).

The origination of such inefficiency may be attributed to a single disruptive event and/or multiple impacting actions. Some common disruptive events or impacts that may lead to a loss of productivity include:


Similar to any other claim, a lost productivity claimant must first prove entitlement, substantive and procedural, i.e., that the events have merit before considering costs. Stated differently, the disruptive action or impacting events must have been unforeseeable and outside the control of the claimant, and the owner must somehow be responsible.

Lost productivity claims often are submitted late in projects because only then is there sufficient evidence of it. One line of defense, therefore, involves change orders. If possible, change order agreements should be all-inclusive, including obtaining full accord and satisfaction. If a claimant later seeks to recover additional costs, including lost productivity, those change orders can be used to limit recovery for the disruptions already compensated.

Moreover, contracts should be drafted to include provisions preventing claimants from reserving rights for undisclosed damages, such as costs stemming from lost productivity in contract change orders.

While substantive merit is implicit to recovery, procedural entitlement should not be overlooked. Here, owners are wise to enforce contractual notice provisions such that where timely and proper notice are lacking on a project, owners can raise the defense of procedural non-compliance.

One often overlooked aspect is the investigation of the time that the impacting event occurred. Disruptions that occurred prior to the time that a claimant gave proper notice may be a proper basis to deny a disruptive event and related costs from the claim. Claimants should be made to pay the consequences of careless contractual compliance. However, only those owners willing to affirmatively enforce the contractual written notice provisions will reap such benefits, including, negating disruptive events of perhaps a substantial portion of an inefficiency claim due to procedural non-compliance.  

In sum, unless owners take the initiative to document, enforce and aggressively pursue their contractual defenses, they should not expect mediation panels, arbitrators or judges to independently raise such defenses in their rulings. The legal maxim is true that the law serves the vigilant, not those who sleep on their rights.
Once substantive and procedural entitlement for disruptions is established, the claimant must prove its damages to a reasonable certainty. But what does that mean?  In an all-too-common scenario, a claimant will submit its lost productivity costs - but not to the same degree or level of proof as submitted in previous change orders. The disparity, in turn, sets off alarm bells in the minds of reviewers.

Every owner has heard the fabled stories of unscrupulous contractors stealing windfall profits and personally vows to not be a victim. As failed negotiations multiply, the parties become frustrated and the unfortunate finger-pointing process that ends in some over-priced forum seems inevitable. While claimants may rightly believe they are entitled to lost productivity damages, many owners feel that claimants fail to appropriately prove inefficiency costs.  Lots of owners have walked away from negotiations or denied such claims out of frustration. What are the typical methods that claimants are likely to utilize when calculating damages caused by lost productivity?  How can owners tell when these methods are properly applied?  Are there abuses that owners should be on the lookout?   
The measured mile is the most widely accepted and credible method used to calculate costs resulting from lost productivity. It is a project specific approach that offers perhaps the closest approximation of actual damages since it is based in fact rather than speculation.

This approach may be boiled down to the following criteria:

1. Comparison of impacted to unimpacted periods
2. Comparison of "identical" or very similar work.
3. An objective assessment of data.
4. Shows lost efficiency or work productivity.

In the example to the right, a high rise structure experienced a disruptive event during construction of the 6th floor. Productivity failed to return to planned rates until crews neared the 10th floor. Here, the measured mile may offer an appropriate method of calculating inefficiency since this type of construction compares repetitive and very similar work types on successive floors. The unit rates during the period of disruption on the 6th floor (impacted period) may be compared to unit rates achieved during earlier or later periods (i.e., normal or unimpacted periods).

For example, cubic meters of concrete placed per crew-hours or lineal feet of wire pulled per electrician-hours. All relevant factors such as learning curve or the differences in comparable work types must be evaluated prior to determining a cost differential under this approach.  

Although the measured mile appears straightforward, potential abuses abound. Many claimants tend to "cherry-pick" an unimpacted period that is more akin to a measured yard rather than the measured mile. Said differently, some claimants offer their best productivity as the baseline for the unimpacted period, rather than comparing more realistic productivity rates, i.e., those rates actually budgeted for in a claimant's bid estimate and that were performed for a reasonable duration.

Any work being compared should be evaluated to ensure the work is truly similar. Analyzing the subcomponents of work in different periods may disclose subtle dissimilarities. Where work is inconsistent, consideration should be given to extract or diminish the inconsistencies. All relevant factors affecting productivity in a claimant's submission must be identified and accounted for, including for example, self-caused inefficiencies, unrealistic budgets, bid errors, learning curve, etc.

Finally, a claimant's submission of unit rates should not be wholly accepted as absolute truth of lost efficiency. Instead, proper analysis of the supporting data, relevant cost items and periods may reveal that the project did not suffer lost productivity to the level or duration claimed. A careful investigation of the claimant's productivity records could reveal selective treatment of certain data favorable to a preset position (cherry-picking). Did the claimant make extrapolations, and if so, were the inferences realistic?  Finally, if the contract stipulates a right to inspect the claimant's project cost records, the owner may discover job costs that do not wholly comport with the amounts claimed.

Lastly, where merit is proven, irregularities may not wholly invalidate a claim but could prove valuable in follow-on negotiations or may be useful to discredit expert testimony and inflated costs presented at mediations, hearings, arbitrations or trials.     
Various general industry studies are available on productivity claims, including one such study published by the Mechanical Contractor Association of America, Inc. (MCAA); cited perhaps more often than most. MCAA offers 16 productivity factors and categorizes the percentages of loss for each individual item as minor, average or severe, as follows:

1. Trade Stacking (10, 20, 30%) 2. Morale & Attitude (5, 15, 30%) 3. Manpwr Reassign. (5, 10, 15%) 4. Crew Size (10, 20, 30%) 5. Concurrent Opns. (5, 15, 25%) 6. Dilute Supervision (10, 15, 25%) 7. Learning Curve (5, 15, 30%) 8. Errors & Omissions (1, 3, 6%)

9. Beneficial Occup. (15, 25, 40%) 10. Joint Occupancy (5, 12, 20%) 11. Site Access (5, 12, 30%) 12. Logistics (10, 15, 20%) 13. Fatigue (8, 10, 12%) 14. Ripple (10, 15, 20%) 15. Overtime (10, 15, 20%) 16. Weather change (10, 20, 30%)

The study offers productivity factors as percentages to add to labor costs for change orders and/or original contract hours. To the dismay of owners, claimants frequently cite multiple conditions and claim the cumulative sum of all observed factors. For example, where a project experienced severe site access problems (#11, 30%) that diluted supervision (#6, 25%) and required man-power reassignments (#3, 15%), MCAA would permit a 70% increase in labor costs and contract hours. Although claimants may offer some reduced percentage (say 35% in the example, only half the sum of the MCAA factors), its effect when applied across a project may be quite steep, e.g., where the cumulative percentage is applied to multiple trades, periods and sectors of a project. As a result, even reduced demands can be no small matter.

The MCAA bulletin is easily accessible and applied by various claimants to a wide array of projects. However, there are limitations that owners should be aware. By its own admission, the MCAA study recommends a cautioned approach:

"These factors listed are intended to serve as a reference only. Individual cases could prove to be too high or too low. The factors should be tested by your own experience and modified accordingly in your own use of them since percentages of increased costs due to the factors listed may vary from contractor to contractor, crew to crew and job to job."

Courts and Boards allow the introduction of general industry studies as evidence, but limit their use for a variety of reasons:

• Source data for the studies is not always known and may be anecdotal rather than empirical and viewed as self-serving for industry participants.
• General industry studies provide no guidelines in how to apply factors where multiple causes have been identified.
• The findings are not conclusive since there is no clear application or no direct relationship to a specific project.
• Courts are more willing to accept the studies as support or rebuttal evidence rather than direct evidence of lost productivity.
• Industry studies are prepared for the purpose of forward pricing of change orders, and therefore, are not for hindsight use in claims for lost productivity.

For further discussion, please see AACEI's Recommended Practice No. 25R-03 Estimating Lost Labor Productivity in Construction Claims, dated April 13, 2004. It is therefore recommended that when referring to such studies, owners should demand that claimants supplement any separate industry study with other acceptable methods of quantifying lost productivity costs, e.g., MCAA bulletin submitted along with project work samplings and questionnaires.
Probably the most popular technique used to support a claimant's damages is the total cost methodology. Simply stated, the approach is the difference between a claimant's as-bid and as-built costs. Like the MCAA study, claimants find this approach convenient, and therefore, frequently utilize it. Acceptance of the method, however, is controversial and is limited to satisfying a four-part test as enunciated by the Court of Claims in Boyajian v. United States, 191 Ct. Cl. 233 (1970).
A claimant must not be able to offer any more direct means of proving actual damages under the particular project circumstances (e.g., the magnitude of change orders was so widespread that cumulative impact resulted). Here, it should be observed that many contracts today are drafted to expressly prevent these sorts of claims, and instead, require strict force accounting of all costs. Unless extreme conditions are experienced on a project, most claimants will have grave difficulty overcoming this prerequisite.
Every claimant will maintain that simply because it was the low bidder does not equate to a blown or unbalanced bid. In fact, the claimant would have met its budget but for owner-caused disruptions. Here, the claimant's bid is compared to other bids on the same project on an item-by-item basis. If the claimant seeks recovery on cost items out of line with the other bidders, the claimant should be made to offer additional proof that its costs and underlying assumptions were reasonable.  
Even if hindsight proves the claimant's added costs were unnecessary or bordering on excessive, claimants will usually carry their burden upon a reasonable showing of proof. Exceptions appear limited to circumstances amounting to gross negligence or fraud.
In the circumstances where errors are well known, claimants will offer some reduction of their demand (modified total cost claim), even if it barely makes a dent in the total costs. As mentioned elsewhere in this article, owners should demand review of the claimant's contemporaneous project cost data to ensure claimed costs reasonably comport with costs incurred during the project. Since claimants will not ordinarily admit, much less track the costs of contractor-caused problems and inefficiencies, it is recommended that owners independently document these matters, including daily tracking of direct costs and hours of labor and equipment.

While all four factors must be satisfied in accordance with Boyajian, owners are cautioned that where a claimant has made a strong showing of entitlement, some level of damages will likely be awarded. Only in the rarest circumstances (e.g., fraud) will all damages be forfeited in an otherwise meritorious claim. If the parties in a dispute fail to offer a reasonable means to estimate damages, most courts or arbitrators will fashion a recovery amount based on even less compelling evidence, including employing methods such the jury verdict that allocates damages based on a percentage basis. Thus, owners should never allow themselves to be backed into a corner and portrayed as only saying "no" to any or all reasonable claimed costs. If owners are unwilling to accept a claimant's cost estimate, owners must be ready to propose an alternate, yet supportable calculation of what they believe to be a more reasonable quantification of lost productivity damages.
This article discussed the most common issues arising in lost productivity claims. The following checklist summarizes some of the practical steps recommended to project owners to better defend their interests and limit exposure when facing these claims.
 

• Was timely notice of impacts given?
• Did any of the impacts occur before or after the noticed period?
• Were an accord & satisfaction given on any of the disruptions?
• Did claimant support its position using only one methodology?
• Was baseline productivity realistic and achievable?
• Did claimant actually compare identical or very similar work?
• Did claimant objectively assess the contemporaneous project data?
• Did the claimant cherry-pick from the best productivity of a "measured yard"?
• Did claimant offer unwarranted extrapolations in its cost estimate? Did claimant misuse any studies?
• Is it a total cost claim, and if so, did claimant satisfy the four-part test?
• Were there any underbid items?
• Were contractor-caused deficiencies vigorously documented, including labor and equipment hours?
• Did the contemporaneous project cost data comport with claimed cost data?

For additional information, please contact the author, Mark Guevara, at 714.730.9052.


DISCLAIMER: The opinions and information presented herein are those of the author only and are provided with the understanding that they are general in nature and do not relate to any specific project or case. Because each project and case is unique, the opinions and information presented herein cannot and should not be construed as being relevant or true for any individual case. Be aware that professionals may differ in their opinions and should not be discredited if their opinions are different from those expressed herein.