Delays on a project can cause significant monetary losses for an owner. For instance, a retail owner, or developer of a multi-unit condominium, can face severe lost revenues where delays prevent anticipated store openings, or unit closings. To avoid having to prove actual damages from delays, the owner and contractor can agree on (or liquidate) the amount of damages payable to the owner upon the occurrence of a contractor-caused delay. Having a liquidated damages provision is encouraged where damages from delay are not readily quantifiable or it would be impracticable to quantify them after a delay has occurred. On the other hand, where the amount of actual delay damages is readily quantifiable, or the amount selected bears no reasonable relationship to actual damages, a liquidated damages amount may be deemed an unenforceable penalty. Almost universally, parties agree on a daily amount which will compensate the owner for the delays. While at first glance, being subjected to a daily amount for delays might seem unpalatable, knowing the extent of potential liability (at least on a daily basis) can help a contractor better manage risk from delays, or perhaps “hedge its bets” by insisting on an early completion bonus based upon a daily amount. Typically, these begin to accrue on the date set for, and end when the contractor has obtained, substantial completion. While not as common, some contracts also allow for liquidated damages for delays from substantial completion to final completion. In drafting liquidated damages provisions, the owner should be mindful of their limitations. For instance, an owner may not recover actual damages where it has agreed to a liquidated amount. Additionally, provisions which are deemed to be a penalty are not enforceable. Nor are liquidated damages available to an owner which is concurrently causing delay.
While there is no magic number, when determining the daily amount, an owner should use good judgment and attempt, where possible, to approximate the amount of actual delay damages to “back into” a reasonable daily amount. This will help mitigate attempts by the contractor to challenge the enforceability of the amount. For instance, where an owner will not suffer any, or will suffer only minimal, damages from a delay, requiring the contractor to pay an exorbitant daily amount (i.e., $5,000) on a contract having a total value of $100,000 seems excessive and would likely be deemed a penalty. On the other hand, the developer of a luxury mixed-use, high-rise condominium project with a construction loan and other carrying costs, could lose several hundred thousand, or even millions of, dollars where project completion is substantially delayed. Thus, having a daily amount of $20,000 (or more) for the project may be deemed reasonable under the circumstances. However, after substantial completion, the amount could be deemed a penalty, especially where the owner is using the property for its intended purposes. So too, could enforcement of liquidated damages being assessed concurrently for a delay to both substantial and final completion dates be deemed an unenforceable penalty.
Whether from changes in the work, differing site conditions, design defects, or other unforeseen events, delays to the progress of the work are common. Contractors can incur significant additional costs, such as unabsorbed home office overhead, field overhead (i.e., general conditions), and general requirements (i.e., costs for insurance, bonds, scheduling, etc.) when forced to stay on a project longer than expected. While project delays are common, not every delay will extend the overall completion of the project; only controlling or critical delays will.
There are four generally recognized methods for proving contractor delay claims: as-planned versus as-built schedule comparison; collapsed as-built schedule; time impact analysis (TIA); and windows analysis. Each has advantages and disadvantages, and one may be better suited than another depending on the timing and purpose of the analysis. Each one is discussed below.
The as-planned versus as-built comparison is an after-the-fact backward-looking approach. It looks at the contractor’s planned duration and compares it to the total time it took to complete the project. This method presupposes that the contractor’s original schedule was realistic, and that the contractor did not cause any of the delays. It also must rely in large part on contemporaneous project records (i.e., correspondence, emails, daily reports, progress meeting minutes, progress photos, etc.) to “recreate” the delaying events, including which ones affected the critical path (which is somewhat subjective), and apportion responsibility for them. Without adequate documentation, it is difficult if not impossible to create a credible as-built schedule.
The collapsed as-built approach looks only at the as-built schedule and removes the delaying events (i.e., but for the delaying events the resulting as-built schedule is feasible). Because it relies on an as-built schedule, it has the same disadvantages as the as-planned comparison.
A time impact analysis, on the other hand, is forward looking. It determines the anticipated delay from an event and incorporates that into the activities of the schedule (called a fragnet), reflecting changes to the critical path. It attempts to forecast the reasonable effects (time impacts) to the schedule caused by the delaying event. In subsequent schedule update(s), the contractor can then make any further adjustments necessary to reflect the continuing effects of the event including mitigation efforts by the contractor. This method is often used to attempt to timely resolve time extension requests during the progress of the work.
The windows approach uses various schedule updates to look at windows (periods) of time in each update where the delays occurred (such as, for example, an increased duration of an activity or added scope of work). Then project documentation is used to explain the reasons why the critical path was delayed between windows, which can be presented in a chart reflecting the updates, delay periods, and reasons for delay. This method has greater reliability because it is based on schedule updates from actual performance (as opposed to forecasts) which can be verified by the owner at the time of the updates.
Even where an owner delays the contractor, is the contractor entitled to damages for delays, or only time extensions? This will depend on whether there is a “no-damage-for-delay” clause which is legal and enforceable in Florida with limited exceptions (such as fraud, bad faith or active interference). Because extended general conditions and other costs from delays, such as unabsorbed home office overhead, can be substantial, contractors should not agree to such provisions, or at minimum, provide for exceptions such as where an owner-caused delay lasts for longer than a specified period or the damages exceed a specified threshold (i.e., giving the owner a grace period before delay damages would accrue), or where an owner intentionally shuts down a project such as with a suspension of the work. Alternatively, even where the contractor is not entitled to delay damages, the provision could allow the contractor to terminate the contract where the delay exceeds an established period of time.
Another consideration is whether the contract sets forth specific events which are not excusable, and therefore, do not justify a time extension or compensation for the contractor. Assuming the contractor can establish delays to the critical path which are both excusable and compensable, what is the best method of calculating its damages? There are several methods for calculating the direct costs of delay such as total cost, modified total cost, and measured mile. Each damage model is discussed below.
Under the total cost method, plaintiffs have been allowed to recover their “total costs” where it was shown the defendant was clearly at fault, where neither the accuracy of the contractor’s estimates nor the reasonableness of its expenditures was impugned, and where there was no alternative method of computing the damages. The total cost method is appropriately available to present to the jury when the nature of the excess costs is such that there is no other practicable means of measuring damages, the original bid was realistic, the actual costs were reasonable, and the plaintiff is not responsible for any of the additional expense. It has been noted that the total cost method is appropriate where the exact amount of additional work which plaintiff had to perform as a result of the defendant is difficult, if not impossible, to determine.
Under the modified total cost approach, adjustment is made to total costs to compensate for bid errors, specific costs arising from the plaintiff’s actions, and specific costs arising from actions of parties other than the party against whom damages are sought.
Measured mile is a method used to quantify labor inefficiencies caused by delays because quantifying the loss of labor productivity is difficult and determination of the dollar amount of damages for labor inefficiency with exactitude is essentially impossible. However, the measurement of the amount of inefficiency must usually be supported by expert testimony. It has been said that the use of a “measured mile” analysis developed by a qualified expert is recognized as the most reliable, though not exact, methodology to quantify labor inefficiency. It compares an area of work where the contractor is able to achieve anticipated or normal productivity, called the “baseline,” against the areas in which the contractor is impacted. It is not appropriate to use, however, where segregating the damages for each discrete impact on a project is impractical, if not impossible.
For indirect costs such as unabsorbed home office overhead, a common though not always accepted method of proving damages is the so-called Eichleay formula. It should be noted that Eichleay requires a suspension of the work. Further, the suspension must be for all or most of the work. However, a contractor is also not entitled to recovery for owner-caused delays and resulting owner-directed suspension where it is shown the contractor could have performed additional work during the suspension.