Part 16 of Our Series on Construction Project Management Skills
XVI. Dealing with Project Delays
A. Acceleration Plans
When a project has encountered delays, a proactive step to explore is whether certain resources on the project can be accelerated to make up for time lost. Asking a contractor to submit an acceleration plan will generally result in the submission of a change order, regardless of the cause of project delays. Generally, the term "acceleration" to a contractor means adding personnel, working overtime and weekends, all of which lead to greatly increased direct and overhead costs that the contractor will want to pass on to the owner.
There are many aspects to a project that can be accelerated without the consequence of additional costs. An in person meeting with the contractor to brainstorm can result in some substantial time savings, and can help your relationship with the contractor.
Here are some different ways to "accelerate" a project:
- Speed up turnaround time on Requests for Information by having the contractor prioritize time sensitive requests.
- Work with the Contractor to identify opportunities to save time by resequencing certain work.
- Consider whether increasing the size of the Contractor's crew, or the number of subcontractor personnel will benefit the project.
- Consider whether slow payment processing is causing the contractor or its subcontractors' to slow down work. If so, offer to speed up the payment process in exchange for increased crew size.
- Consider whether there are constraints to the work that can be addressed at a modest additional cost. Agreeing to pay for an additional piece of equipment to allow two crews to work instead of one can be a very canny way to spend a little money to get a substantial improvement in production.
When an acceleration plan is agreed upon, there should be monitoring to ensure that additional resources are, in fact, resulting in an increased pace of work. Additional care should also be taken to inspect the work during a period of accelerated work to guard against deficient work.
In providing direction to the contractor, be careful to not inadvertently create a claim for "constructive acceleration" of the work. Constructive acceleration can occur when the result of owner directives forces the contractor to increase personnel or equipment on the project, and the Owner refuses to provide a time extension after timely request from the Contractor. For example, if the owner directed an additional length of roadway to a project, the contractor and owner would likely be able to work out a change order on a unit price basis for so many lineal feet. If the request to increase the roadway length comes just before the rainy season arrives, the contractor may be forced to bring in an additional crew to beat the onset of bad weather, which would not have been as efficient as having just a single crew start a few days earlier on road building.
Constructive acceleration is one of the claim concepts that often appear in the ambitious contractor's belated claim submission. This is where having time deadlines for claim submission requirements can greatly reduce the temptation of a contractor to submit a questionable claim at the end of a project.
B. Substitute and Other Available Work
Circumstances may arise where the work is genuinely delayed. An endangered species or an ancient archeological site may be uncovered. A hazardous waste spill could occur. These conditions can result in circumstances where the contractor's forces are delayed for an indeterminate length of time. This is very costly to a contractor, and ultimately to the owner, because the contractor's planned employment of its resources is stopped. The personnel and equipment devoted to the project are no longer generating income, but the contractor continues to incur the overhead expense of maintaining its office, its administrative personnel, and other expenses during a period that it is not performing productive construction work.
Project managers can greatly lessen the impact to owners when delays occur by taking a few important steps.
1. Review the Project Schedule.
Is there other work available for the contractor. If there is, identify the work that is available to the contractor. If the contractor balks at proceeding, continually note in daily reports and correspondence the availability of other work, and the contractor's refusal to perform the other work that is available.
2. Consider whether there is new work on another project that could be worked on by the contractor during a period of delay.
Substitute work can provide the contractor with a means to continue to earn income, and lessens the impact to the owner. Providing substitute work can prove to be a win-win situation for both the contractor and owner, but it must be handled carefully. If such an arrangement is reached, always get the contractor's confirmation that this substitute work is provided as additional compensation to the contractor, that the contractor will be able to devote otherwise delayed resources to the substitute work, and that the contractor agrees that its forces are fully employed during the period of delay. A time extension is usually warranted under these circumstances, so that when the contractor returns to the original project, the contractor has not been penalized for taking the substitute work. Mobilization costs between the ongoing and the substituted work should also be considered.
Taking these steps will provide protection against one of the most common types of claims by contractors: delay claims seeking home office overhead costs. Home office overhead costs are a common part of most delay claims because they employ a formula, known as the Eichleay formula, that compares the percentage of the income earned from the project to the income earned on other contemporaneous projects, and multiplies this percentage against a daily home office overhead rate. The Eichleay formula is derived from a Board of Contract appeals case [need cite], which placed some important limitations on the use of this formula on delay claims. In order for this formula to be used, there must be a delay of uncertain duration that is entirely the fault of the owner, and there is no other work that the contractor can perform during the period of delay.
Application of the Eichleay formula to delay claims generally results in gross inflation of claims. The reason is that the Eichleay formula has no connection to the actual impact caused by a delay, and tends to reward the inefficiency of a contractor's overhead operations.
For example, an efficient contractor who has low overhead and many projects will generally result in a very low daily overhead rate. An inefficient contractor with high overhead and very few projects will generate a much higher daily overhead rate, even if the events causing the delay are identical.
An effective way to defend against the application of the Eichleay formula is to avoid situations where there is a delay of uncertain duration, where there is no substitute work available to the contractor. This is why project managers should look to document the availability of other work, or offer substitute work in order to discourage such claims.
Because the Eichleay formula is often abused by ambitious contractors looking for an easy means to inflate claims, project managers should always note when the contractor has work that is available to be performed that is not being pursued at that time. Should the contractor later claim to have been delayed during that period of time when other work was available to the contractor, the contractor will have a much more difficult time demonstrating entitlement to additional compensation.
C. Project Demobilizations
There are times when a project delay is crippling to future progress on a project for a period of time that does not justify the maintenance of construction crews and equipment on the project site. Under these circumstances, the project manager should consider whether the contractor should remove its personnel and equipment from the project.
Discussions with the contractor concerning demobilization should focus upon determining the method by which demobilization costs will be calculated. If an actual cost method is employed, the components of these costs should be identified. If a lump sum price is negotiated, the contractor should provide a complete release of any other claims.
As with any other type of claim, an important objective of the project manager is to obtain finality with the contractor. The best time to attempt to reach finality with a contractor is before the contractor demobilizes. Another discussion to have with the contractor before demobilizing from the project is to determine what the costs will be to bring the contractor back to the project to complete the work.