August 09, 2005
Author: W. John Irwin II
Both owners and contractors should be apprised of current issues that concern the prosecution and defense of construction claims. "Total Cost" claims are still used by contractors, although they are difficult to prove. "Cumulative Impact" has become a popular avenue for contractor claims to recover cost overruns. "Delay Claims" are difficult to prepare, to analyze and to defend due to the many pitfalls in the use of CPM scheduling on construction projects.
The Difficulties in Proving Total Cost Claims
One contractor problem is how to calculate the costs of its claim. If the contractor's cost records have not segregated costs to specific claim issues, the contractor may resort to the "Total Cost" method. "Total Cost" compares the actual cost to the contractor's bid cost, claiming the full amount of the overrun, either in one particular area of the costs such as labor or, more commonly, for the whole project. Some contractors use the "Modified Total Cost" approach, which calculates the claim value by deducting extra costs attributable to the contractor from the Total Cost. Courts have placed strict criteria on whether the contractor may use the Total Cost method, including the reasonableness of the costs, the lack of errors in the contractor's bid; the impossibility of segregating costs to the claims, and the absence of contractor liability for errors and other problems which drive up costs. It is better to present costs specifically segregated to each claim item in order to avoid the chance that the court will dismiss "Total Cost" damages.
Cumulative Impact Claims in Vogue
"Cumulative Impact" is a distinct type of damage separate from direct, indirect and ripple claim damages. Claim cost damages may include direct and indirect (e.g., overhead) costs of the impacted or changed work as well as the costs of the "ripple effect," the impact of specific changed work on the cost of performing some other specific item of unchanged work. Courts, both federal and state, also recognize another type of claim called "cumulative impact" as a means of contractor recovery. Cumulative impact is the cumulative, or synergistic, effect of the aggregation of numerous changes altering the entire working environment and increasing the cost of all unchanged work.
While it is difficult to document and track costs of cumulative impact, contractors have been successful in proving cumulative impact claims. The contractor usually argues for entitlement to a cumulative impact claim by pointing to the number and magnitude of RFI's, bulletins, delays and changes to substantiate that the entire work has been disrupted. The claimed damages are usually labor cost overruns calculated using the Total Cost method. Owners should be aware that courts recognize that waivers or releases common in change order language may not cover cumulative impacts, since cumulative impacts are by nature not foreseeable. The contractor must not wait until the end of the project to make a cumulative impact claim but should give proper and timely notice to the owner when it becomes aware of cumulative impact to the work.
Beware of Pitfalls in Using CPM Scheduling to Prove Delay Claims
Both federal and state courts require that delay claims must be proven by showing that the delay was on the critical path of the construction progress schedule. Contract clauses on time extensions usually include the same requirement. However, there are pitfalls in the use of CPM scheduling that may make it difficult, or nearly impossible, to determine the correct critical path for a given project. "Computer jockeys" may know just enough to produce a glitzy computer-plotted schedule but their schedules may be inadequate to determine the real or actual critical path contemporaneous with the impact alleged to cause project delay. Schedulers, contractors and owners must watch out for improper critical paths and erroneous float caused by omitted logic ties, constrained and mandatory dates on activities, multiple or incorrect calendars, lead-lags, changes to activities, logic and durations made during updating, out-of-sequence progress, and incorrect actual start and finish dates. The best assurance of proper scheduling is to insure a high level of scheduling proficiency either on the in-house staff or by using outside scheduling consultants. Using that expertise to create a proper baseline schedule and to consistently and properly update the schedule periodically, usually monthly, throughout the project will assist in successful management of time extensions, liquidated damages and delay claims.
Issues concerning "Total Cost," "Cumulative Impact," and using schedules to prove delay have been around for years. However, today these issues continue to be problems in the presenting and defending of construction claims. Both owner and contractor should be knowledgeable of these issues.