Approaches to calculating loss of production
E NTITLEMENT AND PURSUIT By Arif Ghaffur, B.Sc (Hons.), PQS, FRICS, MCIArb OVERVIEW This paper provides Contractors guidance on potential approaches to calculating and recovering loss of production (LoP) and to Owners on how to defend such claims being sought under the terms of the contract between the Owner and the Contractor (Prime Contract). Whilst there are inherent difficulties faced by Contractors in assessing LoP claims, this does not relieve Owners from reviewing and paying such claims where entitlement has been established under the Prime Contract. The starting point is the Contractor’s estimate of the rate at which a work operation is expected to be performed i.e., the productivity allowed for in the bid. Productivity suffers a ‘loss’ when the actual rate at which a work operation is performed is less than that estimated, and can equally apply to labour and equipment. The terms ‘loss of productivity’, ‘disruption’, ‘interruption’ and ‘inefficiency’ can generally be used interchangeably,
without distinction. Figure 1 shows, by simplistic example, a project where there is a variance between the planned work-hours in the contract and recovered through change orders versus the actual work-hours expended. In the above example, the costs resulting from the increase in work-hours will come out of the Contractor’s profit unless there are grounds for recourse from others, including the possibility of recovery from the Owner by pursuing a LoP claim under the terms of the Prime Contract. Whilst compensable Owner caused delays often provide the contractual vehicle to pursue
such claims, there are many factors which potentially impact productivity including: stacking of trades, morale, attitude, reassignment of manpower, crew size inefficiency, concurrent operations, dilution of supervision, learning curve, errors and omissions, beneficial occupancy, joint occupancy, site access, logistics, fatigue, ripple, season and weather change, overtime and fatigue. DISPUTES There continues debate in the industry, (mostly generated by claims consultants and other subject matter experts), as to
FIGURE 1: Man-Hour Variance Description
Man-Hours
Contract allowance
10,000
Change order recovery
1,500
Revised total hours
11,500
Actual work-hours expended
14,500
Increase in man-hours (4. – 3.)
3,000
Winter 2014 | www.ciqs.org | CONSTRUCTION ECONOMIST | 25
