15 minute read
Approaches to calculating loss of production – entitlement and pursuit
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
By Arif Ghaffur, B.Sc (Hons.), PQS, FRICS, MCIArb
FIGURE 1: Man-Hour Variance
Description
Contract allowance Change order recovery Revised total hours Actual work-hours expended Increase in man-hours (4. – 3.)
Man-Hours
10,000 1,500 11,500 14,500 3,000
how to calculate and present LoP claims during the incremental stages of the dispute resolution process leading from negotiation, mediation and arbitration to litigation. The expectation remains that where there is a contractual entitlement to advance a LoP claim, the burden of proof is on the alleging party, i.e., the Contractor, to establish a link between the cause and the effect which resulted in the LoP.
In seeking to advance a LoP claim and arguably any other contractual claim, the Contractor typically assesses what was expected versus what was actually encountered, and the extent to which the Owner is responsible for the LoP. This process of assessment, which typically includes a review of the contractual correspondence between the Contractor and the Owner, often confirms conflicting views on the interpretation of the risks that the Owner and the Contractor assumed under the terms of the Prime Contract.
In deciding whether or not to pursue a LoP claim, the Contractor benefits from knowing 1) the contractual basis of entitlement 2), the current and forecast losses, 3) the adequacy of substantiating records, 4) the cost of pursuing such a claim, 5) the likely recovery of damages and 6) the potential reputational/relationship implications. This cost benefit analysis is best done as early as possible in the dispute resolution process such that the Contractor can arrive at a claims pursuit strategy which confirms approaches, expectations and potential outcomes.
RECORDS
The extent and reliability of project records are key considerations in the approach adopted in the pursuit of a LoP claim. Such records include those documenting the timing of the work (e.g., schedules), the resources utilized (e.g., daily records) and the costs incurred (e.g., cost records).
The discipline in maintaining records unfortunately suffers on many projects and does not aid in the pursuit of LoP claims on projects which typically indicate unsatisfactory financial performance. Records that document ‘loss of productivity’, ‘disruption’, ‘interruption’ and ‘inefficiency’ are at the very heart of a LoP claim and directly impact the Contractor’s ability to demonstrate the link between the cause and effect of the LoP, as reported in the case of Wharf Properties –v- Eric Cumine Associates (1991)52 BLR 1.
APPROACHES
There is some debate as to the level to which damages need to be demonstrated. Suffice it to say that there should be a sound contractual basis with a logical calculation, rather than a precise calculation that is devoid of a reasonable basis. There are various approaches to LoP and these can be summarized as follows: • Measured Mile
This approach utilizes the Contractor’s actual productivity on a part of the work where there has been no
Owner-caused impacts i.e., ‘unimpeded’ productivity. This productivity data is obtained from actual output and cost data and is then compared with the
Contractor’s actual productivity on a part of the work where there have been
Owner-caused delays i.e., ‘impeded’ productivity, thereby providing a basis for the LoP. This method relies on the
Contractor’s records being sufficient, reliable and verifiable.
• Total Cost
This approach (sometimes also known as, total cost less total recovery) compares the actual cost versus the payments received and is based on the Contractor asserting that the additional costs plus recoverable overheads and profit are as a direct consequence of Owner-caused delays. This approach relies on the
Contractor’s ability to show that this is the only realistic method to prove actual losses and in particular that: i. The Contractor’s bid was reasonable and sufficient. ii. The actual costs are wholly and necessarily incurred. iii.The Contractor is not responsible for the events that give rise to the additional costs.
• Modified Cost
This approach is the same as the
Total Cost approach other than that the additional cost is further adjusted to account for those additional costs that are not to the account of the Owner i.e., non compensable costs. Such adjustments take account of insufficiencies in the bid and or LoP resulting from items that were due to the Contractor’s own conduct or performance. This method essentially takes the total additional costs and then distinguishes between compensable and non-compensable costs.
• Specific Cost
This approach is the same as the
Modified Cost approach, except that costs are summarized and presented at a more detailed level, and is reliant upon the Contractor’s detailed cost records. This approach requires a structured methodology that identifies the following specifics of the work from an elemental or functional viewpoint: i. Original bid inclusion. ii. Bid insufficiencies (errors). iii.Changes/Claims. iv. Self-inflicted Contactor Costs.
By nature of preparation, this approach establishes a causal link between a cause and the impact of the cause, i.e., causation where events are not interrelated. This allows the additional costs to be calculated by using the other approaches set out in this paper.
STUDIES
1. Specific Studies There has been much study in the area of LoP and in particular the assessment of the cumulative impact of changes including studies by Leonard (1988), Ibbs and Allen (1995), Hanna (1999) and Ibbs (2005) which reviewed productivity losses (and gains) resulting from a number of factors which were generally characterised as ‘changes’.
There has been and continues to be considerable debate and publication about the basis of the information provided in each of these studies relative to the case under consideration at any given time, i.e., the type of change, location of change, extent of change and the timing of change.
A general lack of endorsement in case law published to date seems to indicate that these studies have generally not been accepted as the authority on measuring and assessing LoP, albeit
that these studies have been focused on changes and the cumulative impact of such changes relative to specific industries and specific circumstances.
2. Industry Studies Studies and research have been conducted by various trade bodies which reviewed the causes and impacts of LoP. By way of example, the Toronto Construction Association and National Contractors Coalition of Canada listed a number of factors which potentially impact productivity. The impacts of these factors were then classified in three categories: 1) Minor, 2) Average and 3) Severe, and expressed by a percentile range of productivity loss for each factor. The factors included: season and weather change, errors and omissions, reassignment of manpower, overtime, fatigue and logistics. These studies can be a compelling reference source particularly where there is a general acceptance that there has been a LoP and there remains a discussion on the additional costs attached to the LoP.
ENTITLEMENT
In pursuing a LoP claim, it is useful to carry out a structured assessment of entitlement and pursuit. Figure 2 shows a mind map of the process of identification, isolation and pursuit of a typical LoP claim. Each pursuit of a LoP claim is distinct and whatever approach is relied upon to demonstrate entitlement, it is important to ensure that the approach is relevant and relatable. Therefore, reference to project specific information is increasingly important starting from a well-thought-out bid to solid contemporary records of resources, i.e., labour and equipment along with correspondingly accurate cost records.
As discussed earlier, there is an increasing requirement for the Contractor to 1) prove that notices to claim have been submitted in a timely manner, 2) to provide the connection between cause and effect and 3) to support this with verifiable costs. LoP studies and formulae are coming under increasing scrutiny, predominantly on the basis that they do not necessarily account for the specific circumstances on the particular job that has suffered LoP.
Some say, perhaps justifiably, that notwithstanding the level of detail provided by Contractors, Owners sometimes adopt a strategy to deny or prolong the resolution of such Contractor claims, and this is sometimes characterised by the Owner’s insatiable appetite for substantiation that proves such claims. Again, reliance on infinite substantiation does not relieve Owners from reviewing and paying such claims where entitlement has been established under the Prime Contract.
Based on the writer’s experience, irrespective of the specific approach adopted, in establishing the connection between cause and effect, it is appropriate to isolate the additional resources (labour
FIGURE 2: Loss of Production – Recovery Mindmap Estimate
Planned Production
Actual Production Records
Loss of Production
Impact Assessment
Compensable Events
Cause
Effect
Impact
Reasons LessonsLearned
Non Compensable Events
Bid Insufficiencies
Lack of Performance
Unrecoverable Loss
Time Cost
Delay Acceleration
Notification Substantiation
Negotiation Resolution
QS online Cost Consultants Inc. Halifax, Nova Scotia | p. 902 405-1504 | c. 902 488-1501 halifax@qsonlinecostconsultants.com www.qsonlineestimating.com
Changes
Claims Lack of Performance
Base Cost Estimate
Profit Overheads
Bid Insufficiencies
and equipment) that have resulted in LoP and identify the following specifics: 1. The event that caused loss of production. 2. Part or section of the work affected. 3. Manner in which the work is affected. 4. Correspondence relating to event causing LoP. 5. Additional hours of labour. 6. Hourly rate ($) for labour. 7. Total Cost of labour. 8. Additional hours of equipment. 9. Hourly rate ($) for equipment. 10. Total cost of equipment. 11. Total cost of loss of production. In addition, where completed projects either entirely or partly achieved their planned production, they form excellent reference points when measured relative to similar impacted projects. This not only proves that planned production can in fact be achieved but also the impact of being impeded. Further, previous and current projects also tend to confirm that the final construction costs comprise various components that should, in theory, make up the whole of the project cost as conceptually shown in Figure 3.
Unfortunately, sometimes Contractors maintain inadequate job-site records to allow the accurate evaluation of LoP claims and do not realize that they have incurred additional costs until the final job profit and loss financial statements indicate a sizeable loss. Only upon detailed analysis, including the development of a recovery roadmap map (Figure 2 above), does it become apparent what the causes of the losses are and to what extent they can be recovered by pursuing a LoP claim.
Each LoP claim should be analysed on its own facts and in light of its own circumstances, giving just consideration to the magnitude of the matters that have led to the LoP. Due to an increasing requirement to prove the connection between cause and effect, it is becoming correspondingly important to ensure that LoP claims are not exclusively based on studies or loss of production formula, but rather a causation analysis augmented by studies.
ABOUT THE AUTHOR:
Arif Ghaffur, B.Sc (Hons.), PQS, FRICS, MCIArb, is the Founder and President of Lakeland Consulting Inc providing Commercial Management Services with a focus on Business Improvement, Contracts Management and Dispute Resolution Services.
Continuing Education at George Brown College
Discover our courses and certificates in construction and estimating. Take advantage of the variety, quality and convenience of our courses. Courses are offered in the evening, on weekends and through distance education. Our series of CIQS accredited courses, taught by industry professionals, provide opportunities to develop your skills and expand your career potential.
coned.georgebrown.ca/technology
Register now!
For more information, contact us at 416-415-5000, ext. 4861, 1-800-265-2002, ext. 4861 (toll-free), or cetechnology@georgebrown.ca.
Check out the new CIQS Videos!
WHAT IS A QUANTITY SURVEYOR?
www.ciqs.org/english/ what-is-a-quantity-surveyor
WHY YOU SHOULD BECOME A QUANTITY SURVEYOR.
CIQS announces the publication of Smart Economics in the Development of Real Estate
By Jim Cuthbert, PQS(F)
SmartSmartSmart Economics in Economics in Economics in the the the Development Development Development of Real Estate of Real Estate of Real Estate Smart Economics inSmart Economics inSmart Economics in the Development ofthe Development ofthe Development of Real EstateReal EstateReal Estate
“Smart Economics in the Development of Real Estate” has a unique question-and-answer format, which is both explicit and rational, and demonstrates how to “crunch the numbers” on Development Projects. Fifteen case studies, all based on actual developments, cover residential projects, both for sales and for rent, commercial projects, and residential sub-division site servicing. Also covered are Build versus Lease Studies, and Life Cycle Costing applications, as well as the methodology for both Feasibility and Market Studies. The case study on the Monitoring of Real Estate Loans explains valuation on a “cost to complete” basis, insisted on by all lenders, very different from the valuation on a “work done” or “work in place” basis expected by contractors. A simple Reserve Fund Study for a small Alberta condominium, rounds out the case studies. A comprehensive glossary of real estate terms is provided, in addition to time and money calculations from basic formulae, and mortgage, future value, and present value tables. Real estate students studying Development Economics will find this book an exceptional aid to their studies, and seasoned real estate professionals, and those associated with real estate development, will find this an excellent reference tool.
Smart Economics in Smart Economics in Smart Economics in the Development of Real Estate of the Development Real Estate the Development of Real Estate
SpineGutter Gutter
13-08-27 9:28 PM
MEMBER PRICE: $80.00 plus shipping and taxes NON-MEMBER PRICE: $120.00 plus shipping and taxes
To order your copy, please visit the CIQS Online Store (members must log in to obtain member pricing) at www.ciqs.org. To order by telephone, please call CIQS at 905.477.0008 or toll free at 1.866.345.1168.
Continued from page 4. responsibilities will remain with each regional Affiliate for the time being.
I reiterate that serving our Designation Holders is the primary function of the National CIQS Board. It is the individual Designation Holders who have decided the path CIQS is to follow and we wish to thank all who contribute through their elected representatives for their valued input.
At the CIQS National Board level, each of the Directors has supported the resolve to improve our communications and transparency with our Designation Holders. Moving forward, we intend to continue to provide National Council updates to our membership with the goal of improving our organization and to best plan for the future. I encourage all within the CIQS to continue to provide your contributions through your regional Affiliate and offer your suggestions. It is through this means that our truly democratic structure functions – for the benefit of all.
Congratulations
to the following ‘Designation Holders’ who have qualified as a PQS or CEC (including reinstatements):
CIQS – Ontario
Manouchehr Adim, PQS Christian Catenacci, CEC Hanzel B. Jimenez, PQS Venkata Pasumarthi, PQS Chinthana Peiris, PQS Mykola Pulnyev, PQS Melissa Schwarz, PQS Nathan Thomas, PQS CIQS – Members at Large
Benjamin Basson, PQS Balwant Bhagwat, CEC Lok Ki Lam, PQS Joseph Magramo, PQS
CIQS – Newfoundland and Labrador
Nolan Bernard Jenkins, PQS Mary Allison G. Vivian, CEC CIQS – Prairies and NWT
Gillan Carruthers, PQS Kevin Magill, PQS Nareshkumar Patel, CEC Carolyn Ssebanakitta, CEC Andries van den Berg, CEC CIQS – Quebec
Gregory Bouché, CEC Jean-Pierre Bouffard, CEC Nardjis Chanez Daouzli, CEC Jean-François Gosselin, CEC Michel Tremblay, CEC
Connect with our advertisers
Company
A.W. Hooker Associates, Ltd Altus Group CB Ross Partners CONECON Consultants Inc. George Brown College Insite SiteWork Lakeland Consulting Inc. LCO Construction and Mgmt MKA Canada, Inc. Pelican Woodcliff Inc. QS Online Cost Consultants Inc. SMARTBIDNET TD Insurance Meloche Monnex
Page Phone # Website/E-mail
8 905-823-8111 www.awhooker.com 2 905-953-9948 www.altusgroup.com 16 416-487-3330 www.cbross.ca 6 604-522-8970 www.conecon.ca 28 800-265-2002 coned.georgebrown.ca 15 877-746-7483 www.insitesoftware.com 31 905 829 4000 www.lakelandconsulting.com 8 514-846-8914 www.lcogroup.com 4 403-532-8662 www.mkainc.ca 15 905-889-9996 www.pelicanwoodcliff.com 27 902 405-1504 www.qsonlinecostconsultants.com 32 866-888-8538 www.smartbidnet.com 16 866-296-0888 CIQS.Tdinsurance.com
Please support these advertisers who help make Construction Economist possible.
To reach construction and quantity surveying professionals through Construction Economist and its targeted readership, contact Jeff at your earliest convenience to discuss your company’s promotional plans for 2015.
Jeff Kutny, Marketing Manager E-mail: jeff@kelman.ca Phone: 866-985-9789 Fax: 866-985-9799
Published for CIQS by:
