Time Is Money - Delay Claims in Construction June 18, 2012

1. Time Is Money - Delay Claims in ConstructionJune 18, 2012 Karen Wyke Alex Kotkas (With thanks to Devin Crisanti)

2. Introduction • Overview of delays – excusable vs. inexcusable • The contractor’s claim for acceleration • Measuring Delay • The contractor’s heads of damage • The owner’s heads of damage

3. What is delay? • A construction delay occurs when: • The construction of a project or a part of the project is not completed within the time that was specified and agreed to in the contract; or • The scope of the work increases to the extent that more work is to be completed within the original contract time

4. Excusable Delay • A non-compensable delay that excuses the parties from meeting a contractual deadline • Where excusable delays occur, the owner must provide an extension of time to the contractor to complete the work • Excusable delays: • Site conditions • Weather conditions (in some cases) • Strikes • Acts of municipal and governmental authorities • Acts of God

5. Inexcusable Delay • The party causing the delay assumes the associated costs • Inexcusable delays are delays that could have been avoided by due care of the party • Where inexcusable delays are caused by the owner - the owner must provide an extension of time to the contractor and compensate for the costs that arise from the delay • Where inexcusable delays are caused by the contractor - the owner does not have to provide an extension of time. The owner is entitled to make a claim against the contractor to recover costs resulting from the delay • To mitigate the risk of an inexcusable delay claim an owner or contractor can use a “float”, which is slack time built into a construction schedule

6. Inexcusable Delays Caused By The Owner • Excessive changes in requirement or design • Defective or insufficient plans and specifications • Owner interference • Failure to provide adequate access to the site • Failure to obtain necessary permits for the work • Failure to coordinate the job when there are separate contracts awarded • Failure of the consultant to provide or approve drawings in a reasonable time

7. Inexcusable Delays Caused By The Contractor • Contractor management and performance problems • Failure to properly staff the job • Poor workmanship • Failure to order materials and equipment in a timely fashion • Unavailability of labour, materials or equipment

8. Acceleration • Acceleration occurs when: • A contractor must complete its work faster than it had originally planned in the construction schedule; OR • Despite excusable delay meriting an extension of time, the owner requires the contractor to complete the construction as originally scheduled

9. 7 Requirements of Acceleration • The contractor encounters one or more excusable delays, which would entitle it to an extension of time • Timely notice by the contractor of such delay • The contractor requests a time extension (in a timely way) • The owner fails or refuses to grant a time extension without reasonable delay • The owner requires the contractor to complete within the original contract period (either expressly or impliedly by the owners actions) • The contractor reasonably attempts to accelerate its rate of performance • The contractor incurs additional costs as a result of the acceleration

10. Requirements For A Successful Delay Claim • Delay must affect the overall construction and not just eliminate the float • Delay must extend the overall project completion date • The alleged problems or events are the ones that actually caused the delay • Notice of delay must be given (comply with contractual requirements for notice: timeline and written) • Evidence in the form of accounting records to prove damages must be available

11. Measuring Delay • It is often very difficult to measure the impact of one delay on the completion of the project • The central question is whether the particular activity being delayed is crucial to the progress of other activities, resulting in an overall delay • Measuring delay is further complicated by the fact that delay in a critical activity may be neutralised by acceleration • The measurement of delay falls within the domain of a construction loss expert • There are 3 common types of delay measurements: • Conventional Method • Collapsing Method • Snapshot Method

12. Conventional Method • Development of a schedule which outlines how the project would have progressed if only the inexcusable delays by the defendant are taken into account (exclude excusable delays) • Compare As-Planned to As-Built Schedules to ascertain the extent of delay • Those delays are then added to an As-Planned Schedule • If the project was completed before the date for completion in the schedule then the contractor accelerated its work

13. Collapsing Method • Reverse of the Conventional Method • Subtract the defendant’s inexcusable delays from the As-Built Schedule • The resulting “collapsed” schedule demonstrates when the project would have been completed but for the defendant’s inexcusable delays

14. Snapshot Method • Selects one or more “snapshot” points at which the impact of preceding delays is measured • Completion date is then recalculated from that date forward using the As-Planned Schedule • The difference between the completion date in the As-Planned Schedule and the completion date in the revised schedule is the delay attributable to the delay preceding the snapshot point

15. Owner’s Heads Of Damage: • Claims that can be made by the owner are: • Loss of Rent • Loss of Business Revenue • Loss of Profits From Sale of the Property • Additional costs are recoverable if they are reasonably foreseeable

16. Loss Of Rent • An owner is able to recover damages for reasonably foreseeable loss of rental income from delayed completion of a building • The following claims can be made: • Loss of revenue during the delay • Loss of revenue resulting from the postponement of future rent increases • A pro-rated amount of property taxes incurred during the period of delay • Loss of parking revenue (if applicable)

17. Loss Of Business Revenue • The owner can claim loss of revenue or profits arising from the delayed opening of its business • The owner is only entitled to damages that are reasonably foreseeable • The owner should declare what the intended use of the project is at the formation of their contract or in the invitation to tender to ensure damages are “reasonably foreseeable”

18. Loss Of Profits From Sale Of The Property • Most often occurs with residential real estate • If the real-estate market falls during the time of the delay, the owner can claim damages for its loss • The owner must be able to prove that it is probable that the contractor’s default caused it to lose profits on the sale of the units

19. Contractor’s Damages • The heads of damage that can be claimed by the contractor are: • Head Office Overhead • Labour Costs • Material Costs • Loss of Opportunity

20. Head Office Overhead • There are two types of calculation methods commonly used: • Shore & Horwitz v. Franki of Canada Ltd. • Contractors monthly project specific overhead costs multiplied by the number of months of the delay, plus • Head-office overhead costs are also awarded based on percentage of out of pocket expenses incurred because of the delay - by determining the ratio between the contractor’s head office overhead and its other direct costs during the time of the project then multiplying that percentage by the project specific out of pocket expenses • Eichleay Corporation • (contract billings / total billings for contract period) x (total overhead for contract period) = overhead allocated to contract • allocated overhead / days of performance = daily contract overhead • daily contract overhead x days of delay = damages recoverable

21. Labour Costs • Labour costs can form part of a contractor’s delay claim in four ways: • Contractor can recover damages for idle workers during the delay (the contractor has a duty to mitigate its losses with idle workers) • A contractor can recover costs for work being completed after an increase in the price of labour • A contractor can claim damages for the loss of productivity due to stop-and-go work which results from a delay OR for over-staffing and overtime due to acceleration • Costs are recovered for loss of productivity if delay causes the project to be extended into months of adverse weather

22. Materials Costs • If a delay forces a contractor to purchase materials after an increase in the price contemplated in its bid, then it may recover this extra cost • The increase in price must be reasonably foreseeable • For equipment: rental, depreciation, operating costs and maintenance costs are recoverable

23. Loss Of Opportunity • In D.J. Lowe Ltd. v Nova Scotia (Attorney – General), the Nova Scotia Supreme Court awarded damages to a contractor who proved that a delay of one year had deprived it of the opportunity to bid on other work • Damages were calculated by estimating the revenue that the contractor was likely to have earned from other projects during the time of the delay, based on its earnings in previous years • That amount was then multiplied by the contractors average ratio between profits and gross revenues over this period of time • Loss of opportunity damages have to be foreseeable and based on reasonable evidence (however, there is no requirement of substantial proof, such as a signed contract) • Parties often limit loss of opportunity damages by contract

24. Global Approach to Contractor’s Damages – Total Cost Method (TCM) • Used when costs of delay cannot accurately be separated by activity • Employed as a last resort approach by the courts to properly compensate the contractor’s loss • The contractor’s damages under this approach are simply taken to be the difference between the amount of its bid and the actual cost of completing the project • TCM is often refused by judges because: • The contractor receives a windfall if the project was underbid • The contractor is compensated for costs despite its own inefficiencies or contributions to the delay • 4 Requirements must be present for the courts to use TCM: • There is no other way of estimating damages • No underbid or errors in the bid took place • Inefficiency by the party submitting the claim can be distinguished from the costs of delay due to improper acts of others • The actual costs incurred by the contractor are reasonable

25. Recommendations • If timing is critical, include detailed and specific As-Planned Schedules • Include adequate contractual provisions to provide for an extension of time due to delay • Include specific provision allowing for the resolution of delay disputes • Build sufficient float into the construction schedule • A contractor should include express terms allowing for an extension of time plus compensation for costs in the event of delay • Owners should expressly contract out of claims for lost opportunity • Document delay issues carefully and contemporaneously