Damages Incurred by Construction Contractors: Part 1

After selecting a methodology for damage recovery, a contractor must calculate its incurred damages.

Recoverable increased labor costs typically result from changed or additional work, loss of efficiency/productivity, and labor escalation. Materials and construction equipment costs can also result from changed or additional work, and job site and home office overhead costs may result from extended performance time due to delays and disruptions. Other recoverable costs may include escalation, interest, lost profits, legal and claim preparation costs, economic loss, and liquidated or actual damages sought from subcontractors that are responsible for delay.

This is the first of two blog posts providing a general discussion of these costs. This post addresses labor, delay, and construction equipment damages and materials claims. The second post addresses other claimed costs, escalation, interest, profits, legal and expert costs, economic loss, and liquidated damages.

Labor Damages
A contractor may have compensable labor damages in several categories:

• Labor hours to perform additional work
• Loss of efficiency/productivity due to delays, multiple scope changes and resulting cumulative impact, overtime, and other impacts
• Labor escalation caused by compensable delays that precluded the performance of work during a lower wage period

Increased labor hours to perform compensable extra work often result from differing site conditions, directed or constructive changes, defective or deficient plans and specifications, or field work orders. If a contractor records man-hours for extra work items separately from the in-scope work, these contemporaneous records are usually sufficient to quantify the labor damages. Change Order requests, field work order documentation, or force account documentation typically include these costs.

Increased labor costs often result from loss of productivity caused by delays, multiple scope changes and resulting cumulative impact, overtime, and other impacts. For a comprehensive discussion on this topic, see the book Cumulative Impact and Other Disruption Claims in Construction.

When owner-caused delay results in the contractor performing work in a time period longer than it anticipated, the contractor may incur increased labor rates due to escalation in hourly rates and associated fringe benefit rates. These increased labor costs may be recoverable.

Delay Damages
The contractor’s delay damages are either increased time-related field or home office overhead costs. Field overhead is among the easiest of the indirect costs of construction to prove. The contractor’s regularly kept business records help prove damages with reports describing equipment, supervisory salaries, trailer rentals, utilities, etc.

In the construction industry, field overhead is normally charged directly to the contract concerned. Field overhead costs can vary depending upon the amount of work that is involved, i.e., they will presumably be less on a dollar basis on a $100,000 contract than on a $1,000,000 contract. In addition, field overhead costs can vary during the performance of a contract, i.e., they may be less on a dollar basis during the early stages of a contract and more on a dollar basis during periods of high activity—particularly if many subcontractors are working at the same time or if difficulties are encountered.

Notwithstanding these project size and timing considerations, the overall amount of field overhead costs incurred primarily depends, in general, on how many days project completion takes. Field overhead costs accrue daily, usually without substantial reduction even when bad weather, strikes, suspensions of work, etc., reduce or eliminate the amount of work accomplished. Each additional day required to complete a project increases field overhead costs.

Field overhead for changed work not resulting in delays is usually recoverable as a percentage markup of the direct costs of the work. When delays become compensable, extended field overhead costs are calculated by deriving a daily field overhead rate, which is the total of all time-related field overhead costs for the entire project duration divided by the total number of days duration over which the costs were incurred. The field overhead claim amount is the daily field overhead rate multiplied by the number of compensable days of delay.

A contractor’s home office overhead consists of costs that are incurred for the mutual benefit of all its contracts and often cannot be tied to a specific project.¹ These costs are allocated to the income-producing projects undertaken by a contractor, normally in proportion to the dollar value of each project.

Costs that are normally included in a contractor’s home office overhead include but are not limited to executive and clerical salaries, outside legal and accounting expense, mortgage on buildings, rent, depreciation, office supplies, postage, books and periodicals, property taxes, insurance, utilities/telephone, auto/travel, professional and trade licenses and fees, advertising, recruitment, relocation, training and education, photocopying, data processing, miscellaneous general and administrative expenses, interest on borrowing and other financial costs, entertainment, contributions and donations, bad debts, losses on other contracts, and bid and proposal costs. Contracts or regulations may exclude some of these cost categories as unallowable for home office overhead calculations, i.e., entertainment.

Construction Equipment Damages
Recovery of construction equipment damages is allowable when additional equipment is needed to perform the changed or additional work or when the original equipment is required to remain on the project, either working or idle, for a longer period than anticipated in the contract. To calculate the equipment damages, the number of additional usage hours and the cost per hour are required.

Materials Claims
Often the easiest component of the claim calculation, materials claims are based on changes in quantity and price. Quantity differences are determined by comparing the amount of permanent materials (concrete, steel, lumber, brick, length of pipe, etc.) shown on the bid drawings to the quantities required to perform the changed work or the actual quantities installed. The price is usually the amount paid for the additional quantity. Credit to the claim value should be made for deleted or replaced materials unless the contractor cannot return or otherwise dispose of them. If the replacement material is more expensive than the original material, the claim should be based on the difference in price, unless the original material could not be returned or discarded.

¹         Eichleay Corp., ASBCA No. 5183, 60-2 BCA (CCH) ¶ 2,688, aff’d., 61-1 BCA ¶ 2,894.

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