Damages Incurred by Construction Contractors: Part 2

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

Other Claimed Costs
In addition to labor, equipment, and permanent materials, other direct costs may be recoverable for compensable claims. Supplies are consumable material items used by the contractor but not necessarily incorporated in the final structure, such as plastic sheeting used to protect curing concrete, lumber for concrete forms, drill bits, etc. Paid invoices for these items usually suffice as proof. Costs for weather protection and heat may be recoverable in a delay claim if performance was extended into winter. Other delay costs may include costs of maintaining excavations, scaffolding, concrete mix plants, etc., during the extended time frame. If not included in overhead, additional insurance costs due to the additional period may also be recoverable for a compensable delay claim. The claim calculation should also include performance and payment bond costs, if required, which also increase as the total value of the work increases.

Escalation
When a contractor is delayed and thereby forced to work in a later period than originally planned, escalation (inflation) may increase labor and material costs. A contractor may recover unanticipated escalation costs for labor and materials for a compensable delay. Such recovery requires a comparison of the schedule of planned expenditures to actual expenditures. An integrated cost and schedule activity relationship is the single most important tool in establishing a contractor’s right to claim escalation costs due to a delay. If the schedule is CPM based, the effect of a delay on the critical path can first be analyzed to allocate responsibility for the delay. As a second step, the as-planned cost can be directly compared to the as-built cost of the activities whose delay is compensable. In some cases, evidence of labor rate increases, as detailed in a union agreement, can substantiate these costs. Another form of proof is labor and/or material indices published by governments or various companies.

Interest
If a contractor can prove that it had to borrow money to finance the added costs imposed on it due to changed or additional work or an owner-caused delay, some U.S. state courts allow recovery of the added interest expense. However, U.S. federal government contracts do not permit recovery for interest on borrowed funds or equity capital.

In jurisdictions where interest expenses are allowable, the rate may be well below the actual rates incurred. Another problem is that such interest often accrues well after the payment date incurred. Prejudgment interest on claims may also be recoverable in certain jurisdictions if the amount of damages was reasonably certain.

Profits
After the contractor determines its additional costs as the result of claim entitlement, including additional home office overhead, the contractor should be entitled to a fair profit. However, this is not always the case. Questions tend to arise about equity, profit percentages, and the base to which profit percentages should be applied. There have been cases in arbitrations in which the contractor has clearly proven its entitlement and the costs of the entitlement (damages), but in attempting to split the award between both parties, the arbitrators have not given the contractor overhead, profit, and interest. Also, the availability of profit may well depend on the legal theory that counsel advances, i.e., damages for breach vs. Quantum Meruit vs. reliance on the contract’s Change Order provisions. The latter of these is the simplest way to claim profit in many cases because Change Order provisions usually include a built-in profit and overhead factor.

Legal and Expert Costs
A contractor’s costs for hiring experts and attorneys to prepare its claim may, in some cases, be recoverable. Attorney fees are generally not recoverable except when authorized by contract or statute or when a party acted fraudulently, acted in bad faith, or willfully and wantonly brought or maintained the suit. Claim preparation costs are often disallowed as a cost of doing business.¹

Economic Loss
Parties who supply products or services usually are not liable under theories of negligence or strict liability for economic loss arising out of commercial transactions—such as loss of business revenue, cost of repairing defective work, diminution in value of a structure, or impact on other commercial transactions—unless defects in their products or services cause personal injury or damage to property.² U.S. courts rarely allow economic loss claims by contractors against architects on the basis of negligent design.³

Liquidated Damages
Liquidated damages are the most common form of damages recoverable by the owner, but the contractor may also be able to recover liquidated damages from its subcontractors if they caused delay. Construction contracts often specify liquidated damages provisions as a daily amount to be withheld from the contract price for each day of delay to the contract completion date. However, the primary objective for specifying liquidated damages is to secure the timely performance that the contractor or subcontractor promises rather than to obtain the specified sum. Because the courts commonly uphold such provisions, the party breaching the contract completion time requirements has an uphill battle to refute liquidated damages without a persuasive argument about the cause of the delay.

¹     Hall Construction v. U.S., 177 Ct. Cl. 870 (1966).

²     Eastern Refactories Co. v. Forty Eight Insulations, Inc., 658 F. Supp.197 (S.D.N.Y. 1987): Two Thousand Watermaker Assn. v. Celotex Corp., 784 F.2d 1183 (4th Cir. 1986); State v. Mitchell Const. Co., 699 P.2d 1349 (Idaho 1985).

³     Prichard Brothers Inc. v. Grady Co., 407 N.W.2d 423 (Minn. App. 1987); Waldor Pump & Eqpt. Co. v. Orr-Schelen-Mayeran & Assocs., 386 N.W.2d 375 (Minn. App. 1986); Bates & Rogers Const. Corp. v. North Shore Sanitation District, 471 N.E.2d 915 (Ill. App. 1984).

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