What Can Go Wrong on Your Construction Project and What Steps Can You Take To Right the Ship?

Author: Donald Harrington, Contributing Author: Rebecca Smith

Last year, your company was awarded a $60 million contract with a required completion period of 24 months. This was the largest contract ever awarded to your company, a major turning point for the company and was the realization of your hopes and dreams for your company.

Fast forward to today: You are now 32 months into the 24-month project, have spent nearly the entire contract amount, with 30% of the project remaining to be completed. You have submitted change order proposals for added work that total 40% of the contract amount. The project owner has not approved any change orders and has failed to pay the last four pay applications. A default notice for failing to complete the project by the required date has been sent to you and your bonding company. The owner is threatening to terminate the contract and make a demand on your performance bond if you don’t promptly perform the remaining contract work and the added work. Your hopes and dreams are being destroyed as you watch. Your cash and credit lines are being depleted. Your bonding line has been shut down as a result of the owner’s notice of default. Without bonding, you cannot obtain new work, which is further reducing your cash flow.

What should you do?

First, obtain legal representation to assist in addressing the default notice and the owner’s failure to pay pending pay applications. Second, retain a competent and experienced claims consultant to assist you in analyzing the reasons for the project delays and cost overruns.

A claims consultant can work with you and your legal counsel to review the contract for possible remedies relating to change order requests along with specific notice and schedule requirements that may be applicable. Providing the proper notices may reduce the threat of termination and allow completion of the work while negotiating the additional costs.

It is easy to see that a project is behind schedule. However, what is needed to resolve disputes over late performance is to determine the reasons for the project being behind schedule. Determining the reasons and responsibilities for a project being behind schedule usually requires a schedule analysis. A schedule analysis can take many forms, and using the proper analysis method can be critical to the success of the claim.

If the issue is schedule-related, you will need a claim consultant with extensive experience in analyzing schedules using critical-path-method (CPM) scheduling. Comparing the planned schedule generated at inception of the project to the various schedule updates allows changes to the sequence of work, added work from change orders, and potential delay events to be identified. Delays to individual activities, including subcontractor activities can then be analyzed to determine specific impacts to Project Completion.

The reason for each cause of delay must be determined. Delay may be the result of added or changed work. A few examples:

Untimely design changes interrupting work or causing re-work
Increased quantities - One hundred units becoming 125 units
Changes to materials that affect procurement or installation requirements
Changes to regulations that affect work hours or conditions

Extended durations on your project could also result from issues including but not limited to:

Trade stacking
Weather (for example, work planned for the summer season being pushed into a winter performance period)
Material or labor shortages
COVID-19

For example: The owner asserts the contractor delayed the project due to a lack of personnel (manpower), but the contractor’s records show its actual labor hours were equal to or higher than planned during the alleged delay period which is inconsistent with the owner’s claim. Use of real-world data rather than theoretical data generally yields more accurate results.

Projects that are behind schedule frequently have cost overruns. Analyzing the causes and responsibility for those cost overruns is necessary for the recovery of those costs.

When project costs increase, a claims consultant can determine the reason for the increase in costs, which might include:

Added work scope including increased quantities
Extended duration
Rework of previously installed work
Inefficiencies resulting in additional labor hours

Recovering the additional costs caused by productivity losses is often a source of dispute. A determination of whether and where the labor hours ran over the budget should be made. This may involve:

Determining the actual cost of those additional labor hours, including all applicable burdens such as FICA, FUTA, SUTA, etc.
Segregating the additional hours between added work, inefficient work, and extended duration
Establishing the timeline of when the labor hours were expended compared to the planned resource utilization

Analyzing the reasons for cost overruns often requires a productivity analysis. There are differing methods of productivity analysis. Which method is most appropriate depends on the circumstances of the project. An experienced claims consultant should have the experience to determine which methodology is appropriate for a specific matter to produce the best results.

Performing a measured mile analysis, calculating earned value, or applying an empirical study to validate the asserted labor losses can determine whether and where the labor budgets were exceeded and identify the reasons for the overruns.

A good consultant:

Will have worked in the construction industry analyzing construction claims and assisting in the development of construction claims for decades and will have worked on virtually all types of projects, including single-family, multi-family, commercial, industrial, power, and heavy civil projects of all sizes
Will have years of experience in the construction industry combined with years of work as a forensic expert analyzing schedule delays and increased costs
Can assist in analyzing schedules, labor productivity, and cost overruns to either support your claim or defend against claims being made against you

If you, the owner, the contractor, or a subcontractor are experiencing any of these issues, it is important that you work with counsel and a competent consultant to assist in working towards an acceptable result for construction scheduling issues and defective work claims by producing an expert report and providing expert testimony if necessary.