Given the complexity of many construction projects today, delays to the completion date are common, because permits, personnel, materials, equipment, activities, design changes and many other elements must be coordinated under unpredictable circumstances. These conditions have made completing projects on time and within cost extremely difficult.
Because of the considerable amount of resources required to carry out a construction project, delays can generate significant additional costs. Allocation of these additional costs often becomes a point of conflict between the parties involved, giving rise to tensions and disputes. In many cases, this leads to the application of penalties, changes in project scope or the implementation of recovery or acceleration plans.
When responsibility for the delay lies outside the contractor's control, it is imperative that the contractor submits a claim. This action seeks to exempt the contractor from the established penalties and, at the same time, obtain compensation for the additional expenses incurred. There are several types of claims, each adapted to the different situations and delay events experienced by the contractor.
1. Prolongation claim
If an amicable agreement cannot be reached, on projects where a critical delay has occurred due to an event or situation outside the contractor's control, an extension or prolongation claim must be submitted. In this type of delay claim, the contractor requests relief from penalties and compensation for additional site prolongation costs.
To support a claim of this type, documentation and evidence must be provided that clearly support the causes of the delays and the costs associated with the project extension. A delay analysis that quantifies and explains the delays helps substantiate the claim; the outcome depends on the contract, applicable law and the evidence. This analysis must be supported by project records, progress reports, correspondence between the parties and any other document that supports the position of the party involved.
It is important to bear in mind that extension claims are subject to the specific terms and conditions established in the contract between the parties. Contractors and subcontractors must carefully review the contractual provisions related to delays, extensions of time and compensation rights in order to understand the requirements and procedures needed to submit a valid extension claim.
In complex construction claims, experts with specialised knowledge in delay analysis, cost estimation and construction management play a crucial role in the impartial quantification of prolongation costs. Their experience gives credibility to the claimed costs in legal disputes. Clear and concise communication of the methodology, analysis and conclusions is vital for successful resolution of such disputes. However, having the best delay analysis team is of no use if there are no records and documentation supporting the analysis.
2. Disruption, interruption or disturbance claim
There may be situations where a contractor suffers losses as a result of the employer's actions in areas that are not critical for the project. If these events do not delay completion or a contractual milestone, they do not by themselves establish entitlement to an extension of time. Any claim for additional direct or indirect costs must be assessed under the contract and supported by records.
However, because the contractor is paid according to the quantity of work performed, it is sometimes difficult to understand why certain events give rise to recoverable losses.
Disruption claims are common in most international construction arbitrations. They frequently arise at the same time as extension of time claims. Disruption can be defined as a disturbance, obstacle or interruption to the contractor's normal working methods that results in lower productivity or efficiency. A loss of productivity means that the work is being performed less efficiently than anticipated in the contract.
To understand this definition, the terms production, productivity and efficiency must be properly understood, as well as their importance in pricing construction contracts.
- Production is the quantity of work performed, whether manufacturing, installing, constructing or designing anything related to the project.
- Productivity, on the other hand, is the quantity of work produced in a given time. For example, if an installer can place 50 m2 of roofing in one hour, productivity is 50 m2 per hour.
- Efficiency is a percentage relationship between inputs and outputs. It allows production to be measured against the resources (materials, time, energy, equipment and so on) that were needed to achieve that production.
The price of construction work is based on production, productivity and efficiency. For example, the price of roofing for an industrial facility would be quoted as follows:
Roof installation/m2 = Material cost/m2 + equipment/m2 + labour/m2
The material cost corresponds to the price of the materials required to build one square metre. Labour cost is calculated by multiplying the time required to place one square metre by the hourly rate of that specific labour. Likewise, equipment cost is calculated using the time the workforce needs to build one square metre multiplied by the hourly cost of the equipment.
By assuming a set level of productivity, the contractor also assumes a set level of efficiency. Therefore, if the contractor can perform the work more efficiently, its productivity will increase, meaning better performance compared with the fixed rate. Conversely, if the contractor's efficiency decreases, its expected performance against the fixed rate will be reduced.
Disruptions affecting productivity may arise from an infinite number of sources, including, but not limited to, excessive changes to the work, changes in work sequence, site access problems, differing site conditions, weather, overtime, rework and workforce morale. It is also possible that productivity is lower than expected because the contractual baseline assumed unrealistic productivity.
Example
For example, if a contractor assumes that 30 m2 of curtain wall can be installed per day and labour, equipment rental and material costs amount to 15,000 euros, the cost will be 500 euros per m2. If, as a result of a disruption (the lift has not been installed due to a design failure for which the contractor is responsible and workers must carry material up the stairs), only 15 m2 can be installed per day, direct labour and equipment rental costs would increase.
The prices offered by the contractor usually assume an optimum level of efficiency. The moment a contractor modifies the work sequence or stops a work front, efficiency normally falls, and therefore productivity falls as well.
Through a disruption or interruption claim, a contractor will try to recover the additional direct costs derived from the loss of productivity. Considering that direct costs are much higher than indirect costs, it is important for the contractor to collect as much information as possible about what is being done and when, regardless of whether things are going well or not.
In principle, calculating loss of productivity seems relatively simple. The problem lies in the detailed documentation needed to perform the calculation at a level where the loss of productivity can be demonstrated.
Unfortunately, disruption claims are often considered only after the opportunity to create those records during the project has already passed. They also face various practical difficulties, such as the need to demonstrate the causal link between the alleged disruptive events and the losses claimed, as well as verification of the actual losses suffered. Accurate and complete documentation is a fundamental element for supporting the connection between disruptive events and the resulting losses, thereby allowing a more robust and convincing presentation during arbitration.
A good planning engineer can collaborate from the earliest project phases. They can help create the contractual baseline by analysing whether the durations and sequences are realistic, organise and create data to support a claim, create delay events in the schedule for later analysis and even carry out a delay analysis to encourage an amicable settlement.
What is required to succeed in a disruption claim?
The SCL Delay and Disruption Protocol states, in general terms, that disruption is demonstrated by applying analytical methods and techniques to establish the loss of productivity arising from disruption events and the resulting financial loss.
For contractors to succeed in disruption claims, they generally must demonstrate the following:
- Identify the disruptive event or events outside the contractor's responsibility.
- Identify the activities affected by that disruptive event.
- Demonstrate that the anticipated production figures, planned resources and time required to complete the disrupted activities as calculated in the tender were feasible.
- Calculate the loss of efficiency caused by the previously identified event.
- Identify the number of hours actually recorded for the disrupted operation.
The purpose of disruption analysis is not merely to show the discrepancy between what actually happened and the contractor's original plan. Rather, it seeks to demonstrate the genuine loss of productivity and additional expenses the contractor would have incurred because of the disruptive events for which the employer is responsible.
As with delay analysis, maintaining detailed project records is essential for disruption analysis. The claiming party must substantiate the link between the disruption and the losses claimed, in accordance with the contract and applicable law. The contractor must not only demonstrate the amount of the claim, that is, the cost of the loss of productivity, but also that the costs were actually incurred while carrying out the affected activities. Establishing that link can be difficult when contemporary records are incomplete.
3. Global claim
Global claims, also known as total cost claims or composite claims, are claims submitted by contractors without attempting to substantiate the cause and effect of the events that occurred. This type of claim, although often preferred by project management teams, is the least advisable. No explanation is provided of the causal link between the delays or productivity losses and the relevant events that occurred on the project.
Global claims global claims in construction arbitration arise from the difficulty of proving causation in complex projects with many interrelated events. Consequently, the claimant does not seek to attribute a specific loss or delay to a specific breach or event. Instead, numerous events outside the contractor's responsibility are typically identified and used to justify the delay or additional direct costs of the project.
Only on projects under very particular circumstances is it advisable to submit a global claim:
- A large number of events clearly outside the contractor's responsibility under the contract have occurred.
- A precise or reasonable allocation of the claimed compensation caused by the identified events cannot be made.
In those rare cases where a global claim is justified, the SCL recommends proceeding in two stages:
- Individually quantify those elements of the claim for which the causal link between the event and the resulting claimed losses can be established.
- Claim compensation for the remainder as a whole.
Difference between disruption and prolongation claims
Interruption or disruption claims are frequently mixed with prolongation claims arising from delays. It is easy to imagine a scenario where a project experiences interruptions that result in delays, and to overcome those delays an acceleration plan is required, thereby generating further disruption and additional costs for both contractor and employer.
When distinguishing between prolongation and disruption claims, it is important to understand that direct and indirect costs are valued and paid in different ways. The price and payment for the real work are based on the volume of work performed (production), while indirect costs are mainly time-based.
Disruption claims focus on compensation for the reduction in expected labour and/or equipment productivity, that is, a loss of efficiency. This loss of efficiency leads to an increase in the project's direct costs. In addition, disruption may arise from both critical and non-critical events.
On the other hand, only critical delays are relevant to prolongation costs and can give rise to compensation (indirect costs). The contractor's right to compensation depends on whether the delay event was caused by matters that are the employer's contractual responsibility.
Extension or prolongation claim
An extension claim arises when a project suffers a critical delay due to factors outside the contractor's control. The delay to completion may be due to events such as variations in the scope of work, changes in project specifications, unforeseen site conditions or delays caused by the owner or other external factors.
Extension of time requests generally focus on additional time, postponing the application of penalties, and the indirect costs incurred due to extended presence on site.
Interruption or disruption claim
A disruption claim arises when the productivity or efficiency of the contractor's work is significantly affected, generating additional direct costs. As with an extension claim, interruptions can be caused by a wide variety of factors.
Disruption claims often focus on demonstrating the specific impacts on productivity, efficiency and costs incurred by the contractor as a result of the disruptive events. Contractors seek compensation for the additional expenses incurred because of the disruption.
Global claim
A global claim arises when a large number of events outside the contractor's responsibility have occurred and the cause and effect of those events cannot be substantiated.
Global claims focus on identifying a large number of events and explaining in a reasoned way how those events affected the project, while accepting that, because of the project's complexity, it is impossible to quantify each one separately.