Difficult Issues for Contractors and Construction Owners
While the recent storms in Texas and other areas in the southern United States represent a silver lining for those involved in repair and reconstruction, these storms have caused disruption and delay on many construction projects that were underway prior to the storms. In many cases, those associated with the construction industry have experienced costly delays and increased expenses to their construction work. The illustration below shows the major storms experienced in 2017.
Contractor’s Delays and Increased Cost
The first and foremost concern relative to a hurricane is the loss of life, followed closely by property damage. The primary focus for the public sector should be those issues, and routinely is the focus for all. However, the focus for the construction industry becomes the completion status and delays to ongoing construction projects.
Typically, only certain delays are addressed in a contract and are considered excusable under particular conditions, and thus provide for an extension to the construction schedule. As hurricanes are considered force majeure events, contractors are typically entitled to a schedule extension, but not recovery of any increased cost for the contractor’s work. Thus, there is a high potential for disputes concerning the owner’s and the contractor’s views of how much time is allowed for a schedule extension and which increased costs are considered storm-related. This, in turn, impacts the subcontractors and suppliers and creates the potential for conflicts with the general contractor and the owner. The illustration below provides some insight into the issue of delays resulting from hurricane impacts. From one perspective, the actual force majeure delay, when the worksite was abandoned, was only 5 days, but after accounting for the total effect for the hurricane impacts, the project ended up being delayed 73 days. The reason for this disparity will be addressed later in this article.
Hurricane Impact Delays
Almost as costly and disruptive is the issue of changed conditions at the work site. Changed conditions are work site conditions that are different from when the contractor’s estimate was prepared and which served as the basis of the contract. However, changed conditions are not simply an altered site environment or damage to partially completed and permanent facilities; there are hidden changed conditions, which like delays, can lead to disputes and claims. The basic building blocks and cost sectors of the construction process are adversely impacted, such as the supply and cost of labor, materials, and equipment.
While many impacts can be identified and measured, some are more subtle, such as fuel cost increases, disruptions due to insurance issues, and even design modifications to existing and future facility construction.
Construction Material and Equipment
Construction materials can be problematic for the owner and contractors on a project that has been adversely impacted by a storm. The impact relative to construction material is not just from a cost and supply aspect, but also from specification compliance and quality control perspectives. As material supply sources are disrupted, suppliers will frequently provide material that generally meets the specification but is from a foreign manufacturer and may have different standards of dimensional control or chemical composition. Suppliers themselves may not be aware of the differences until the discrepancies are identified during the installation or testing phase of the facility.
The availability of construction equipment can also become an acute issue for dispute, and contribute to lower labor performance. Some contractors and equipment rental firms will extract their equipment from one work site and relocate it to another due to better rates and longer income potential. Work sites that are adversely impacted by a hurricane may require equipment of a higher capacity, such as a 140-ton capacity crane when the contractual requirements only require a 75-ton capacity lift equipment. In addition, as the changed conditions and additional work scope are identified, additional construction equipment will likely be required at a time when other facilities are also experiencing the same difficulties.
A little-known impact associated with the aftermath of a hurricane is reduced field labor productivity before and after the specific hurricane event. Reduced labor productivity can be the result of numerous factors, such as a lack of material and equipment, disrupted work processes, and/or work site access problems due to the storm or storm-caused damage. Reduced labor productivity can also stem from a labor force that is demoralized due to the loss of homes and vehicles, and workers may experience a high level of anxiety due to uncertainty involving the future. In addition, field supervision, inspections, and quality control processes may be absent from the job site, leading to disruptions and adverse impacts on field labor.
Subcontractors and their labor pool are frequently negatively impacted by the influx of unqualified labor after a hurricane. In addition, new subcontractors that may not be from the area are added to the workforce due to the increased work scope. The new subcontractors may not be licensed, properly insured, adequately staffed, or experienced in the type of work they are assigned, as well as being required to perform under adverse work conditions.
The illustration below shows the delay periods discussed above, with added periods of reduced labor productivity that frequently are not recognized by contractors and owners alike.
Hurricane Delays and Reduced Labor Productivity
As the illustration shows, the easily identified delay to the project is the 5 days during which the work site was abandoned, but the project had 73 days of delay to its completion. Connecting the identified delay of 5 days and the full delay to the project of 73 days in order for the contractor to achieve a schedule extension becomes one of the primary areas of disputes in storm-related situations.
Challenges for Contractors and Owners
The vast majority of construction contracts do not address most of the issues outlined above. Specifically, construction contracts do not contain provisions for contractors to recover losses and increased costs for lost productivity issues and changed conditions due to force majeure or even severe storm events. Contracts will generally address hurricanes as force majeure events, but typically only provide additional time as relief from onerous contract provisions such as liquidated damages. Contracts usually do not provide provisions for contractors and suppliers to recover the additional costs incurred due to a hurricane or its aftermath.
While a construction contract may have broad or comprehensive change-in-work provisions, it is usually formulated to address issues involving owner changes in design and construction. The challenge on most of the issues outlined above is not for the contractor and owner to agree that a change in work conditions of some type has occurred; the parties usually acknowledge that changes in the work scope have occurred. With that being said, the majority of the time the parties do not agree on who should be responsible for any increased cost and to what extent.
These types of conflicts may become issues of equity as opposed to contract entitlement. Many construction owners have become more knowledgeable about this issue and have even solicited proposals from contractors to address the increased cost and delays. If the parties recognize that the contractor has been impacted and agree that those impacts should be mutually addressed, the next issue becomes the calculation of the costs that need to be considered in negotiating cost recovery. In some cases, owners have employed experts to assist contractors in preparing their positions on delays and additional cost.
While addressing the increased costs relative to the issues outlined above can be complicated, it can be done, but is dependent on the level of information available and the spirit of cooperation between the parties. In order to properly address the contractor’s impact, it is critical to record the tasks and actions that were taken specifically for storm preparation, as well as those performed afterward that can be attributed to the storm or its disruption to construction operations. Daily reports are typically expanded to reflect the work performed for both ongoing construction operations and storm preparation/recovery efforts. It is important to note the labor, equipment, and material used for storm preparation and work site revitalization.
Photographs of the facility under construction just prior to the storm’s arrival can be helpful in establishing work progress as well as documenting damages. While damage reports are also necessary, sometimes affidavits from fact witnesses can be valuable sources of information, particularly to establish the progress history of certain systems, and damage that is not easily seen in photographs or recorded in project records. The same process and locations should be recorded before and after the hurricane for comparison and substantiation of damages.
The ultimate challenges associated with the issues discussed above will be reaching an agreement between the owner and contracting groups regarding the effect the storm had on the project from a schedule standpoint, and how to address the various costs that have been incurred. The difficulty lies in quantifying the actual delay to the project and identifying the various additional costs that have been incurred in such a manner that they can be presented for potential recovery. The contract will usually be silent as to risk sharing for certain delays and increased cost. Cost recovery for the contractor’s delays and increased cost will be dependent on relevant documentation and present the contractor’s position in a persuasive and effective manner.