INDUSTRY REFERENCE DOCUMENTS
The subscribers to our newsletters are aware that contractor claims for labor costs have become increasingly common over the past few years. In particular, there has been something of an explosion in the number and frequency of claims seeking to recover labor costs resulting from the impacts of extras, changes and change orders. One of the factors contributing to the proliferation in such claims is the availability and convenience of labor productivity studies produced under the auspices of various institutions and industry groups, such as CII.
It has been Holloway Consulting’s experience that both general and specialty contractors, on a wide variety of construction projects, are using (and misusing) industry studies in an attempt to justify for their labor productivity claims. Therefore, owners, contractors and designers, and their counsel, will need to be familiar with the following examples of change-related labor productivity studies:
1. “Quantitative Impacts of Project Change”, by C.W. Ibbs and Walter E. Allen.
2. “The Effects Of Change Orders on Productivity”, Charles A. Leonard.
3. “Quantifying The Cumulative Impact Of Change Orders For Electrical and Mechanical Contractors”, by the Construction Industry Institute Cumulative Change Order Impact Research Team.
We have analyzed numerous other studies, but, due to space limitations in this newsletter, have focused on these three popular documents.
OVERVIEW OF LABOR PRODUCTIVITY
Productivity can be expressed as the ratio of input to output (I/O). For example, an hour of welding labor (input) should produce a certain quantity of weld-inches completed (output). Continuing with this example, the contractor’s estimate, bid and contract prices are often based on assumptions (e.g., labor productivity factors) regarding the quantity of weld-inches that each welder will complete. A contractor’s profitability is likely to be adversely impacted if its workers fail, for whatever reasons, to meet their bid or contract productivity rates. The differences between bid and actual labor productivity are the subject of labor inefficiency claims.
Although productivity is most often thought of as relating solely to labor, in practice, it also relates to other resources used to produce a product. For instance, lost productivity can also result in higher equipment costs because the equipment is tied up for a longer period of time, and additional material and consumables costs.
POPULAR STUDIES USED IN CLAIMS ASSOCIATED WITH CHANGE ORDERS
Having Your Cake and Eating It Too
Something of a conundrum exists in today’s construction industry relative to the performance of extras and change orders. On the one hand, contractors have traditionally been enthusiastic about performing change order work, because such work is often performed at pre-established, profitable rates. In fact, contractors have been known to design their bid with the goal of becoming the low bidder and recovering profit solely from extras. On the other hand, some contractors are also using those same change orders as the basis of labor productivity claims submitted to the owner at the end of the project, based on CII or similar studies. However, as discussed in this article, some contractors are misusing these studies and attempting to use them in circumstances where they are not applicable.
=> Reference Document No.1. “Quantitative Impacts of Project Change”, by C.W. Ibbs and Walter E. Allen.
In an attempt to isolate the impact of change orders on labor productivity, Ibbs selected “normal” projects where changes and change orders occurred, but without other impacts such as delay, acceleration, trade stacking, learn curve, multiple shifts, bid error, labor force mismanagement, etc. These projects were in the $40 million to $1.2 billion range, and can be described as EPC turnkey contracts with a direct hire labor force working either 4 – 10 hour days or 5 – 8 hour days. Projects with multiple shift and/or overtime work were excluded from the study.
What You Should Look For In Your Claim
1. The Ibbs document was specifically designed to take a macro look at labor productivity losses on large projects that were “unimpacted”, except via change orders. Therefore, it seems unlikely that the circumstances of the projects studied by Ibbs would be similar to most other projects in dispute. In fact, it would not be unusual for your plaintiff contractor’s work to have been impacted by delay, acceleration, trade stacking, learn curve, multiple shifts, bid error, labor force mismanagement and other factors that Ibbs excluded from his study.
2. Percent of change and impact should be measured at the project level and should be based on productive (foreman, journeyman and apprentice) hours, excluding general foreman and superintendent hours. Therefore, you should confirm that the claimant contractor has excluded unproductive change order hours, supervision, general foreman and superintendent hours, time lost due to weather, etc. in his calculation of change and lost productivity.
3. Consistent with the opinions of other industry experts, Ibbs believes that the contractor’s failure to implement a labor productivity management system can result in a significant increase in incurred labor manhours. Did your plaintiff contractor maintain a labor productivity management system? If not, he may have contributed to non-compensable hours that should be excluded from claimed hours.
4. Of the 40 projects used in his study, Ibbs only checked the accuracy of the bid estimates on four projects. Is contractor bid error an issue in your case? If yes, he may have contributed to non-compensable hours that should be excluded from claimed hours.
5. Ibbs states that labor productivity or labor efficiency may actually increase on projects with changes and change orders. Ibbs found that labor productivity improved or was unchanged on 17 projects where change was measured at 0 to 25 percent. Would your contractor and/or his expert agree that labor productivity may actually have increased on your project?
Finally, the Ibbs document is not well suited for labor efficiency assessments at the cost account level, e.g., micro level.
=> Reference Document No. 2 – “The Effects Of Change Orders on Productivity”, Charles A. Leonard.
The Leonard document is based on a very different set of projects, as compared to Ibbs. In preparing his master’s thesis, Leonard selected 57 Canadian building and industrial facility projects, that were completed on a lump-sum or unit price, competitive bid basis. Leonard excluded projects such as nuclear power, offshore, and heavy civil projects.
What You Should Look For In Your Claim
Leonard states that:
1. Productivity on projects carried-out under cost reimbursable contracts generally experienced productivity losses of 30% to 40%. He does not address whether he believes that time and material change order hours would inherently include such productivity losses. What has been your experience with the efficiency of time and material work?
2. Change should not include unproductive labor hours reimbursed through change orders, and other items such as support labor, overtime premiums, and site supervision. Recent experience has shown that contractors have included unproductive hours in their calculation of the percent of “change.”
3. When the contractor’s bid is more than five percent below the average of the other bids, Leonard adjusted the plaintiff contractor’s bid upward to equal the average of the other bids. How did the plaintiff contractor’s bid compare to the other bids on your job?
4. Prior to calculating lost productivity, Leonard agrees that the contractor should exclude unproductive and non-compensable hours associated with contractor inefficiencies, rework, labor disruptions and inclement weather. Has the plaintiff contractor in your case acknowledged any bid error or non-compensable costs? If not, he may have miscalculated his claim.
5. The number or quantity of change orders is NOT an accurate indication of the number of delays and disruptions. Contractors have made the mistake of quoting the number of changes as somehow being related to the amount of delay or lost productivity.
6. Leonard’s document should only be used to “predict” loss of productivity when change order hours (adjusted downward per the above parameters) exceed 10% to 15% of the earned contract hours. Has your contractor used earned hours or total contract hours, or some other calculation?
7. Predictions obtained from Leonard’s document are approximations, which do not account for the specific circumstances of a particular job. Courts require strict proof of causation or connection between cause and effect. Based on HCG’s recent experience, an increasing number of contractors are basing their loss of productivity claims solely on these studies, at the expense of proper causation analyses.
=> Reference Document No. 3 – “Quantifying The Cumulative Impact Of Change Orders For Electrical and Mechanical Contractors”, by the Construction Industry Institute Cumulative Change Order Impact Research Team.
The reported purpose of this study was to quantify the cumulative impact of change orders on the labor efficiency of electrical and mechanical contractors. The research team consisted of representatives from the electrical and mechanical contracting community and other members of CII. Contractors submitted survey data from projects that were “perceived” to be over budget as a result of change orders, rather than from factors such as low estimates, unforeseen weather conditions, or poor field planning.
What To Look For In Your Claim
1. Industry experts agree that this document was prepared in such a way as to produce biased and unreasonable results, and to encourage the document’s misuse. In addition, industry experts agree that asking contractors to participate in the preparation of a document that might be used in the future by those same contractors in an effort to “validate” their claims against owners is patently unreasonable.
2. One of the fundamental bases of this document is that the respondent contractors submitted survey data to CII from selected projects that were “perceived” by the contractors to have experienced man-hour and cost growth as a result of changes and change orders, without due regard for the other potential causes of labor overruns such as bid error, mismanagement, etc. Therefore, this document appears to be based more on subjective perception than objective analysis.
3. Upon review of this document, defendant owners and their counsel will quickly discover that the single largest component used to calculate “%Delta”, or percent of lost craft labor productivity resulting from change orders, is called the “Constant.” This Constant is likely to equal 37 percent in your contractor’s claim, which means that the contractor believes that, just by handing you the claim document, you owe him an additional 37 percent of total incurred man-hour dollars. This “constant” is a product of an unreasonable and subjective data collection process.
Based on our experiences in cases where we have represented both owners and contractors, combined with recent discussions and interaction with the authors of these studies, we are unaware of any state or federal law that recognizes, or relies on, these studies. In this regard, owners and their counsel should not be unduly influenced by the fact that the plaintiff contractor’s claim is based on, or relies on, such industry reference documents. Rather, counsel should insist that the plaintiff contractor support his claim with persuasive causation analyses, linking and providing the nexus between the owner’s actions or inactions and the contractor’s damages.
Contractors should not become reliant on industry studies as the basis of labor productivity claims. Rather, commercial and industrial contractors should implement labor management systems in the field, and track productivity throughout the project. Contractors should provide the owner with notice of events affecting productivity, and should work with their attorney or consultant to include the appropriate reservation of rights language in change orders. If possible, the contractor should periodically quantify compensable productivity losses and report those losses to the owner.
Perhaps more importantly, contractors should strive to understand these industry studies and confirm that the study they rely upon is consistent with the circumstances of their project. Regardless of the study, an objective assessment of the percentage of “change” should exclude change orders that could be readily incorporated into the work, and change orders issued after substantial completion.
Owners also should become familiar with labor productivity topics. Prior to issuing a change directive or change order, the owner would be advised to ask the contractor about the anticipated impact of the extra work. Depending on the contractor’s response, the owner could elect to award the extra work to another contractor, and the owner could also confirm that all time and material change order billings include productivity losses. Finally, unless there is a compelling financial reason to the contrary, the owner would be advised to consider granting valid time extension requests, in lieu of paying related acceleration and labor productivity losses.