August 03, 2020 Article

So You Are Entitled To Relief For COVID-19, How Do You Prove How Much?

Jesus Schuldes and Kate Hull

As COVID-19 advances across the United States, various industries and nearly all aspects of the supply chain continue to be impacted, including the construction industry–and, by default, skilled workers, architects, engineers, and more. COVID-19 will likely have significant effects on construction due to mandatory work stoppages, material delivery limitations, labor shortages and reduced inspector availability, which will ultimately result in delays. An April survey by the Associated General Contractors of America (AGC) found that 67% of respondents had already experienced delays or disruptions on construction projects.

Delays on construction projects can lead to a cascade of negative financial repercussions for contractors and subcontractors. Extended general conditions are the most common damages associated with delay. However, delay damages can also include unabsorbed home office overhead, idle labor and equipment costs, labor and material cost escalation, de-mobilization/re-mobilization costs, productivity loss and many others. As COVID-19 progresses and new mandates are put in place by federal, state and local government entities, it is imperative that contractors and subcontractors properly provide notice and document, monitor, quantify and report all additional costs resulting from COVID-19.

After determining that you are entitled to relief for delay damages resulting from COVID-19, how do you prove how much?

Providing Timely and Proper Notice

Seeking relief for COVID-19 starts by providing timely and proper notice. In today’s construction industry, particularly in the United States, it is important for contractors and subcontractors to get past the stigma that a claim notice or notice of relief is adversarial or confrontational. By execution of the contract, the parties agreed to a procedure for handling a demand or assertion for monetary relief. Therefore, it is very important to adhere to the notice requirements as specified under the contract. The contract will dictate time, content, and delivery of notice requirements. Failure to adhere to the contract notice requirements can prevent a contractor or subcontractor from obtaining relief.

In the case of COVID-19 and any delays and damages resulting therefrom, it may be nearly impossible to determine the full extent of time and cost impacts until COVID-19 is a thing of the past, which may be months or even years. In the meantime, it is recommended that contractors and subcontractors provide proper notice with whatever information is available at the time. Contractors and subcontractors can and should supplement their initial notice as COVID-19 impacts continue to progress and new information is made available.

Pricing Delay Damages

The most prudent pricing approach requires presentation of well-supported, well-documented, and legitimate costs that readily can be tied to impacting events on the project. The following subsections provide insight on how to support, document and price potential cost impacts that may result from COVID-19.

Unabsorbed Home Office Overhead

The concept of unabsorbed home office overhead is based upon the premise that extension of the performance period increases overhead costs. During a project, a contractor continues to incur overhead costs during periods of delay or reduced activity. However, the delay or reduced activity prevents the contractor from making “sufficient” project progress, and therefore obtaining payment to be able to absorb its share of overhead costs. This results in a reallocation of home office overhead amongst the ongoing projects, diminishing the overhead costs that can be absorbed by the project suffering delays or reduced activity, and increasing the burden on all other projects. As established by case law, unabsorbed home office overhead costs are a recoverable element of delay damages.

Home office overhead costs are not associated with a particular project or incurred at a project job site but are necessary to support construction operations. These costs include, but are not limited to, executive and administrative salaries, legal fees, accounting fees, home office rent and operating expenses, advertising, recruiting costs, general insurance, utilities, and taxes.

There are several calculation methods used to quantify unabsorbed home office overhead costs associated with a particular project, but the Eichleay formula continues to be the preferred and most accepted method. The standard approved Eichleay calculation is the following:

Home Office Overhead Allocable to Contract =
Total Contract Billings / Total Company Billings for Contract Period x Home Office Overhead Actual Contract Period

Home office Overhead Allocable to Contract / Actual Days of Contract Performance
= Daily Home Office Overhead Allocable to Contract

Daily Home Office Overhead Allocable to Contract x Number of Days of Delay = Extended Home Office Overhead

Courts have established that the Eichleay formula provides a reasonable basis for estimating the unabsorbed home office overhead allocable to a particular project.

Extended Field Office Overhead

A contractor often continues to incur jobsite expenses when the project period of performance is extended—that is, when a contractor is required to remain at the jobsite or continue construction operations for a longer period of time than originally anticipated.

Field office overhead costs, also known as general conditions, are incurred at the project jobsite and cannot be identified with a specific construction activity but support overall project construction operations. These costs include, but are not limited to, supervision, timekeeping and clerical work, engineering, field office rent and operating expenses, utility costs, material handling and cleanup. Field office overhead costs are typically time-related and can increase when there is an extension to the as-planned period of performance. Overheads are frequently segregated within the job cost report under general conditions or field overhead costs.

There are several calculation methods used to quantify extended general conditions for a particular project. However, the two most recommended methodologies include actual general conditions incurred during the time period of non-performance and a calculated general conditions daily rate multiplied by the number of days of extended performance.

When a definite and clearly defined period of work stoppage or suspension occurs, it is recommended that the contractor quantify the extended general conditions based on field office overhead costs actually incurred during that given period. For example, if a continuous one-month suspension of work occurred due to COVID-19, the contractor should quantify the general conditions costs incurred during that month. In this case the contractor does not need to rely on calculations or assumptions to quantify general conditions, as it should be relatively easy to track and quantify field office costs, such as management salaries and trailer rent during the period of non-performance.

In some instances, the extended period of performance cannot be definite, such as when a work suspension occurs. In this case, the method frequently used and recommended to calculate extended general conditions is to take the actual general conditions costs incurred for a period of time and divide by the number of days for the selected period. The daily general conditions rate is then multiplied against the days of delay or extended performance.

For example, assume COVID-19 government and community actions taken from March 1, 2020 through July 31, 2020 resulted in a 50-day project delay. The extended field office overhead can be calculated as follows:

Total General Conditions of Period (5 Months) / Total Days of Period (5 Months) = General Conditions Daily Rate

General Conditions Daily Rate x Days of Delay (50) = Extended General Conditions

The use of a daily rate to quantify extended general conditions is widely utilized and has been adopted in many cases.

Idle Labor and Equipment

During a delay period or work stoppage, a contractor may incur idle labor and/or equipment costs. In order to recover these costs, it is important that the contractor demonstrate that the labor and/or equipment could have been utilized except for the delay. In addition, the contractor should provide documentation (such as daily reports) showing that the labor and/or equipment was not able to perform work during the delay period. 

These costs are typically quantified by the actual costs incurred during the delay period unless the contract specifies otherwise. When determining the costs incurred for idle labor and/or equipment, the following questions should be considered:

  • When was the labor and/or equipment idle?
  • How long was it idle?
  • What was the actual cost incurred for the idle time?

For example, if a project is suspended for 30 days due to COVID-19, a contractor may incur idle equipment costs for one tower crane and one operator:

Actual Daily Rate ($500) x Delay Period (30) = Idle Equipment Cost
Actual Wage Rate ($22) x Labor Hours during Delay Period (160) x Burden = Idle Labor Cost

When claiming idle equipment costs, the contractor can claim rental costs or ownership costs. The contractor cannot claim operating costs, such as fuel, filters, oil, grease and minor repairs. For rental equipment, actual costs can easily be determined through invoices. For contractor-owned equipment, actual costs can be determined based on internal equipment rates that should account for depreciation, interest, storage, taxes and insurance. There are also several industry manuals that can be used to determine equipment rates including, but not limited to, the Associated Equipment Dealers (AED) Green Book Retail Rental Rates, Rental Rate Blue Book, and National Electrical Contractors Association (NECA) Tool and Equipment Rental Schedule.

When claiming idle labor costs, the actual cost and/or labor hours can easily be determined through payroll records, daily reports, and timesheets. An average wage rate can also be used, either for the entire labor force or just the trades affected. The contractor should also apply labor burden costs, which are not included in the wage rate and typically consist of taxes, insurance and other benefits.

De-Mobilization and Re-Mobilization

A contractor may also incur unanticipated de-mobilization and re-mobilization costs resulting from delays or work stoppages. If it appears a project is going to be delayed or suspended for a long period of time, the contractor may be directed to de-mobilize in order to mitigate additional costs.

These costs are typically quantified by the actual costs incurred for de-mobilization and re-mobilization, which include the transportation of material, labor, and equipment to/from the project jobsite, among other costs. These costs can vary depending on the type of project and the level of de-mobilization and re-mobilization efforts required. It is also important to make sure these costs do not overlap with any extended general conditions costs.

Labor and Material Cost Escalation

Delays or work stoppages can push performance into a period of higher labor wages and material costs, which are a recoverable element of delay damages. Typically, the contractor assumes the risk of increased labor wages and material costs during the original performance period but can claim increased costs if the performance period is extended due to delays.

To calculate labor escalation, the estimated and actual wage rates need to be determined. The estimated wage rates can be based on the bid estimate or contract, whereas actual wage rates can be based on payroll records. An average wage rate can also be used, either for the entire labor force or just the trades affected. The following calculation can be used to determine increased labor costs if they were originally planned in one wage period:

Hours after Increase x Rate Escalation = Wage Escalation
Wage Escalation x Burden = Total Wage Escalation Costs

Two methods can generally be utilized to determine material escalation costs:

  1. Direct Method – Compares estimated cost of material and actual cost of material, as purchased based on invoices or other supporting documentation.
  2. Indirect Method – Uses published cost indices to illustrate the difference in material costs (e.g., Engineering News-Record (ENR) Construction Cost Index, Turner Building Cost Index, RS Means Construction Cost Data, etc.) when invoices or other supporting documentation are not available.

Other costs to keep in mind when it comes to material escalation include storage, transportation, and taxes.  When calculating labor and material escalation, it is important that the contractor only calculate the difference between the estimated cost and actual cost.

Productivity Loss

Productivity loss is experienced when work is not accomplished as originally anticipated and can result from work stoppages, out-of-sequence work, restricted site access, unavailability of manpower and other disruptions. Methods for quantifying productivity loss generally fall into four major categories: measured mile, comparison to bid, productivity factors, and visual observation or judgment.

The measured-mile analysis is a widely recognized and preferable productivity loss quantification method in construction. This analysis estimates costs resulting from lost productivity by comparing scope production during the disrupted period of performance to scope production during a period of unaffected performance. The unaffected performance period represents the “measured mile,” which serves as a basis for comparing impacted labor productivity and determining lost man-hours and equipment-hours for the impacted scope of work. The procedure to implement a measured mile analysis generally is as follows:

  • Identification and tracking of impacted activities
  • Compilation and analysis of productivity data
  • Identification of measured mile
  • Productivity loss calculation

Productivity loss implementing the measure-mile methodology can be calculated as follows:

Productivity = Units / (Work – Hours) or Total Output / Total Work Hours

For a project with activities impacted by disruption event(s), labor productivity for the impacted and non-impacted periods should be calculated separately. The non-impacted labor productivity pertains to the measured mile:

Productivity for Non-Impacted period = PMM

Productivity for Impacted period = PIP

The PMM and PIP labor productivity values can be used to calculate the Productivity Factor:

Productivity Factor, P. F = PIP  / PMM

Using the Productivity Factor, the lost man-hours for an activity can be determined:

Lost Manhours = THIP x (1 – P.F)

THIP is the total hours of the impacted activity where labor productivity is PIP.

In this case, a pre-COVID-19 vs. COVID-19 scope production comparison could be made in order to determine any productivity loss. It is imperative that proper documentation is maintained to substantiate actual production and items such as work stoppages and unavailability of manpower. Additional precautions during use of a measured mile analysis should be implemented to avoid use of erroneous or inconsistent data, the use of incorrect productivity measurement and the use of different scopes of work in comparing labor productivity.

The comparison to bid using earned value can be considered as a proxy or substitute to the measured-mile analysis because it compares the planned performance with actual performance over a specific period. Earned value can be calculated using revenue per labor hour by comparing revenue expected to be generated for each labor hour against the actual revenue generated by the actual hours expended. In addition, earned value can be calculated by comparing the budget to perform certain work against the actual cost of work performed.

Conclusion

It is becoming apparent that COVID-19 will likely have significant effects on construction that will ultimately result in delays. These delays could lead to a cascade of negative financial repercussions for contractors and subcontractors including, but not limited to, unabsorbed home office overhead, extended field office overhead, idle labor and equipment, de-mobilization and re-mobilization, labor and material cost escalation, and productivity loss.

As COVID-19 progresses and new mandates are put in place, it is imperative that contractors and subcontractors properly provide notice and document, monitor, quantify and report all additional costs resulting from COVID-19.

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Jesus Schuldes

PSP, Spire Consulting Group, LLC, Houston, TX

Kate Hull

Spire Consulting Group, LLC, Austin, TX