NEW LAW EFFECTING CONSTRUCTION CONTRACTOR DIRECT LABOR CLAIMS
Much of the work that Holloway Consulting performs on behalf of both our contractor- and owner-clients includes analyses of costs associated
with reduced craft labor productivity. More often than not, these analyses focus less on whether the contractor actually experienced losses, and more
on the causes of, and responsibility for, those losses, and the methodology best suited to quantify the direct labor damages.
Expert methodologies associated with schedule delay and labor productivity losses have come under increased scrutiny in recent years, largely
as a result of the Daubert and Kumho Tire decisions. These decisions did not specifically address construction causation and damages methodologies,
but they did provide guidance on the need for acceptance of expert methodologies by the legal community.
Two recent court decisions have provided authority on the recovery of delay and acceleration damages as measured by the 'measured mile' approach:
- Bell BCI v. United States, 81 Fed. Cl. 617 (2008); and
- James Corp. v. N. Allegheny School Dist., 938 A.2d 474 (Pa. Commw. Ct. 2007)
Bell BCI Co. v. United States
Bell sued to recover damages resulting from over 200 modifications issued by the government. Bell's claims included a pass-through claim on
behalf of its sheet metal subcontractor, Stromberg, whose work had been impacted by project design revisions. Stromberg's claim utilized the 'measured mile'
approach, which compared production rates during the early unimpacted period to production rates after the government's changes had been issued.
The court approved Stromberg's measured mile analysis, and awarded the total labor cost claim amount. The court stated, "Stromberg's "measured
mile" approach for measuring productivity is an accepted method to prove a cumulative impact claim."
James Corp. v. N. Allegheny School District
James sought acceleration damages for completing the project on-time despite delays caused by the District. James utilized the 'measured mile'
approach to establish the inefficiency costs incurred as a result of the acceleration. The trial court approved James' measured mile damages,
and entered a judgement in James' favor.
On appeal, the District argued that the measured mile method is too imprecise, because the calculations were based on estimates which were based on flawed
assumptions. The appellate court rejected the District's arguments by ruling that "when a contractor alleges a loss of productivity, the
measured mile is the preferred method of computing damages."
THE MEASURED MILE METHOD
Whether managing projects via cost/ schedule control systems criteria (C/SCSC) or resolving disputes using the "Measured Mile" method or other such techniques,
one of the primary goal is to determine why actual labor performance has varied
(+/-) from estimated and budgeted performance. The "Measured Mile" is a popular analytical method to quantify productivity losses on construction and manufacturing projects.
The original stated goal of this method is to compare productivity during periods of a project that have been adversely impacted by unanticipated excusable/compensable causal events to productivity
during those period(s) that were not impacted, or that were unhindered. This unimpacted or unhindered period of performance is referred to as the "Measured Mile", which is used as
the baseline to predict what the contractor's cost performance should-have-been, or would-have-been.
This article examines some of the strengths and weaknesses of this technique as revealed over the past 20 years in settlement, mediation, arbitration and trial.
WHAT TO MEASURE AND QUANTIFY
The subscribers to this newsletter are reminded that the core fundamentals of the Measured Mile method originate from the C/SCSC first developed by various U.S. government defense agencies in the 1950's and 1960's, and later adapted to EPC projects by large U.S. contractors such as Fluor, Bechtel, etc. (The author was a construction field engineer dealing with real labor productivity issues during these ancient renaissance days). Earned Value systems and construction cost engineering rely on performance measurement concepts which share many similarities with the "Measured Mile" methodology such as the:
- Budgeted Cost of Work Scheduled (BCWS);
- Budgeted Cost of Work Performed (BCWP); and
- Actual Cost of Work Performed (ACWP).
As is the case in field cost accounting and engineering, the goal in the Measured Mile method is, or at least should be, to analyze direct labor performance at the lowest level (cost account or sub-account) possible. The reason for this is obvious: the lowest levels of data reporting should produce the highest levels of clarity. For example, high level reporting of total steel erection man hours/ton erected might be appropriate for executive management, but, if possible, project managers will endeavor to measure performance at the steel sub-accounts; unload, erect, bolt-up, weld, decking, stairs, handrails, etc.
A common challenge here arises when the contractor has failed to prepare daily time sheets that accurately record the activities of each craftsman. Two situations most often arise:
- The contractor did not prepare any type of daily worker time sheet, or
- The contractor prepared time sheets but failed to specify the type of work performed.
A predictable course of action in Situation #1 is to forego use of the Measured Mile in favor of some other technique. Courses of action used in Situation #2 in past cases were to:
- Move forward with an analysis of total man hours incurred at the account level, i.e., steel, piping, etc., with the hope that the other side will see the merits of your argument in settlement or,
- Forego use of the Measured Mile in favor of some other technique.
IDENTIFYING THE MILE
In the context of a "Measured Mile" analysis in a construction project dispute, a no-stone-unturned causation analysis theoretically examines all of the potential causes of excusable and non-excusable events. As much as the participants (experts, attorneys and triers of fact) would like to believe that a no-stone-unturned approach can and should be applied to every such analysis, in reality this rarely happens in these analyses because of lack of data, lack of time, cost concerns, etc. As a result, experience shows that many parties base their Measured Mile analyses on the period of performance that was "least" impacted by excusable and non-excusable events.
Some of the key questions to be addressed here by experts, attorneys and triers of fact are:
- Must the Measured Mile represent a period of completely unimpacted performance?
- Is the technique valid and useable when the Measured Mile was the least impacted period, or when the Measured Mile was relatively unimpacted?
When the Mile Contains Only One Causal Event
Let's consider a situation where the unimpacted and impacted periods are relatively easy to identify:
A Gulf Coast union piping crew (journeyman welder, pipe fitter, and an apprentice) was assigned to fabricate large bore Schedule 80 carbon steel process piping during the winter in an indoor shop with controlled temperatures. The crew worked for a few weeks in solitude with absolutely no unanticipated outside impacts to their work and accomplished the budgeted rate of 150 weld-inches per day. This crew's work was then moved to a nearby outside fab shop, where they worked for a few weeks with absolutely no outside impacts to their work, other than cold temperatures. Their outdoor production was reduced to 125 weld-inches per day, and the cost account experienced a labor overrun of approximately 20%. In this example, a week in the indoor shop might be used as the measure mile, and one could argue that the entire cost overrun was caused solely by the decision to move outdoors.
When the Mile Contains Multiple Causal Events
Let's consider a situation where the unimpacted and impacted periods are relatively difficult to identify and quantify:
That same Gulf Coast union piping crew was assigned to fabricate large bore Schedule 80 carbon steel process piping during the winter in an indoor shop. However, from the outset, the crew's work was impacted to varying degrees by:
- A move to an outdoor fab shop;
- Late and unpredictable material deliveries;
- Design changes;
- Crew turnover;
- Changes to crew composition;
The crew's production during the impacted period was reduced to 100 weld-inches per day, and the cost account experienced a labor overrun of approximately 33%. In this example, a period of time in the indoor shop might be used as the measure mile. Because the cost overrun was caused by multiple events, the challenge for the expert then becomes the allocation of the cost overrun between the parties based on their relative contributions to losses.
There are certain Ph.D.s who would have the industry use linear regression analysis, differential equations or Laplace Transforms to reach mathematical solutions to these problems. Although their academic peer group, this author and a few other experts may understand the mathematical methodology proposed by these Ph.D.s, there is little, if any, chance that such esoteric analysis would be understood or welcomed by judges or a jury of housewives, truck drivers and insurance salesmen. Instead, common sense dictates that effective testifying experts use more widely understood concepts should be used to explain the relative contributions of the parties to the losses. Common sense also dictates that a popular master's thesis should not be used blindly to support a claim for productivity losses due to change order impacts, because contractors often bid jobs with the hopes in earning all of their job profit from change orders. Similarly, productivity has been shown to sometimes increase during periods of scheduled overtime.
AT WHAT POINT IN TIME SHOULD THE MILE BEGIN?
Figure No. 1 below shows the original Measured Mile graphic, wherein the mile starts at Point A, three months into the work after 30% progress has been achieved very inefficiently. Experience has shown that the methodology described in the original 1986 article and employed on many occasions thereafter is deeply flawed, because virtually all of the inefficient hours incurred prior to the start of the measured mile would be non-compensable and fall to the contractor's account.
Figure No. 1
Click to view larger
As shown in Figure No. 2 below, the proper approach would be to first establish a defensible measured mile or rate of performance. That rate of performance should then be started at 0,0 point on the X-Y axis of the chart and projected forward to the substantial completion of the work. The analysis should then reflect the fundamental premise of this method --- the work at issue could have been completed at the rate of production upon which the mile is based, without unreasonably penalizing the contractor for the consequences of "when" the mile started and ended.
Insert Figure No. 2
Click to view larger
The original article also proposed that the first and last 10% of the work, "are not valid because they are build-up and tail-out and are not representative of expected or average sustained costs." While this statement may have represented the original author's opinion, experience on over $20 billion of construction indicates that there is no analytical basis for these percentages. We are in agreement that build-up and tail-out often occurs, but their rates and durations vary from project to project.
Special thanks to the lawyers at Watt, Tieder, Hoffar & Fitzgerald, LLP for informing us about these two recent cases, which provide authority
on the measured mile method.