Asserting a Delay or Disruption Claim
Contract Bulletin #7 identified how delay and disruption claims can arise. This Bulletin will discuss how the subcontractor might react when faced with a material delay or disruption to the progress of its work. Since the SMACNA member will most often encounter delay or disruption claims as a claimant (as opposed to a party claimed against), that will be the focus of this Bulletin.
The first critical step in successfully preserving a delay or disruption claim is the creation and maintenance of the proper documentation. Under the terms of almost all construction contract forms, a subcontractor claim not brought forward in a timely manner is lost. For example, under the AIA A-201 General Conditions (1987), a written notice of claim must be delivered to the architect within twenty-one (21) days of the occurrence giving rise to the claim or twenty-one (21) days after the subcontractor first recognizes the condition giving rise to the claim, whichever is later. (This requirement can cause problems where the cause of the delay is poor coordination or some other factor that is not really a specific "occurrence"). The claim for delay must include an estimate of the cost and of the probable effect of the delay on progress of the subcontractor’s work. Upon encountering a material delay or disruption situation, the subcontractor should promptly request a change order. Under the AIA contracts, the architect is authorized to issue such a change order. If the change is not issued, the subcontractor is left to pursue its delay claim under the dispute resolution procedures of the particular subcontract (most likely through arbitration).
Typically, the parties will "slug it out" over delay claims at the end of a job. The timing for resolution of these claims raises its own issues. The project is substantially complete and the architect may no longer have any involvement with the job. Yet, most contracts require the subcontractor to refer all claims for a decision by the architect as a pre-condition to arbitration or litigation. If the architect is still involved, the subcontractor should carefully follow the procedures of the contract for notice and dispute resolution through the architect. If the architect is no longer involved, the subcontractor can claim that the position has been vacated and that the subcontractor has direct recourse to arbitration or litigation. The safest course for the subcontractor is to attempt the submittal of claims to the architect until notified by the architect, general contractor, or owner that the architect is no longer providing services to the project or until the period for architect response under the contract expires (i.e., Para 4.3.2 of the AIA A201 (1987) specifies either a 30 or 45 day response period, depending on the circumstances). It should always be kept in mind that, while resolution of a delay or disruption claim may be postponed until the end of the job, the notice requirements concerning the claim must be complied with when the claim actually arises.
The subcontractor’s failure to act when a significant delay or disruption situation is encountered can have a number of consequences, none of which are favorable. The subcontractor will still be expected to complete its work in accordance with the project schedule, notwithstanding the delay or disruption it has encountered. Its failure to complete its work under the schedule could expose the subcontractor to liability for breach of contract and, possibly, for liquidated damages claims. As importantly, the additional costs and damages the subcontractor has incurred because of the delay or disruption will likely not be recoverable.
It is also critical that the subcontractor maintain detailed records of the additional costs or damages incurred as a result of each delay or disruption. Proving the claim will require that the subcontractor demonstrate the existence of additional costs or damages and that those costs or damages were caused by the delay or disruption to its work.
Obvious and Not So Obvious Claims
Some types of delay and disruption claims are obvious. Overtime labor costs attributable to the total work stoppages that were unforeseen and attributable to the general contractor should certainly be recoverable. Increased equipment expenses in that circumstance should also be recoverable. The labor claims may include payroll taxes, fringe benefits, and additional supervisory costs. In addition, the subcontractor may also have a claim for the costs of demobilization, labor, equipment downtime, and remobilization. Finally, it may seek to claim for increased overhead, increased job site costs, lost profits, financing costs, costs of renting machinery and equipment and costs of bond and insurance premiums, permit fees and taxes. Such claims may arise not only with respect to total work stoppages attributable to the general contractor, but may also be supported by schedule disruptions, work sequencing problems, concealed conditions, and other circumstances falling short of a complete stoppage of work. A claim may also exist where the delay or disruption is due to a party other than the general contractor, such as the owner or another subcontractor. Each circumstance will differ.
The Balancing Act
Some legal counsel advise their contractor clients to file a notice of delay on the first day of a project in order to preserve and enhance subsequent claims. While that advice may maximize the prospects for the subcontractors delay claim recovery on a particular project, it is almost certain to negatively affect the relations with the general contractor throughout the project. It may also impair the willingness of the general contractor to put the subcontractor on bid lists for future projects. Some minor delays and inconveniences are to be expected on a construction project. The general contractor will not expect, or welcome, a request for a change order or a delay claim, if a subcontractor’s work gets started a few days late or experiences occasional interruptions. In an era in which the construction trades are moving towards the “partnering” concept, an unreasonably hard-nosed approach by the subcontractor concerning delays has the potential to poison the well for the remainder of the job.
An approved change order providing for time and/or compensation is usually the best outcome in a delay situation and clear and effective communication (and a good rapport) with the general contractor will improve the prospects for a subcontractor to obtain such change orders.
On the other hand, when a delay or disruption becomes so significant to the subcontractor that the time and cost assumptions on which the project was bid are being affected and no change order is approved, the subcontractor must take action. First, the subcontractor must be aware of the time limitations for notice of its claim under its subcontract. As stated above, the standard AIA subcontract terms provide for the giving of notice within twenty-one (21) days. However, the standard AGC subcontract (AGC Document No. 600) requires notice from the subcontractor within five days of the occurrence. If the time is about to run out and there is any question about the materiality of the delay or disruption, the subcontractor should always send its notice containing the claim information required by the subcontract. At the same time, the subcontractor should begin keeping the record of additional costs for the day, perhaps a year or more in the future, when the delay claims are finally sorted out.
It is also highly recommended, since the laws concerning delay and disruption claims vary greatly from state to state, that the subcontractor consult with its legal counsel early in the process of evaluating a delay or disruption claim. The merits of a particular claim will depend upon the facts, the terms of the subcontract (and its accompanying general conditions) and the laws of the particular state. The subcontractor can evaluate the facts, but the precise meaning of the subcontract terms and their likely interpretation by the courts can only be ascertained by competent legal counsel.
The subcontractor is always performing a "balancing act" when dealing with delays or disruptions. Perhaps more than any other element of a construction project, delay claims have the potential to throw a project budget severely out of balance and trigger disruptive feuding between a general contractor and its subcontractors. Taking a reasonably accommodating position (i.e. requesting simply an extension of time, rather than monetary compensation) where potential claims have not materially affected the subcontractor’s performance or costs will certainly enhance its relations with the general contractor. On the other hand, understanding and taking the proper procedural steps and creating the necessary record of damages where a valid, significant claim exists, and aggressively pursuing that claim, will be essential if the subcontractor is to prevail when it has been materially impacted.