April  26, 2001



Bulletin #45: Delay Claims

ZZZ Sheet Metal felt fortunate to have secured the HVAC work on a regional mall project. The project schedule contemplated a construction start on July 1, with substantial completion twenty-four months later. The HVAC work was scheduled for the final nine months of the project, with the bulk of the work between months sixteen and twenty-three. The subcontractor’s work would have to be carefully coordinated with the base building construction work, as well as other mechanical system work. The ZZZ system would also have to be in place in time for the finish contractor to come through. Many areas of the project included architectural ceilings using drywall and various special materials, which made the timeline for installation of the HVAC distribution system all the more critical. In accepting the work, ZZZ signed a subcontract the general contractor had developed, using the 1990 AGC 600 Form.

The mall project was behind schedule from day one. Excavation work was delayed by six months due to environmental conditions discovered on the site, and the construction lender’s unwillingness to fund until all environmental issues had been addressed. Months were consumed with soil borings, sub-surface water tests, and work with federal and state regulatory authorities. Finally, the lender achieved a sufficient comfort level to commit its financing. By that time, the optimal time frame for excavation had passed, and the excavation subcontractor found itself dealing with frozen ground and other winter conditions. This further delayed the project. The general contractor periodically updated the project schedule so that ZZZ would have a reasonable notion of when its work would be required. In the meantime, the subcontractor had placed orders for all of the equipment and materials it would need, and accepted delivery of much of it. The manufacturers and equipment vendors expected prompt payment, but installation was still months off. The subcontractor submitted a pay request as to the stored items, but the general contractor rejected the request stating that it had not pre-approved the ordering of the equipment and materials, and would not pay for it until it was installed. The subcontractor had also arranged to lease hoisting equipment, based upon the project schedule, and had to cancel the arrangements because of the delay. The lease contracts included a tenpercent cancellation penalty, which the subcontractor was required to pay.

Finally, and most troubling, the subcontractor had scheduled another major job to come in directly behind the completion of the mall project. It now appeared that the mall work and work on the second project would be substantially simultaneous. The only way that the subcontractor could possibly complete both projects would be to take on additional employees, and to pay substantial overtime. Having no choice, the subcontractor did so. With its final pay request, ZZZ submitted five pages of itemized delay claim damages. By its calculation, ZZZ’s delay damages were more than $500,000. While the subcontractor was prepared to negotiate over some of the items, it was not prepared for the response it received. The general contractor rejected the delay claims in their entirety.

ZZZ promptly initiated the dispute resolution procedure under the subcontract. The initial attempts to resolve the dispute through direct discussions went nowhere, and it became apparent to ZZZ that the general contractor was being barraged from all sides with delay claims. A project manager for the general contractor indicated that, while the whole situation had been unfortunate, the owner was taking a hard line with the general contractor concerning delay liabilities. The potential for delay claims was also apparently causing the owner problems with its lender. The lender was concerned about the filing of mechanic’s liens that might have priority over its mortgage, but was not prepared to fund any delay claims. The general contractor’s representative indicated that if he approved a delay claim for ZZZ, he would have every subcontractor on the project using that precedent against him.

The dispute resolution procedure next called for mediation, which was also a complete failure. The general contractor was unwilling to make any concessions. Finally, the matter was submitted to arbitration. ZZZ provided ample documentation as to changes in the project schedule, and decisions that it was compelled to make, based upon the delays resulting in significant costs to the subcontractor. Some items, such as the penalty for cancellation of the hoisting equipment lease, were easy to prove. Others, such as labor overtime for the simultaneous projects, were more difficult to definitively establish. Many items, such as the cost of storing some equipment in the ZZZ warehouse, were even more difficult to define. However, the subcontractor felt confident that it could prove most of its damages, and recover at least on the most substantial items. The general contractor did not even attempt to dispute the occurrence of substantial delays. It called into question some of the claim items (particularly related to labor overtime), but focused its defense primarily on the language of the subcontract form.

The general contractor first asserted that ZZZ had an obligation to provide timely notice of the existence and extent of its claims. Paragraph 6.3 of the subcontract required the subcontractor to “give the contractor written notice of all claims . . . within five days of the occurrence of the event for which the claim is made; otherwise, such claims shall be deemed waived.” ZZZ responded that the general contractor had actual knowledge of both the delays and their impact on the subcontractor. There was extensive written and e-mail correspondence as to extended work schedules, weekend work, changes in equipment installation schedules, changes in equipment shipping dates, etc. The subcontractor asserted that strict compliance with the five-day time requirement of Paragraph 6.3 would have necessitated the delivery of claim notices to the general contractor practically every day.

The general contractor also called the arbitrators’ attention to language in Paragraph 6.6, which stated: “The Contractor shall not be liable to the Subcontractor for any damages or additional compensation as a consequence of delays caused by any person not a party to this Agreement unless the Contractor has first recovered the same on behalf of the Subcontractor from said person . . . apart from recovery from said person, the Subcontractor’s sole and exclusive remedy for delay shall be an extension in the time for performance of the Subcontractor’s work.” The general contractor stated that it had provided ZZZ with additional time to complete its work, and had not recovered from the owner any delay damages for ZZZ or other subcontractors. Therefore, the general contractor argued that it had no contractual obligation to pay such damages to ZZZ.

The arbitration panel, while expressing sympathy for the position of the subcontractor, ruled in favor of the general contractor, and denied ZZZ’s delay claims. The arbitration panel found that, in the absence of specific claim notices from ZZZ during the course of the project, the general contractor would have no means of knowing the extent of damages that were being incurred. The panel also noted the “no damages for delay” language, although it expressed some distress at the “Catch 22” nature of the language, which would allow the general contractor to avoid subcontractor delay claims by failing to pursue such claims against the owner. ZZZ asked its attorney to appeal the arbitration decision. The court rejected the appeal, citing the extremely narrow scope of review applicable to a court’s evaluation of arbitration decisions.

Delay claims continue to be one of the most troubling and difficult issues in construction contracting. There is no question that unforeseen and significant delays result in increased expenses for all parties to the construction process. The approaches to dealing with delay claims have varied across a spectrum, from “no damages for delay” provisions, to the delivery of the delay claim notices by subcontractors within a few days after a project was to have begun. While the circumstances, as to delay claims, will vary on each project, there are some general rules that apply from the perspective of a subcontractor:

1. Fully understand the delay claim provisions of the subcontract before signing it. If the provisions are unfavorable (i.e., no damages for delay), try to assess the risk of delay on the particular project.

2. Err on the side of providing regular notices as delay damages are incurred, and be careful to comply with the deadlines for delivery of notice. The subcontractor should assume (at least for internal purposes) that it will not be able to recover on claims unless it has provided timely notice.

3. Carefully consider all elements of “delay damages” before bringing a claim. Along with increased labor or material costs, the subcontractor should consider whether additional financing costs, contractual obligations, administrative and overhead costs, storage costs, downtime, and other items might be legitimately attributed to project delays.

4. To the extent that the subcontractor can foresee that known delays will impact its contract performance, it should take reasonable steps to minimize the resulting damage. If it incurs damages that were preventable (i.e., schedules its work for certain dates, knowing that the project is well behind schedule and that the work cannot be performed on those dates), the general contractor will certainly assert that the subcontractor failed to mitigate its damages. Under those circumstances, the general contractor will have a high likelihood of success in defeating the claims. 

 

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