May  10, 1996



Bulletin # 7: Delay Claims -- Part 1

The Importance of the Project Schedule

Every significant project begins with a schedule, usually setting out the "critical paths" of each component of the work. Materials are ordered and labor availability is planned based upon that schedule. The various trades are to coordinate their efforts in light of the schedule. Almost all standard contract forms state that "time is of the essence of the contract." On a construction project, there is no question that time truly is money.

The project schedule is typically developed by the general contractor or construction manager, in consultation with the architect, and taking into account the requirements of the owner for completion, estimated lead times for ordering materials, the proposed start date, and, in some instances, anticipated weather conditions. First-tier subcontractors usually have some input into the project schedule. Lower-tier subcontractors most often do not. Therefore, the HVAC subcontractor may find itself starting a job with a very tight, or even an unrealistic schedule. This can have major cost and liability implications. When the subcontractor encounters an obviously flawed or unrealistic schedule, it should request a modification of the project timeline applicable to the subcontractor’s work before the subcontract is signed.

The project schedule serves several purposes. It defines the anticipated start and substantial completion dates of the project. Perhaps more importantly, the schedule defines the sequence of the work and the dates of commencement and completion for each of its elements. This aspect of the schedule allows the subcontractor to order materials for delivery when they will be needed and to block out the time and plan for the labor force required. The schedule is intended to make certain that one subcontractor’s work is substantially complete (i.e. electrical wiring) before the next subcontractor’s work in the same space is commenced (i.e. drywall installation). Improper sequencing of the work will negatively impact efficiency and increase costs, as will overcrowding of a work area with multiple trades. Unfortunately, the reality of a job site often defies even the most carefully developed schedule.

The Sources of Delay Claims

By definition, a delay arises when some component of a project (or the entire project) deviates materially from the project schedule. The reasons may have nothing to do with the construction process. For example, the project may experience a late start due to problems with the construction financing, delays in obtaining plan approval, or adverse weather conditions. The delay may be construction-related, but not under the control of any party, such as strikes, material shortages or concealed conditions.

Finally, delays can be caused by those involved with construction. They may result from poor coordination of the work by the general contractor, failure of one or more of the subcontractors to meet their portions of the schedule, or both. In any case, it is inherent in the concept of a delay (and a delay claim) that a material deviation from the project schedule has occurred that negatively impacts the particular subcontractor.

The relief available to the subcontractor may include: (i) an extension of the time for completion and compensation; (ii) only an extension in the time for completion; or (iii) nothing.

The impact of a delay on the subcontractor and its right to an extension of time and/or compensation will depend upon a number of factors. First, the subcontractor must consider the terms of the subcontract agreement. The subcontract will certainly specify the procedure for presenting notices of claims and the method for pursuing a delay claim. The typical subcontract and general conditions will provide that the subcontractor, by signing the subcontract, has agreed that the schedule applicable to its work is reasonable. (This further emphasizes the importance of a workable schedule at the beginning of the job.) The subcontract may provide that certain types of delays will justify only an extension of time, but no compensation to the subcontractor. This will often be true where the delay results from acts of God, strikes, material shortages, or unusually severe weather. The subcontract form may even contain a clause under which the subcontractor waives any claim for damages due to delay, whatever the cause. Therefore, the starting point for a subcontractor’s evaluation of a potential delay claim must be the subcontract form itself. However, the discovery of seemingly unfavorable language in the subcontract should not be the end of the subcontractor’s analysis of whether to seek a change order or assert a delay claim. The law of the jurisdiction will also have an impact. For example, courts in many jurisdictions limit the application of "no damage for delay" clauses.

On the other side of the coin, the subcontract will almost certainly make the subcontractor liable for damages caused to the general contractor, the owner, and other subcontractors as a result of the subcontractor’s breach of the subcontract terms through its failure to complete its work on time, The subcontract may also specify that the subcontractor is liable for liquidated damages to the general contractor and/or owner. A liquidated damages clause will typically specify an amount of damages for each period of delay (i.e. per week) that the subcontractor has caused, notwithstanding the actual damages that may or may not have been suffered by the general contractor or owner. Liquidated damages clauses can also be subject to legal challenge.

While there will be some variation in how different subcontracts treat circumstances of delay, the subcontractor must be able to recognize the potential claim, must understand the procedure for asserting the claim, and must take prompt action when the claim arises. The one thing that is certain is that if the subcontractor does not act promptly, at least by providing proper notice of its claim, it will ultimately fail in recovering anything for the claim.

Delays versus Disruptions

The concepts of project delay and project disruption are sometimes used interchangeably. However, disruption claims actually cover a much broader set of circumstances than delay claims. A set of circumstances may support a claim by the subcontractor for disruption, where no delay claim would exist. Therefore, the characterization of the claim by the subcontractor can have great importance. For example, if the subcontract contains a "no damages for delay" clause and the courts of the particular state broadly enforce such clauses, the subcontractor may attempt to characterize its claim as a disruption claim and circumvent the impact of the "no damages, for delay" clause, Also, a claim for delay requires the subcontractor to establish that its time of performance was extended and its completion date was affected. However, a disruption claim can be based upon losses of performance efficiency and increased costs, even though the time of performance itself did not change.

For example, assume that an HVAC subcontractor was scheduled to work continuously on a five-story building project from March 1 to May 31. On April 5, the schedule provided for the subcontractor to move onto the third floor to install duct work, but it could not do so because the installation of the curtain walls, fire walls, and partitions was incomplete. The subcontractor kept half of its work force on site doing work on the first two floors but could not reasonably utilize the remainder of its work force on the job. The delays in base building construction ultimately required the restart of HVAC installation work on the third floor three weeks late. However, by scheduling of overtime and performing installation work in the same areas where the piping contractor and other subcontractors were working, the HVAC subcontractor was able to complete its work by the May 31 deadline. There would be no delay claim, but the subcontractor could certainly assert a disruption claim.

It should always be kept in mind that the subcontractor may also find itself subject to delay or disruption claims. Those claims would typically be asserted through the general contractor. The HVAC subcontractor can also be subject to delay or disruption claims from its own sub-contractors. Taking a pro-active approach to legitimate delay or disruption situations will not only preserve the subcontractor’s right to adjustment in contract time and price, but will also provide some protection as to claims against the subcontractor asserting its responsibility for the particular delay or disruption.

Next month’s Contract Bulletin will discuss some of the issues in asserting a delay or disruption claim and some factors that impact whether or not a claim should be pursued.

 

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