By Michael C. Loulakis and Lauren P. McLaughlin
When projects are delayed or disrupted, it is quite common for contractors to submit claims for loss of labor productivity. These claims are based on the contractor incurring more labor hours than anticipated and believing that someone should pay for the attendant costs. To recover, contractors have to prove that their labor productivity was negatively impacted and that they should receive some financial recovery. Where they typically struggle is in proving what that recovery should be.
There is an abundance of literature that explains how to prove a loss of productivity claim. The most effective way is using what is commonly called a measured mile approach, which compares productivity on work that was not disrupted by problems with work that was disrupted. Industry research studies, such as those published by the Mechanical Contractors Association of America, approximate productivity expected from certain events — like the prolonged effect of overtime or working in congested areas.
A third approach is commonly called the total cost approach. With this method the contractor claims the difference between its actual and bid labor costs and argues that its counterparty caused the problems that created the overrun.
While each approach to proving loss of productivity costs is susceptible to challenge, the total cost approach creates the hardest path to successful recovery. This was shown in a recent case in Missouri, Rand Construction Co. v. Caravan Ingredients Inc., in which the contractor, despite being disrupted, received nothing.
Rand entered into a contract with the owner of a food product manufacturing facility to provide mechanical construction services. The parties had worked together previously, and Rand was selected after the owner conducted a competitive selection process. Bid at $2.9 million, the contract stipulated an anticipated 15-person crew that would work 40 hours per week through the project’s completion, set for February 2016.
The contract was for a fixed price, but it included a time and materials provision that called for scope changes to be based on billing rates included in the contract.
Rand began work on the project in July 2015. During the course of the project, Rand received 187 change orders that disrupted its workflow; 136 of these orders came in the last three months of the project. Rand finished the project in mid-May 2016 and filed a mechanic’s lien claim in September 2016 for $875,000 in unpaid labor, equipment, services, and materials. Rand eventually filed a lawsuit to enforce the mechanic’s lien in state court.
Rand claimed that “it was not paid pursuant to the ‘time and materials’ clause of the contract for its ‘actual time and materials’ costs incurred due to the project’s change orders,” according to the court documents. Its claim was predominantly based on loss of labor productivity.
Rand argued that it exceeded its bid amount of labor hours by 7,566 and was owed an additional $716,000 in labor. The trial court disagreed, finding, among other things, that Rand failed to prove it was entitled to any damages for additional labor hours because it used a total cost approach to its recovery.
The Missouri Court of Appeals agreed with the trial court that Rand was not entitled to loss of labor productivity damages. The appellate court first cited the legal standard for determining damages in Kansas, which was the governing law for the dispute. Looking at prior case law, the appellate court stated, “‘The basic principle of contract damages is to make a party whole by putting it in as good a position as the party would have been had the contract been performed.’”
Parties are not entitled to damages that are “‘not the proximate result of the breach of contract and those which are remote, contingent, and speculative in character.’” Moreover, the claiming party must “‘… show with reasonable certainty the amount of damage suffered as a result of the injury or breach.’”
Rand first argued that it was not using a total cost approach but was basing its claim for additional labor on the time and materials clause of the contract, which had a billing rate of $94.69 per hour to be used for changes. The appellate court rejected this argument, as the number of hours used for this calculation (7,566 hours) was based on the difference between Rand’s originally estimated hours and actual hours. This was the same calculation one would do for a total cost approach.
The appellate court found that Rand had not provided any case law demonstrating that Kansas law recognized the use of the total cost approach in pricing claims. Regardless, the court concluded that it did not matter what Rand called it, as “Rand’s calculations suffer from the same defect courts note about the total cost method, and …are too speculative to meet the reasonable certainty requirement.”
The court said Rand presented no evidence to demonstrate that its bid was reasonable or that the owner was the sole reason for the labor overrun. But according to court documents, “these two presumptions are the very factors that courts have pointed out make the total cost method problematic as a measurement of damages.”
The appellate court found other flaws in Rand’s calculations. For example, Rand failed to provide evidence that clearly separated hours spent on base contract work from those spent on change order work. It also failed to submit evidence reflecting when its base contract work stopped and when additional change order work started.
Rand’s claim also requested compensation for rejected change order work, but Rand did not prove that such change orders were properly the responsibility of the owner.
Finally, the appellate court noted that Rand’s lost productivity expert was found by the trial court “‘to be lacking, without substance, of no assistance to the court, and void.’”
The appellate court did not question the trial court’s witness credibility determinations.
Aside from its labor productivity claim, Rand also argued at trial that it “suffered ‘cost impacts due to schedule (delays),’ which included additional supervisor hours, overtime, site safety representatives, site overhead, and rental equipment costs.”
The trial court found these damages as also being too speculative to meet Kansas’ reasonable certainty standard. The appellate court agreed, stating that these claims lacked documentation “linking these additional costs to any change orders.”
There is one final quote from the decision that is critical for readers to remember:
“Ultimately, whether Rand had presented sufficient credible evidence to prove damages attributable to its performance of approved change order work presents a factual question for the fact-finder to decide. … We will generally not second guess a fact-finder’s rejection of evidence offered by the party with the burden of proof.”
What does this mean in practical terms? Proving damages is something that needs to be accomplished before the trier of fact — be it an arbitrator, trial judge, or jury. If one does not succeed with the trier of fact, there is little hope of having an appellate court overturn that opinion. Stating it differently, if Rand had convinced the trial judge of its position, there is a reasonable chance the appellate court would have upheld that decision.
There are many other parts of this case that we could have discussed but for space limitations did not. This includes the issue of whether Rand properly gave notice of its loss of productivity claim. While it was not the reason Rand lost, both courts noted that Rand knew early in the project that it was experiencing loss of productivity, but it did not give notice until late in the project.
This is another reminder for our readers: Make sure you follow those contractual processes, as they can create a major roadblock to recovery for changes.
We have one final thought: There are times when projects are so disrupted that the only real way to price loss of labor productivity is with a total cost approach. Do not assume that this will be a losing argument.
It is true that total cost claims are disfavored and viewed with suspicion, for all the reasons cited by the appellate court. But they can be successful if the trier of fact finds that the contractor’s bid and actual costs are reasonable and that the contractor has accounted for any of its own problems.
Michael C. Loulakis ([email protected]) is the president and CEO of Capital Project Strategies LLC in Reston, Virginia. Lauren P. McLaughlin ([email protected]) is a partner of Smith, Currie & Hancock LLP in Tysons, Virginia.
This article first appeared in the March/April 2023 issue of Civil Engineering as “The Challenges of Proving a Labor Inefficiency Claim.”