14.3 Contractor’s Damages

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

14.3 CONTRACTOR'S DAMAGES ⁷⁵

14.301 In General. Contractors who experience plan changes, delays, or termination of a contract attributable to the owner, or wrongful termination, may seek recovery as specified in their construction contracts. Absent an express contract term, common law rules apply.

14.302 Damages for Changes and Defective Plans or Specifications. A contractor is not liable for defects when it has relied on the owner's defective plans. The contractor is "bound to build according to the

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plans and specifications prepared by the owner." ⁷⁶ Virginia courts have adopted the Spearin doctrine, based on the theory that when an owner supplies the plans or specifications, the owner impliedly warrants that those plans or specifications are sufficient or free from defects. ⁷⁷ The Virginia Supreme Court has also held that a contractor is not liable for deviating from an owner's flawed plans. ⁷⁸

Virginia courts, however, have recognized two exceptions to the Spearin doctrine: (i) negligence on the contractor's part, and (ii) an express or implied guarantee or warranty by the contractor that the plans are sufficient or free from defects. ⁷⁹ Therefore, if the contract contains a provision in which the contractor agrees that it has reviewed the plans and guarantees that the plans are sufficient or free from defects, the Spearin doctrine does not apply.

Additionally, if a contractor suffers damages, an owner's defective plans may provide a basis for relief. ⁸⁰ In Laburnum Construction Corp. v. United States, ⁸¹ the court permitted the contractor to recover damages for a delay caused by defective plans even though the contract specifically permitted the owner to delay the contractor while it made changes in the specifications. ⁸² The court held that "the critical factor in this case is that all of the delay to which plaintiff was subjected came about because the specifications were deficient. Were this not the case, defendant's contention would be correct: plaintiff would have no right to complain if the defendant's exercise of its reserved right to make changes set its work schedule awry." ⁸³

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14.303 Damages for Delay or Schedule Disruption by Owner.

A. Nonculpable Delays. Delays occur for a myriad of reasons. When a delay occurs due to circumstances beyond the contractor's or the owner's control, such as bad weather, the contractor is not entitled to any compensation from the owner. The contractor, however, may be entitled to an extension of time to complete the contract.

B. Types of Owner-Caused Delays. A contractor may recover damages for owner-caused delays, such as when an owner (i) delays production of plans; ⁸⁴ (ii) makes changes in the project that slow completion; ⁸⁵ (iii) fails to properly schedule the work of multiple contractors on the same project site; ⁸⁶ or (iv) proves unable to obtain necessary ownership or permits. ⁸⁷ Section 2.2-4335 of the Virginia Code establishes a contractor's right to seek delay damages in public construction cases. Thus, a contractor is entitled to recover to the extent it can show, with particularity, delay damages that include "'the direct cost of all labor and material . . . plus fair and reasonable overhead expenses properly chargeable . . . during the reasonable time required' to complete performance." ⁸⁸

C. Proof of Damages. ⁸⁹ For a contractor to recover damages for an owner or another contractor's delay, the contractor must prove three key elements:

1.	The defendant unnecessarily caused the delay;
2.	The delay constituted a breach of contract; and

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3. The contractor suffered damages as a result of the breach. ⁹⁰

In Metropolitan Paving Co. v. United States, ⁹¹ the court held that the contractor could not recover delay damages because the delay did not prevent completion of the contract within the specified time; therefore, the contractor could not prove that it had been damaged." ⁹²

D. Extended Project Costs.

1. In General. Delays or disruptions by the owner may cause contractors to incur additional overhead or administrative expenses and possibly losses related to lost productivity. Such delays or disruptions may also cause a contractor to miss an early completion target date or be compelled to accelerate the work schedule. The following are some of the extended project costs that flow from the owner's delay.

2. Idle Labor and Equipment. When a disruption or delay by the owner occurs, a contractor may incur costs associated with keeping workers available on the jobsite. A contractor can recover these costs if it can show that it has mitigated damages and that there were no work assignments for these workers on the contractor's other jobsites.

Contractors may also incur damages related to the costs of retaining heavy construction equipment on-site. If the contractor rents the equipment, the contractor may recover costs of the rental for the period of disruption or delay. ⁹³ If the contractor owns the equipment, however, awarding plausible rental value would likely result in overcompensation. Therefore, many courts have accepted a calculation based on a percent of the equipment ownership expense rate published by a source like the Associated General Contractors of America (AGC). ⁹⁴ In Nolan Bros., Inc. v. United States, ⁹⁵ the Court of Claims set aside an administrative finding that ignored the AGC rates, holding that the AGC rates were reliable and should be used "unless

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the Government proves that there is special and good reason to employ some other method." ⁹⁶ In cases where the equipment has been fully depreciated, however, a court is likely to find that the contractor has suffered little or no damages for the equipment being idle. ⁹⁷

3. Overhead Expenses. Some courts have allowed contractors to recover overhead expenses incurred on a project as the result of an owner's delay or disruption. In Fairfax County Redevelopment & Housing Authority v. Worcester Bros. Co., ⁹⁸ after the contractor proved damages created by the owner's delay, the court awarded damages for overhead expenses in addition to the direct labor costs associated with the delay. ⁹⁹ The court divided overhead expenses into two categories: (i) "field office overhead," or on-site expenses, and (ii) "home office overhead," or the expense in not securing future projects elsewhere. ¹⁰⁰ The court allowed the contractor to recover home office overhead, finding that (i) the owner caused a compensable delay and (ii) the contractor incurred idle labor costs, while the delay also kept the contractor from seeking other contracts to mitigate home office overhead expenses. ¹⁰¹ To determine the ultimate monetary award attributable to home office overhead costs, the court applied the Eichleay formula. ¹⁰² Following Fairfax County Redevelopment, the court in Commonwealth v. AMEC Civil LLC ¹⁰³ denied a contractor's claim to recover home office overhead based upon inadequate proof, where the contractor's proof consisted only of a mathematical calculation using the Eichleay formula. The court determined that the contractor failed to present evidence that it could not have reasonably recouped its home office overhead from other revenue-producing work during the period of delay, a required element of proof. ¹⁰⁴

4. Unabsorbed Overhead Expenses: The Eichleay Formula. The Eichleay formula is the prevailing method for computing home

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office expenses. It provides a three-step method of computation, focusing on the length of delay, in calculating home office overhead damages. ¹⁰⁵ The Eichleay formula is as follows:

	1. First calculation:
Contract billings / Total billings for original contract; term × Total overhead during contract = Overhead; allocable to contract
2. Second calculation:
Overhead allocable to contract / Original contract; term = Daily contract overhead rate
3. Third calculation:
Daily contract overhead rate × Number of days of; compensable delay = Amount of damages. 106

Owners may counter with mitigating factors such as (i) the contractor's failure to reduce home office...