15.5 Measuring the Cost of Delay

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

15.5 MEASURING THE COST OF DELAY

15.501 Contractor's Damages for Delay.

A. Escalation.

1. Labor. "Labor escalation" refers to added labor costs that are due to increases in labor wage rates. Such costs are incurred when a project is delayed and some or all of the work is then performed in a higher wage rate period. But for the delay, the work would have been performed during the lower wage rate time frame.

A claim for escalated labor costs is solely for the escalated portion of the labor costs; that is, the differential between the prior rate and the new, higher rate. A common mistake in labor escalation claim calculations is to seek recovery for the total cost of the labor in the higher wage rate period, not just the cost of the incremental increase in the wage rate.

Another common mistake in calculating escalated labor costs is failing to deduct labor hours priced at the higher wage rate that are included in additional direct labor cost calculations, such as change orders, or included in loss of labor productivity calculations.

A simplified calculation of labor escalation costs would be:

Planned performance:
100 hrs. @ $10.00/hr. =	$1,000.00
Actual performance (delayed/no added work):
90 hrs. @ $10.00/hr.=	$ 900.00
10 hrs. @ $11.00/hr.=	$ 110.00
	$1,010.00
Labor escalation claim:
($1,010 - $1,000) =	$ 10.00
Escalated labor costs have been recognized as proper damages. 119

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2. Materials. "Material escalation" refers to added material costs that are due to increases in material prices. Such costs occur when a delay to the project pushes the purchasing of materials into a time of higher material costs. Similar to "labor escalation," the claim is solely for the escalated portion of the material costs.

When claiming material cost escalation, the best proof is invoices for the materials. When actual invoices are not introduced, courts have permitted the use of material cost indices to measure material cost escalation. For example, in George Hyman Construction Co., ¹²⁰ the Corps of Engineers' Board of Contract Appeals observed that the Engineering News Record was "a recognized guide for material costs used in the construction industry." ¹²¹

B. Extended or Idle Equipment. With many claims, the largest additional cost item after labor is equipment. There are several primary reasons for equipment cost increases. First, additional equipment may be needed to perform the work. Additionally, it may be necessary to leave the original equipment on the project site, either working or idle, for a longer period of time than anticipated. To calculate the amount of these costs, it is necessary to determine the number of additional hours the equipment was used or idled and the cost per hour of that equipment. In some cases, the number of additional hours may have to be separated into hours worked and idle hours, with a different rate for each type. A contractor should only recover the cost of equipment that is in satisfactory operating condition and suitable for the project work.

In calculating additional equipment costs, the number of additional equipment hours can be calculated in several ways. In a simple extra work claim, the number of hours worked by each piece of equipment can be recorded as the work is performed. However, if no contemporaneous records were maintained, it is possible to determine the number of equipment hours based on the quantity of the extra work and the typical productivity of the equipment. For example, where the project requires placement of 100 additional cubic yards of concrete and the concrete pump places 20 cubic yards per hour, the contractor would be entitled arguably to a minimum of five additional hours (100 cubic yards) 20 cubic yards per hour = 5 hours). Extra time for set-up, normal maintenance, and travel time should be added

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if appropriate. The manufacturer's rated capacity of an item of equipment should not be used, because it is typically much greater than the normal working capacity of the equipment.

Once the number of additional equipment hours has been determined, the number of hours should be multiplied by an appropriate equipment rate. In many cases, the contract specifies the rates that will be used. Frequently, this is specified by reference to a commonly accepted industry compilation. Some of the most common are:

1.	Associated General Contractors of America Contractors' Equipment Manual (AGC Manual);
2.	Rental Rate Blue Book for Construction Equipment (Blue Book); 122
3.	Associated Equipment Distributors Rental Rates Compilation (AED Rates);
4.	U.S. Army Corps of Engineers Construction Equipment Ownership and Operating Expense Schedule.

The recovery of equipment cost may be dictated by the contract. ¹²³ If the contract is silent as to equipment rates, the general rule is that the contractor's actual hourly cost of additional equipment will be used. If the equipment is rented, the actual rent paid to the equipment supplier is the amount recoverable.

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When the equipment is owned by the contractor, it is considerably more difficult to calculate the cost since it can be based on depreciation, interest expense to finance the purchase, overhaul and repair costs, property taxes, storage, and insurance. Obviously, it is very difficult to allocate these categories of expenses to individual items of equipment.

The longer a piece of equipment remains on a jobsite, the greater the cost to the contractor. At a minimum, costs such as maintenance, repair, fuel and oil, insurance and depreciation (assuming the equipment is not fully depreciated), or rental rate increases occur whether the equipment is in use or idle. If a project delay forces a contractor to keep equipment on site longer than originally planned, the contractor will incur such added equipment costs for the extended period. ¹²⁴

In a delay or disruption claim, there are two basic ways of calculating additional equipment hours. The first, and easiest, is to assume that each piece of equipment was used for a typical work day (usually eight hours) for each additional working day. The underlying assumption of this approach is that equipment once assigned to a project is chargeable to that project until reassigned. Even though it may not actually be used a full eight hours each day, the project will bear the full cost.

The second method of calculating equipment hours in a delay or disruption claim is to correlate equipment hours to the additional labor hours. This is done by determining the ratio of equipment hours to manhours. For example, a small service crane may be used one hour for each 16 manhours of labor. Thus, if there were 80 additional manhours of labor, there would be 5 additional hours of crane usage (80 × 1/16 = 5). In this case, it may again be appropriate to add time for set-up, maintenance, and travel time.

Once the extended equipment hours are calculated, the appropriate equipment rates, as derived from the contractor's costs or manuals, are used to measure the claimed damages. Note, however, that when using manuals for added equipment or extended equipment calculations, a manual's rates are averages and not "personalized" to the particular contractor or, in some cases, the project. Thus, any calculation based upon manual rates will not necessarily reflect the contractor's actual equipment damages. Nonetheless, in Commonwealth v. AMEC Civil, LLC, ¹²⁵ the Virginia Supreme

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Court, relying on expert testimony that the "Rental Rate Blue Book" (Blue Book) was an accepted industry standard for determining the actual cost of operating owned equipment, upheld the contractor's calculations of actual equipment cost damages based on the Blue Book. However, on remand the Virginia Court of Appeals clarified that reliance on the Blue Book for actual costs was limited to the specific category of damages pertaining to actual equipment costs based on expert testimony. The court held:

[W]here proof of actual costs is expressly required by the parties' contract and the record establishes the plaintiff maintained those figures on at least a monthly basis, the defendant is entitled to have those monthly amounts proved without averages calculated based on wholly different months, absent expert testimony or inferences therefrom, accepted by the fact finder, that averaging data from different months outside the damages period is an accurate method of calculating actual costs. ¹²⁶

C. Lost Productivity.

1. Methods of Calculation Generally. The most widely accepted method for calculating loss of labor productivity is a comparison of identical work activities during a non-impacted period of the project versus the same work activities during the period impacted by the claim event. ¹²⁷ This is often referred to as the "measured mile" method. Other methods that are less favored but recognized by courts or arbitration panels include comparison of productivity achieved on prior projects, comparison of industry rates, and the "total cost" method. ¹²⁸

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2. Measured Mile Method.

a. Illustration. The "measured mile" comparison technique may be illustrated as follows: a steel erection contractor encounters misfabricated steel and late deliveries during a portion of its project work (the impacted period). The misfabricated steel and late deliveries caused the erector's productivity (measured in manhours per piece) during the impacted period of the project to be 8.0 manhours per piece. In comparison, during another portion of the project when steel deliveries were timely and there were minimal or no misfabrications (the non-impacted, or base, period), the erector achieved a productivity rate of 5.0 manhours per piece. The calculation of lost labor productivity would be as follows (MH = manhours):

Impacted Period; (Floors 1-10)
	80,000 manhours = 8.0 MH/piece
	10,000 pieces set
Unimpacted

...