Webinar: Extended Duration Claims in Construction
When a construction project goes longer than planned, things can get a little confusing. How can you get paid for the extra time? By using an extended duration claim.
In this webinar, we take a deep dive on extended duration claims. You’ll learn:
- What causes extended duration claims
- How payment is affected for the hiring and hired parties
- Steps you can take to protect payment or resolve a claim
Full Webinar Transcript
Justin: Welcome everybody, my name’s Justin Gitelman. I am the expert content partnerships coordinator here at Levelset, which means that I work with all these experts in our ask an expert center to get them into webinars just like this one. And basically we’re going to have a webinar today on extended duration claims with our guest speaker here, David Vicknair from Scott, Vicknair, Hair and Checki in New Orleans.
He’s an active expert on the Levelset Expert Center. We’re very happy to have him here. The expert center is a place where you can ask a payment question about construction and get an answer from a construction attorney or industry expert in your state any day of the week. Go ahead and ask any questions that you have there after this presentation or if you’re tuning in live here, feel free to chat in and ask and hopefully David can give some insights. Without any further ado, David, take it away.
David: Thank you, Justin. I’m excited to be with you all this afternoon and have a brief discussion on extended duration claims. I was just joking with Justin, this is a type of a seminar I could probably talk for about three or four hours on, but I’m trying to cram as much helpful content and information to help all of you get paid in this potential type of claim in 30 minutes as I can. First I’d like to start with a basic overview of an extended duration claim and talk generally about what it is.
Overview of extended duration claims
Essentially, any contractor who builds a project is going to put in the bid, bidding for amount of time that they expect the project to take. What is the cost of the office overhead allocable to the project? What is the cost of materials? What is the cost of labor? Fundamental costs to be able to project out based upon the length and time and expenses, whether or not the project is something that can be profitable for the company and it’s something that particular contractor is going to want to bid on.
However, what happens whenever the project which is anticipated for example, to take a year, it goes three years. Obviously, contractors up and down the chain or negatively impacted with increased material costs with increased labor costs, with extended office overhead, so extended duration claims really are as they’re generally referred to as delayed claims, seek to compensate the contractor for that extended duration of the project and for them to recover damages that they can get reimbursed for the project taking longer than it was anticipated to take, which was not within their control.
Elements of a claim
Next, I’d like to kind of just talk a little bit about some of the potential elements of a claim. I mentioned a few of them briefly there.
Soft costs (overhead)
One, increase office overhead. Whenever you are bidding a job, you are not only projecting out what some of your hard costs will be, but this is something that typically be referred to as a soft cost, which is your office administrators, your different project managers, people in the office who are devoting valuable, valuable, valuable time and energy to that project. If you only initially anticipated them to be in that same time period example, on a project for a year and then the project ends up lasting three years, well then you’ve got two years of extended office overhead on that project then what you had originally anticipated to have.
Now, that is a very difficult thing to calculate and we’ll kind of get into that in a little bit later and some of the methodologies that are used to actually calculate that extended increased office overhead, but that is one potential element of the claim.
Labor & material costs
Another two very common elements of an extended duration claim are increased labor costs and increased material costs. Obviously your costs are not static in time. When you go and get quotes for different types of material which you’re going to be sourcing a project and what your labor costs today. Those things obviously will increase just with, for example, inflation over time, so those costs may change.
Additionally, if you just look at a current issue happening in our economy. If you bid a project and you were supposed to supply a bunch of steel which was coming out of China three years ago, and that project was delayed because of different tariff issues going on with that particular piece of material, that could have vastly increased your costs on that project if the project was delayed.
That’s a small example, but those two elements, increased labor and material costs, are common elements of an extended duration claim.
Damage, loss of use & insurance costs
And then there’s some other potential ancillary and/or may be included in a consequential damage category, damage items, which typically will fall into these claims.
Some examples of that are loss of use, insurance costs, so you have insurance that you’re carrying for a longer period of time on this particular project. In some situations there may be a construction loan that was taken out so that interest may be extending over a longer period of time and increasing your costs on that construction loan.
Job trailer rentals, that typically will be a compensable element if you were only projecting to have to rent a job trailer for a year and then you ended up having it for four, you have that differential in rent cost over time.
And also sometimes there’ll be some increased demobilization or increased re-mobilization costs associated with delays. Those are some of the other damages that typically may fall in the claim, some may be present and some may be present in others. Those are the elements, general elements of the claim.
Identifying a compensable delay
And the next thing I kind of wanted to chat about and jump into this is how identifying a compensable delay actually works. And in most situations that starts with a critical path analysis and essentially you’re going to be looking at what was the critical path on that project. At the beginning of the project, for example, obviously the roofer is not going to be a critical path.
A contractor, for example, in the first 10 days of a project it’s likely going to be depending upon the project, maybe an abatement contractor, maybe the site work guy. There’s going to be at some point in the claim, if you’re going to be successful, you will have to show that you were a critical path item and this is where the critical path was delayed and this is how it impacted you and to do that you’ve got to show on that path, on that plan what the delays were and how you were impacted.
Compensable vs. non-compensable delays
One of the things I talked about which I’d like to talk next about within that analysis is understanding compensable versus non-compensable days. And this is kind of an issue which dovetails in with a critical path analysis because in many ways you need the critical path to determine compensable days, but there are also some days that are just non-compensable.
A very common example of that is a rain delay is typically in every construction contract and in every situation going to be considered a non-compensable day for a delay claim. Weather is just not going to be something that you’re going to get compensated for.
Now, at the same time, you’re part of the project which is a critical path element of the project is coming up and is delayed say 50, 100 days because of something related to another contractor or the general contractor or the owner, that is potentially going to be compensable.
Along with compensable and non-compensable Days there does need to be an analysis and an understanding of force majeure. In a lot of contracts there will be language that addresses a force majeure situation. What is force majeure? It’s a fancy word to basically describe a situation which is outside of the control of the contractor and/or the owner.
or example, if there is a terrible lightning storm and lightning strikes a site and burns a lot of the work down, that is in many situations going to be considered force majeure situation, a situation that was outside of the everybody’s control and/or ability to prevent and not be something that you could likely find the contractors or the owner responsible for.
Most construction contracts will have standard language governing that issue and talk about how force majeure is not compensable.
Look at your construction contract
And that’s probably a good point […] which is when we talk critical path, compensable and non-compensable days, force majeure, […] I feel more and more I have to tell contractors that I represent you need to read the contract, because it all starts with your contract.
I know that seems basic, but it is a very thing that I’ve seen in the industry, at least in our legal community as a prevailing issue is that contractors just sign the contract, don’t ask about the language in there, don’t look at it at the outset of the project. And unfortunately the law in most states, I can only say for in Louisiana, is a contract is the law between the parties. A lot of these things will be in there, but I just use this also as a cautionary tale and I’ll talk about it in another context shortly.
Always go back to your contracts to have a good standard contract, the one on file that you’re using on every project that protects you, that you understand and obviously I think you should have a good lawyer on call to review contracts for you and give you advice on those issues.
We talked about compensable and non-compensable days ,as well as a force majeure consideration. And that dovetails with this talk about contractual analysis into the next element of the presentation which is contractual pitfalls to claims. These are sometimes the most concerning part about delayed claims and I think that for most contractors, if you are seriously considering making an extended duration or a delay claim that you really need to get an upfront analysis from an attorney reviewing your contract and giving you sound advice on whether or not there are some landmines in that contract.
Notice of delays
One common problem is going to be a requirement of note, it’s called notice of delay provision and this is becoming more and more prevalent in construction contracts. There’s also been some case law interpreting this both at the Federal and State level in Louisiana and the delay notice issue is essentially this, a contractual provision which requires you, as the contractor within so many days of knowing that you’re being delayed to put a written notification of some form in. Whether it be via email, whether it be via a letter that you federal express to certain parties. That is a common problem for many, many delay claims.
And the candid reason is just that as a contractor, you’re just out there working and you’re just trying to get the job done. You’re trying to make money, have everything paid for and build a good product. But a lot of times contractors don’t look to the contract to understand that they have to give a notice of delay. And that can in many cases be a condition precedent which would potentially bar your claim. These potential delay notice provisions can come in many different contexts and specifically when you’re reviewing that notice of delay provision, it really needs to be read in concert with the general notice provision in your contract, because there’ll probably be one of those too. Most contracts do have a notice provision where if one party feels like the other is in breach, they have to give them written notice or to give them a curative notice for a curative period for them to cure the fault.
Those two provisions really need to be read together, but that is a huge landmine to many extended duration claims. You really need to look at the documentation that you have of it or contemporaneously get advice from an attorney while the delay is occurring and ask them what their opinion about the delay notice provision is and how it should be properly documented.
In many ways documentation, just like it’s the same way for any type of lawsuit, is incredibly important in a delay claim and this is one of the really critical elements is really, really documenting a thorough and a well known notice of delay letter, whether it be via email or actual paper letter dependent upon the notices which are required in the contract. But really putting out a really lengthy notice and sending it as often as necessary.
This can sometimes be a practical dilemma for contractors. They don’t want other contractors they’re working with if they’re a first year sub for example, or other parties to think of them as always gunning up a lawsuit on a project or want to negatively impact the working relationship that you have with the various parties on a project while it’s going on. But unfortunately this is in there as a legal requirement and you got to do it and if you don’t do it and you go to court and you file a lawsuit. Or whether it be arbitration, state, federal court, at some point you’re going to be looking at a disposit, what’s called a dispositive motion to potentially dismiss your case or lose it at trial based on the fact that you may not have complied with the notice of delay provision.
Waiver of delay damages
Another contractual pitfall along the same line that you will find in contracts is what’s called a waiver of delay damages. There is a recent US Fifth Circuit case from a couple of years ago which found the pre-construction contractual delay waiver to be legally unenforceable. The layman quick skinny on how it found that without really getting in all the code articles and legal analysis is that court found that because the damage had not yet occurred, I.E the contract was signed before the project even started, that it was not enforceable. Now, will appellate courts of the Louisiana Supreme Court follow that line of thinking and opinion? I don’t know. I do think it will certainly have some element of persuasive effect on that issue if it ever reaches appellate consideration. I’m not aware that it has yet, but there are other types of waivers in Louisiana which are against public policy.
For example, there’s a specific code article waving personal injury waivers for somebody to waive a personal injury claim before they get injured, that’s not enforceable in Louisiana. I do think that this could potentially not be enforceable, but a law is certainly not settled on that so it’s certainly something you have to be worried about if you’re going to really take into consideration making an extended duration claim that you need to worry about if there’s a waiver in there of that claim.
Okay, some other pitfalls to the claims. I don’t want to get too negative here, but sometimes I like to warn clients about the issues, everybody sometimes thinks that it sounds great to make a delay claim. And it can be if you’re significantly delayed and you need to get paid for that, but it’s just like anything in business is you have to analyze both the negative and the positives of it.
Calculating overhead with the Eichleay Method
One important thing to really analyze with your legal team is which methodology you’re going to utilize to calculate your office overhead. We talked about that a little bit earlier. One of the first calculations or methodologies that became industry standard was what is called the Eichleay Method. There are some pitfalls and using the Eichleay Method, some delay damage experts will tell you that it’s not necessarily the best methodology to use to calculate that office overhead.
Another element with it that could potentially could be illegal pitfall if you use Eichleay is that there is at least one appellate court case in Louisiana that I’m aware of and familiar with that says that there has to be a work stoppage for Eichleay to be appropriate, for a court to allow that Eichleay calculation to happen. You can certainly be delayed without there being a work stoppage so in some ways I can be kind of reticent of a client using that methodology to calculate the extended office overhead because of that. That there’s this case lying out there just kind of making it somewhat problematic.
But that’s a discussion you want to have with your attorney and potential expert early on is what documentation do I have and what amount of organization of that documentation do I have to ensure that we use the best potential methodology to calculate our extended office overhead.
Delays when a bond is involved
Another important thing which could be a pitfall is in any project where you have a bond involved. Most large commercial jobs that are public requirement and a lot of larger commercial private projects also require a bond to be posted. Obviously, the real reason for that to be there is to protect both the first tier subs all the way down the line. Whether it be a material man labor, an equipment supplier that you want to be protected, that if you have to file a lien to ensure collection against that surety. That the general contractor is not going to just go out of business and you’re going to be left there holding the bucket.
The bond there really does operate as a protective device for everybody down the chain and you want to within the lien period, whether you’re dealing with the Public or Private Works Act in Louisiana, you want to ensure that you are getting your lien timely filed. You want to ensure that you’ve got all the necessary elements of your lien in there. And when at all possible you really want to be calculating your delay damages to the best amount of number that you can approximate at, at least at that given time and get it in that lien. The reason is if you don’t have that amount in the lien, then the surety is not going to be responsible for it. You may only be owed 50 or a hundred thousand dollars for example in your base contract monies, but you may have a million dollar delay claim and if you only lien the project for 50 or a hundred thousand dollars, then the surety is only on the hook for what’s in the lien potentially.
That leaves you in some situations with vulnerability, if the general contractor is not a solvent steady, large general contractor. Sometimes on public bid projects there may be less contractors, not as many contractors like that. The surety analysis and ensuring that you can get that delay damage number calculated and itemized to some level of specificity as early on as possible will really do a good job of getting the surety on the hook for it. And ensuring that you, from a practical standpoint, if you put together a good claim and win your claim can actually collect money for it, which is the bottom line thing that matters. At the end of the day, you can get a judgment but it’s just as good as the paper it’s on if you can’t collect it.
The importance of expertise
Okay. Next I think is a super, super important, if not the most important thing to consider and making in delay claim or an extended ration claim which is expert retention. This is not an area of law that you can go to trial on without an expert. You would be foolish to think that you could, for many different reasons. Even attorneys who handle these regularly are probably not equipped to do the calculations, to manage the documentation, to do a critical path analysis to determine which methodology to use.
You really need somebody who knows what they’re doing, who is good at managing documents, is good at knowing what to go look for and being as time efficient as possible because the bottom line is these experts are not cheap. My law firm for example, we are many different types of experts in many different types of cases and I would probably say that a good delay damage expert, a good extended duration damage expert is one of the more expensive experts that our clients ever hire.
And think about it, the reason is just simple. I mean, a lot of construction projects have a lot of documents and they’re in the business of getting all the necessary documents, managing and organizing all those documents and then reviewing them to take into consideration what caused the delay on the particular project, who they’re alleging is responsible for the delay and then calculating out all of your damages. You just can’t do that without an expert, mainly because you need somebody to come in and give you a full calculation of that office overhead with a tried and tested methodology that would survive a Daubert challenge.
A Daubert challenge is simply a motion that get filed in different litigation matters seeking to exclude expert testimony either based upon their qualifications or the methodology that they use. If you have an expert who’s not qualified and using an untested methodology, you’re going to lose the case.
Screen your expert
You really want to screen this expert. You really want to talk to them early on about what methodology they’re going to use. Get as much information as you can about their experience and their pricing and how much it’s going to cost. Get an estimate, budget estimates as best you can and that will be a critical element of you deciding whether or not from a cost benefit analysis you should move forward with this particular type of claim.
Arbitration vs. trial
And the last thing that I wanted to talk about is just some basic practical considerations in making this claim or deciding to make the claim. One dependent upon your venue, obviously if you’re in arbitration, you’re not going to be in front of a jury. You either going to be in front of one, two or three potential arbitrators in construction arbitration.
If you’re on trial though, if you’re in Federal or State Court and you don’t have an arbitration clause or the parties waived the arbitration clause and decide to litigate in court, you have to make the consideration of judge versus jury. There’s no right answer to that.
If you’re in front of a particular judge who has a lot of experience in overseeing construction cases, you’re probably going to want to go judge. Because while I do strongly believe in the jury system and while this may be a discussion which I’m interested in because I’ve handled these cases and I find them to be interesting and that you’re interested in because this effects your bottom line and you making money in a livelihood, you would probably not be surprised to know that 12 random people who get selected for a jury are truly going to be interested in talking about Eichleay analysis and material and labor costs for weeks on end.
Sometimes if you can, you want to go judge if the judge is well equipped to handle the case and that’s just my two cents on it, you could have different attorneys look at it different ways.
Battle of the experts
Another consideration is to just be cognizant that the case will probably just become a battle of the experts. Most of the time if there is a serious delay and it’s been analyzed and there was a serious delay, the issue isn’t that there was no delay. The issue is whether who was at fault for it and one of the defenses will always be… The other party will, whether it be owner or general contractor, will bring in an expert to attack your experts calculations, to attack on your experts assumptions and/or potentially blame other parties for the delay to escape liability. That is just another reason that selecting an expert is such an important thing.
I know I harped on that, but there are a lot of great delay experts around the country. This is an actual big expert in industry where they are experts who do this all over the country and you can really find some great ones, but you got to do your due diligence because if you got a weak expert and then the other party brings in a strong expert these cases many times are consider to be battle of the experts.
Involve the surety
And last, we talked a fair amount about it earlier, but the consideration of making sure that you have the surety involved on the hook, it’s the same thing. You don’t want an entity if it’s not a serious viable entity to not be able to pay your judgment if you’re able to be successful in your particular claim. And when you have a surety there, you just have the level of protection that you’re going to get paid.
Yeah, so just on wrap up, this is a prevalent thing in the construction industry where there are compensable delays and I hope I haven’t been too negative about making the claims. They’re just a very difficult claim to prove and so you really have to have all the T’s crossed and the I’s dotted because some of the elements of this are going to be reliant upon the expert calculating it. There’s a lot of strong defenses to these claims so you want to make sure your documentation is great, you want to make sure you got a great expert and you want to make sure that you’ve lined it up really well if you’re going to make this particular type of claim and be successful on it.
And for anybody who has any questions about this afterwards, this will be available on our website within 24 hours. But if you have any questions that you think of later, or if you’re watching this from on-demand, go to the expert center at levelset.com/payment-help and just ask a question and then David, or a network of a handful of construction attorneys and other industry professionals around the country can give you some help and make sure that you get paid. I guess that’s all we’ve got for today. Thanks everyone for joining us.