The challenge of quantifying lost productivity damages

by David M. Wolfenden, CPA, CVA, MS, Managing Director

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Stick around the construction business long enough and it will happen to you. Maybe it already has. We’re referring to the unfortunate circumstance of, through no fault of your own, a project getting severely disrupted. In such cases, you might eventually need to file a claim in court against the owner for lost productivity damages. Among several challenges you’ll face in actually obtaining this money is quantifying a defensible amount of damages.

The definition of productivity
In a construction context, “productivity” generally refers to the amount of work a contractor can perform during a given time. Lost productivity simply means that an unanticipated disruption of the project causes the contractor to work less efficiently, which may lead to additional labor, equipment and materials costs.

Lost productivity is often associated with a delay, but lost productivity damages and delay damages aren’t the same thing. A contractor may suffer lost productivity even if the project isn’t delayed. Of course, when a delay occurs, lost productivity may become a component of the contractor’s damages.

Measured-mile method
Generally, when these situations develop, a qualified appraiser should get involved. Appraisers use several methods when quantifying lost productivity damages. Determining the appropriate method depends on the particular job’s facts and circumstances. One difficulty in establishing damages is distinguishing whether additional costs were caused by lost productivity or by the contractor’s failure to estimate correctly.

For this reason, one of the most common methods (and the one generally favored by the courts) is the measured-mile. It compares a contractor’s productivity levels during periods in which work was disrupted with productivity levels during undisrupted periods. The advantage of using this method is that it reflects only recoverable productivity losses, eliminating the need to determine whether a loss is attributable, in whole or in part, to bidding mistakes.

The measured-mile method won’t work, however, if a project is disrupted from start to finish, because periods of optimal productivity for use as a baseline don’t exist. Also, for a baseline period to be appropriate, it must involve work that’s reasonably similar to the work being done during the disrupted period. Finally, the measured-mile method relies heavily on thorough documentation of the type of work being done, the disruptions to the work and the additional costs attributable to those disruptions.

Other ways to calculate
Appraisers do have other methods for calculating lost productivity damages. For example, under the total cost method, the appraiser calculates lost productivity damages by taking actual contract costs and subtracting the bid amount (taking into account agreed-upon change orders).

Although this method’s simplicity may be appealing, it fails to reflect productivity losses caused by bidding mistakes or otherwise attributable to the contractor. It also ignores the reasonableness of costs the contractor incurred. A “modified total cost method” attempts to address these problems by requiring adjustments to account for unreasonable bids or other cost overruns that are the contractor’s responsibility.

Another avenue for an appraiser is the actual cost method. It relies on actual cost and productivity numbers and is the most accurate, but it may not be practical. Why? First, the labor-intensive nature of the method may render it cost prohibitive. And second, it demands detailed, accurate records that include productivity measurements — something few contractors possess.

In some cases, an appraiser will resort to the jury verdict method. Essentially, this approach involves an educated guess on the part of the trier of fact. Some courts have allowed this method when it’s clear that a contractor suffered lost productivity damages but there’s no other reliable method of quantifying those damages.

A big plus
Most construction projects begin with high hopes, undergo some struggles and are eventually completed. But, once in a while, you may encounter one that goes so awry that you’re left seeking lost productivity damages. In such instances, having a team of professional advisors behind you (including the aforementioned appraiser) can be a big plus.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.

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