September 12, 2017

DELAY CLAIMS – A Primer on Compensable and Uncompensable Delay



This article originally appeared in the August 28, 2017 edition of the Daily Journal of Commerce Oregon.

Time matters: In the words of Malcolm McDowell in Star Trek: Generations, brushing off Picard’s appeal to not destroy a star and its solar system, “They say time is the fire in which we burn. Right now, Captain, my time is running out.”  Being on time is important in construction because time is money for all of the parties involved.  The owner wants the project finished so he or she can begin habitation or flow of revenue, and the contractor wants to finish so that its overhead and labor expenses can end.  Timely completion is important to all of the parties involved because it has real-world financial impacts.

Time for a construction project is usually established by the contract.  It is set out as a date certain for completion (e.g., January 25, 2019) or as a defined number of days (e.g., 180 calendar days) that starts upon a defined event, such as a notice to proceed.  If no completion date is specified, the law imposes a “reasonable” completion date.  Reasonable is considered a highly fact-driven inquiry that could result in a completion date along a spectrum time. 

From the contractor’s point of view, claims for additional time can be divided into two broad categories; pure time claims (I should be given additional days to finish because “x” occurred) and compensable time (I should be given additional days and you should pay for my additional costs).  Pure time claims, often called extension requests, can arise from factors outside of either the owner’s or contractor’s control.  Pure time claims are often called “excusable delay.”  For example, unusually severe weather or fire will normally entitle the contractor to additional time to complete.  These types of events are often referred to as “acts of God.”  In such circumstances, the contractor is entitled to additional days (measured by the delay caused by the event) to timely complete the project but not additional costs.  If both the owner and contractor contribute to delay, called “concurrent delay,” and it cannot be apportioned between them, the result is usually additional time but not additional costs.  If concurrent delay can be apportioned by clear proof, the contractor can still receive additional time and costs for the portion caused by the owner. 

Compensable time, on the other hand, is usually a delay to the contractor caused by the owner or those under the owner’s control.  Owner-caused delay can result in idle equipment, idle personnel, additional job site overhead, and additional home office overhead.  Owner delay that merely slows the work can increase the contractor’s costs to perform a task (e.g., it takes four hours to do work that should have taken two).  This is commonly called inefficiency or production loss. 

From the owner’s point of view, a late finish by the contractor can trigger multiple remedies.  The contract may contain a liquidated damages clause.  In general, liquidated damages are an estimate of the damages, negotiated with the rest of the contract, which the owner would incur for each day the project is late.  The daily amount must be “reasonable” based on what was known at the time of contracting and can be difficult to prove.  The rate cannot be so great that it is actually a penalty for being late, but it should include all potential amounts of damage that the owner will suffer.  Damages for delay can include interest paid on loans, lost rental, lost profits, and additional project management.  Liquidated damages are usually in place of actual damages.  The contractor will be excused from any liquidated damages when there is a concurrent delay.  The alternative to liquidated damages is actual damages.  These are the same items you would have included in computing any liquidated damages amount (e.g., lost profit, lost rent, additional administration), but now you must identify and prove them. 

Both parties must be aware that there are many other contractual clauses and legal principles that can affect claims based upon delay.  A few factors to be considered in private contracts include waiving damages for delay and limiting recovery to only additional time.  By statute, Oregon has made “no damage for delay” clauses void in public contracts.  Other contract issues to consider are implied duties in every contract to not obstruct, hinder, or delay the performance of the other party, and owners being held liable for additional costs by constructively accelerating the contractor’s work.  Constructive acceleration occurs when the owner fails to recognize excusable delay, refuses to grant additional time, and insists the contractor finish work on the original completion date.  This usually requires the contractor to incur additional costs in additional workers, overtime, and equipment to timely complete, which can be collected from the owner.  These are only a few of the other possible factors that could affect your delay claim.

Delay claims are complex and can make or break your business.  They are subject to many clauses of the contract and even statutes and implied duties.  Computing damages can be complicated and you can leave a lot of money on the table.  Determining the effect of a delay in a construction schedule can be convoluted and there is usually a mix of fault on both sides.  It takes a collection of knowledgeable persons working together to unravel this Gordian knot.  If you are wrong, you can find yourself subject to paying the other party’s interest and attorney fees or having your property liened.  If you find yourself either claiming delay or wanting to seek time or damages for delay, it is highly recommended that you seek the counsel of an experienced construction law attorney to advise you of the risks and benefits of pursuing, or defending, such claims.  This means planning ahead and getting sound legal advice before you sign a contract.  It also means getting technical support immediately when a problem arises.  While time is the fire in which we burn, sound advice can limit the severity of the injury.  

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