Why Construction Delays Cost Money

Contractor makes claim against Army Corps of Engineers for delay damages.

brian-morrowUntitled-1By Brian Morrow, P.E., Esq.

Time is a critical resource in construction, as in “time is money.” In construction contracts, contractors must budget their resources, including labor, materials, equipment, supervision and overhead expenses, so they can realize an anticipated profit by the projected completion date.

Delays impact a contractor’s costs and profit. Throughout the years, courts have developed methods to analyze delays, such as the Eichleay formula.

In a recent case, JMR Construction Corp. v. U.S. (U. S. Court of Federal Claims, July 14, 2014), a federal court addressed delay damages, including issues relating to the Eichleay formula.

On June 26, 2007, JMR contracted with the U.S. Army Corps of Engineers (COE or Government) for the construction of an aircraft maintenance facility at Nellis Air Force Base.

The contract projected a planned completion by Oct. 6, 2008. However, final completion was not obtained until Sept. 4, 2009. Delays to the project occurred through January 2009. From Jan. 1 to Jan. 16, 2009, JMR performed substantial work on-site. On Jan. 14, the COE took possession, or “beneficial occupancy,” of the facility. From that point, JMR’s work slowed and it installed temporary lighting in “Room 109.”

On Feb. 2, JMR installed a temporary power converter. On Feb. 3, JMR removed its office trailer from the work site. After Feb. 3, JMR performed six days of fieldwork to complete two tasks: installation of a permanent power converter and permanent lighting in Room 109. Between Jan. 16 and Sept. 4, 2009, JMR conducted off-site work. On Sept. 4, the COE acknowledged JMR’s contract transmittals.

JMR submitted several requests for equitable adjustment (REAs) to the COE, including a revised REA on Feb. 2, 2010. On March 25, 2010, the COE’s contracting officer denied the revised REA. Subsequently, JMR brought a breach of contract claim, claiming delay damages of $428,261.44. The government moved for summary judgment regarding JMR’s field overhead damages from Feb. 4 to Sept. 4, 2009, and JMR’s home office overhead damages.

Field overhead costs, i.e. jobsite overhead, are administrative field costs that increase throughout time, such as field worker salaries, work trailer costs and temporary site utilities fees. Home office overhead costs are the general administrative costs of running a business, such as accounting and payroll services, general insurance, salaries, work trailer costs, taxes and depreciation. Home office overhead involves costs for the benefit of the whole business and may not be charged to a particular contract.

The government claimed that after JMR removed its job site trailer on Feb. 3, 2009, JMR performed minimal work, and therefore, “did not occupy the field” sufficiently to recover damages for field overhead costs. The court, however, found that JMR’s work – six days of fieldwork after Feb. 3 – created a factual dispute that prevented summary judgment on this issue.

To recover home office overhead, JMR had to satisfy the Eichleay formula, which requires the following: there was a government-caused delay not excused by a concurrent contractor-caused delay; the contractor incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the unextended performance period’s close; and the contractor was required to remain “on standby” for the duration of the delay.

To establish standby, the contractor must further demonstrate that the government-caused delay was “not only substantial but was of an indefinite duration;” during the delay, it was required to return to work “at full speed and immediately;” and a suspension of most if not the entire contract work.

The court addressed two distinct periods of JMR’s work: Jan. 16 to Feb. 3, 2009, and Feb. 4 to Sept. 4, 2009.

For the first period, the COE did not issue a stop work order. To recover under Eichleay, JMR had to establish a suspension of its work through indirect evidence. JMR argued that its work during this period was minor, including changed contract work and minor punch list items. Since there was a factual dispute as to the nature of the work and whether JMR suffered a suspension, the court denied summary judgment for this issue.

For the second period, JMR was largely waiting for the manufacture and delivery of the permanent power converter and installation of permanent lighting. The court found JMR was not required to return to work immediately at full speed and because the outstanding tasks were not time-sensitive.

Instead, both remaining tasks were previously addressed with stopgap measures that removed the urgency for JMR to resume work, because the COE had possession of its facility with fully functional power and lighting systems. Therefore, the court granted summary judgment on this issue.

The JMR matter highlights the requirements to bring a claim against the Government for delay damages, including for field office overhead and home office overhead. To prevail on a claim for delay damages, strict criteria must be met, especially when claiming home office overhead through the Eichleay formula. Here, as JMR learned, the failure to meet those criteria is fatal to any such claim.

 

Attorney Brian Morrow is a partner in Newmeyer and Dillon LLC and a licensed civil engineer specializing in construction law including road and heavy construction. brian.morrow@ndlf.com