WHAT TO DO WHEN CONTRACT PERFORMANCE IS DELAYED?
By: Brian S. Case, Esq.
If there is one notion which should need little introduction to the experienced contractor in California, it is the notion that time means money. Generally speaking, when a contractor bids a project, it has usually estimated that its performance will take a specified period of time for which it must allocate an economic value for the cost of the company’s overhead in performing such work. Even though the concept needs little introduction, the application of the concept is critical to a contractor successfully keeping a project profitable.
For example, when a contractor agrees to perform the installation of interior drywall for a high-rise hotel, let’s say it has estimated it will take approximately 300 hours per floor of labor costs and material costs of approximately $50,000 per floor. If this hotel were five stories high, then in addition to the labor and material costs of (1500 hours + $250,000), the contractor must also figure in its bid the amount of overhead which it will sustain in order to complete the project which is estimated to take say three months time.
Let’s then say the contractor has a reasonable home-office staff of a president, vice president and secretary, three estimators, two secretaries, a bookkeeper, and receptionist. The total of these personnel’s salaries and other administrative expenses roughly run about $480,000 annually, which when spread over a three month period equals about $120,000. Normally then, the contractor’s bid will roughly include such an amount to cover the overhead expense.
After beginning construction, let’s assume the contractor later finds out that because of structural engineering problems, some of the metal studs to which the drywall is to be fastened have to be changed and cannot be delivered to the job site until two months after the drywall contractor mobilized and began construction on the lower floors of the project. As a result of these design changes, although the contractor is asked to continue its performance where possible, the total time in which the contractor is required to perform at the project now exceeds five months which is approximately two months longer than had been anticipated. Obviously under this scenario, the contractor probably will incur additional overhead expenses (approximately $480,000 ÷ 12 x 2 months = $80,000.00) beyond those overhead costs originally contemplated to be incurred for the project. How can the contractor recoup these added costs?
It is this scenario which has, over the last few years, led to an explosion of delay and schedule related claims on construction projects and ultimate litigation between the players. In order for a contractor and a construction law practitioner to be adequately prepared to address these issues and to keep a project profitable, each should be sufficiently familiar with the problem areas and expected results.
1.0 CONSTRUCTION DELAY NOMENCLATURE
A starting point in understanding and resolving construction claims relating to delay and schedule performance is the use of terms upon which the parties can base discussions. Generally speaking, delays can be broken down into excusable or unexcusable delays and compensable or non-compensable delays.
“Excusable delays” are delays which are not the fault or within the control of the contractor. They may be further clarified either as compensable or non-compensable as discussed below.
“Unexcusable delays” are delays which were within the control of the contractor, and since the contractor is at fault for the delay, no adjustment in time or money is available. Unexcusable delays are usually the subject of owner claims against the contractor and are discussed further under Section 3.0.
“Non-compensable delays” are excusable delays which are actual delays to the project schedule but are within the parties’ contemplation and not the fault of either the contractor or the owner. These include delays caused by unusual weather, other acts of God, and even some forms of labor disputes. Essentially, these types are beyond the control of the parties and, therefore, will neither be compensated nor penalized to any particular party to the construction project. Although the contractor is not entitled to extra compensation for non-compensable delays, in most instances it is entitled to an extension of contract time.
“Compensable delays,” on the other hand, are excusable delays to the construction schedule which are allegedly within the control of the parties and are caused by the fault of one party or the other or even a combination of forces. In these instances, the parties to the contract undoubtedly have incurred cost impacts to their extended performance due to an extended period of time that the project covers.
Before discussing the particular problems associated with some of these terms, one other term is noteworthy. This is the notion of “acceleration” which essentially means that there has been some delay caused on the project which would normally extend the time period of performing the tasks at hand, but for one reason or another, the time period is not extended and the contractor must essentially accelerate the same amount of labor and work force into a shorter period of time.
Acceleration can be either directed or constructive. A directed acceleration is where, although the contractor has for one reason or another been delayed, the owner directs the contractor to perform the original scope of work in the original period of time notwithstanding the delay. A constructive acceleration may be implied where, although the owner does not expressly direct the contractor to perform in a shorter period of time, the owner has made the contractor aware that it will require the contractor to complete within the original schedule which did not anticipate the alleged delays.
With these terms and concepts in mind, we now turn to how California courts are treating the disputes concerning delays between contractors, owners, and the other players to construction projects.
2.0 OWNER-CAUSED DELAYS
When a contractor is faced with a delay to its performance through acts or omissions of the owner or the owner’s representative, the first thing a contractor or its lawyer must ascertain is whether, as a matter of law, the contractor is entitled to damages for such delay. That is to say, although the delay appears to be a “compensable delay,” is there any legal impediment to payment of the costs of such delay? For some time now, many owners (as well as contractors in their subcontracts) attempted to contract away any liability for delay to the progress of a contractor. These provisions typically described as “No Damage For Delay Clauses” were at one time very frequently found in agency contracts between a public entity and a contractor. Acknowledging the extreme unfairness of such provisions, especially when they relate to public works, the California Legislature enacted Public Contract Code Section 7102 which, as recently amended, provides:
Contract provisions in construction contracts of public agencies and subcontractors thereunder which limit the contractee’s liability to an extension of time for delay for which the contractee is responsible in which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to preclude the recovery of damages by the contractor of subcontractor. No public agency may require the waiver, alteration, or limitation of the applicability of this section. Any such waiver, alteration, or limitation is void. This section shall not be construed to void any provision in a construction contract which requires notice of delays, provides for arbitration or other procedures for settlement or provides for liquidated damages.
Essentially, under Public Contract Code Section 7102, neither a public entity nor a general contractor can avoid the obligations for either of their delays to contractors who are damaged due to unforeseen and unreasonable delays of the progress of the work. It should be pointed out, however, that the above provision by its express terms does not limit any notice requirements that a contractor must give to either an owner or a general contractor.
Notwithstanding Public Contract Code Section 7102, “No Damage For Delay” provisions may still be upheld by California courts in private works. K & F Construction v. Los Angeles City Unified School District (1981) 123 Cal.App.3d 1063. To the extent that such clauses are not precluded by Public Contract Code Section 7102 (such as non-public works), such a provision may be upheld against a contractor to limit a contractor’s remedy for delay by the other to only an extension of time.
Even where such clauses have been upheld, however, a contractor who has been delayed by the acts of another may still be able to argue that the “No Damage For Delay” provisions should be limited under certain circumstances. For example, in Hawley v. Orange County Flood Control District (1963) 211 Cal.App.2d 708, the court strictly construed a “No Damage For Delay” provision against an owner who had delayed the progress of the project and so actively engaged in hindering the contractor’s progress that the court refused to apply a “No Damage For Delay” provision. Therefore, even in the private work context, a contractor who has been prevented by the owner from progressing with its work in an orderly fashion may seek damages for such delay even in some cases in the face of “No Damage For Delay” provisions.
Although the above principals seem to be firmly decided, one issue which has not been directly taken up by California courts to date is to what extent will a contract provision be upheld where it does not exclude damages for delay, but merely “liquidates” the cost of such delay to a specific dollar amount for each day’s delay that the owner is responsible for under the circumstances. To the extent that such clauses are seen as “liquidated damage clauses”, it is possible that such clauses will be upheld even though the liquidated damage amount is not equal to the actual damage amount that a contractor incurs for each day of delay. See Public Contract Code Section 7102. A contra argument to such a position is that the contractor’s actual delay costs were unreasonable under the circumstances and, therefore, the liquidated damage provision is invalid. Civil Code Section 1671(b). The issue is difficult at best and the contractor under the current code has the burden of proof.
Once having ascertained that Damages For Delay are available to a contractor who has been delayed by the owner or its agents, the contractor must then turn to quantifying the amount it is damaged due to such delay. There has been much debate and acrimony between contractors or their scholars and owners or their scholars as to a reasonable basis for calculating delay damages in a given context. Many jurisdictions have applied damage calculations which are derived from a formula known as the “Eichleay Formula” which originated out of a government contract with a contractor known as the Eichleay Corp. 60-2 BCA (ASBSC 1960). Essentially, the Eichleay Formula attempts to quantify delay damages of a contractor by determining what percentage of a contractor’s total overhead, which has been incurred during the contract period in question, versus the percentage of that contract’s gross revenues in question, compared to the contractor’s total billing, multiplied by the number of days of the owner caused delay. In mathematical terms:
Contract Billing Total ÷ Total Billings for all Contracts During Contract Period x Total Overhead Incurred During this Contract Period = Total Allocable Overhead to this Contract (or Y). Y ÷ Number of Days Performed on the Project x Number of Days Delayed = Extended Overhead Claim.
Many modifications to such a basis of calculation for delay damages to a contractor have been approved throughout various jurisdictions known as “Modified Eichleay Formulas.” In California, it is reasonable to assume that trial courts will follow Eichleay or Modified Eichleay Formulas for determining delay damages of a contractor unless the contractee can offer convincing proof that such formulas are unreasonable under the particular circumstances of its particular context.
3.0 CONTRACTOR-CAUSED DELAYS
To the extent a contractor has delayed a project through no fault of the owner, owners may also be entitled to damages for the contractor’s unexcused delay. In most contracts, these situations are typically dealt with in advance by contract provisions which attempt to delineate the owner’s damages for a contractor’s delay. These contract provisions, known as Liquidated Damage clauses under recent changes to Civil Code Section 1671, are presumed valid. It is up to the challenging party to establish that the clause was unrecoverable under the circumstances then existing. Civil Code Section 1671(b).
Where a contract between an owner and a contractor does not provide for Liquidated Damages, an owner may still be entitled to compensation for damages due to the contractor’s delay through a calculation of its actual damages. Proof of actual damages to an owner for a contractor’s delay is very dependent upon the particular circumstances that the owner and contractor have found themselves under. Contractors have been held liable for damages due to its delay to an owner as a result of lost income or rental revenues. J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799.
One area of increasing interest and dispute among contractors and owners involves the analysis of whether the delay of either an owner or a contractor is concurrent to the other’s delay which would somehow prevent one or the other from being entitled to Delay Damages. For example, in General Ins. Co. v. Commerce Hyatt-House (1970) 5 Cal.App.3d 460, the court held that an owner who has “contributed substantially to the delayed performance of a construction contract may not recover liquidated damages . . . .” Id. at 472. Where, however, the delay of each is somehow allocable in causation, then it may be plausible to segregate such delays and they are no longer “concurrent.” Furthermore, there is California authority for the conclusion that the fact finder may determine relative fault for the delay through a “jury verdict” method of allocating a dollar amount to one or the other. State v. Guy F. Atkinson Co. (1986) 187 Cal.App.3d 25.
4.0 ACCELERATION AND DISRUPTION CLAIMS
In addition to claims for the cost of the overhead of a contractor during an extended time or performance, delay on the construction project may also lead to other types of claims such as acceleration or disruption claims. It is basic construction contract law that a party to construction contract owes a duty to cooperate and to refrain from performing any act or omission which would prevent or otherwise hinder the other party’s performance of its contractual duties. Joanaco v. Nixon & Tierney Construction Company (1967) 248 Cal.App.2d 821 (1967).
For example, should the owner or its agents delay the progress of the contractor but also insist that the contractor still complete within the time period that had originally been contemplated by the parties? The contractor, upon finishing within that time frame, does not have any extended overhead since he has finished on time. The contractor may, however, have additional costs as a result of having to perform the original scope of work in a shorter time period due to the delay caused by the owner or its agents.
In these instances, it is likely that the contractor will be forced to supply additional manpower to the project in order to complete within the original time frame and may incur additional costs due to loss of efficiency of its manpower, overtime, stacking of trades, etc. It is reasonable for the contractor to be entitled to compensation for such acceleration costs or disruption damages. These damages are awardable whether the acceleration is expressed or constructive as was previously defined.
In some instances, the hinderance by the owner may be so substantial and the changes to the schedule so great that the parties ultimately must even “abandon” their original contract and proceed on a day by day basis with the best production and progress as possible. In these instances, a contractor may even be entitled to recover on a total cost or quantum meruit basis. C. Norman Peterson v. Container Corp. of America (1985) 172 Cal.App.3d 628; State v. Guy F. Atkinson (1986) 187 Cal.App.3d 25.
5.0 ARCHITECT/ENGINEER LIABILITY
Throughout the above sections of this chapter, there have been references to delay caused by the owner or its agents and resulting damages to a contractor. Probably the greatest agent or even independent contractor for some instances of the owner who may contribute to the delay is the architect or engineer. Architects and engineers may be liable to a contractor directly due to delay or inefficiencies. Nicholson-Brown, Inc. v. City of San Jose (1976) 62 Cal.App.3d 526.
Furthermore, the architect and engineer may even be liable to the owner for delays and unanticipated costs to the contractor as a result of errs and omissions in the plans and specifications. County of Los Angeles v. Superior Court (1984) 155 Cal.App.3d 798.
Furthermore, architects and engineers may be held liable for lost profits. Kuffel v. Seaside Oil Company (1977) 69 Cal.App.3d 555; Csordas v. United Slate Tile (1960) 177 Cal.App.2d 184.
6.0 PRESERVING AND PERFECTING DELAY CLAIMS
It is also important for contractors and their counsel to remember that of equal significance to the ability to seek damages for delay is the significance of a contractor’s timely perfecting its claims for delay. Most contracts provide for notice provisions by the contractor should it wish to seek compensation for delay or impact claims against the owner, etc. These notice provisions are not barred by Public Contract Code Section 7102 and are enforced under reasonable circumstances. For example, on a Cal-Trans project, a contractor must give a notice of potential claim within 10 days of the act or event giving rise to such potential claims. See Standard Specification Section 9-1.04.
Similarly, there are frequently additional time frames in which to set forth with substantial accuracy the basis of the claim and amount of requested contract adjustment due to such claims. Notwithstanding the importance of meeting the above deadline and the potential significant adverse results if they are not met, there are cases which will relieve a contractor of its failure to meet deadlines under certain circumstances. See Peter Kiewet Sons Co. v. Pasadena City Junior College District (1963) 59 Cal.2d 241, where an owner was suing a contractor for liquidated damages and the court rejected the owner’s claim even though the contractor had failed to give notice of the delays caused by the owner that accounted for the period of delay with the contractor. An affirmative claim for delay under a theory of waiver or actual knowledge by the owner. See Brinderson Corp. v. Hampton Roads Sanitation Dist. (4th Cir., 1987) 825 F.2d 41.
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