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NUANCES OF ANALYZING DISRUPTION AND LABOR PRODUCTIVITY CLAIMS ON PROJECTS IN LATIN AMERICA
By Jaime Gray, Partner – NPG Abogados, Scott Gray, Managing Director - Navigant, Israel Almodovar, Director - Navigant
INTRODUCTION
Labor productivity is defined as “a measure of production output relative to labor input.”1
This concept is a key indicator of efficiency and effectiveness of performance during a
construction project. From the bidding process to the management and control of cost
and schedule during construction, productivity is a factor of significant importance for
the management of a project.
During the bidding process and initial project planning, a contractor must determine
its means and methods in order to build a project in accordance with the contract
requirements. As part of these determinations, the contractor will establish the
composition and distribution of its resources and the required construction sequences.
Subsequently, based on those means and methods, resources, and sequences, the
contractor will estimate the duration and cost for each activity.
However, once that plan is established, and the construction work is underway, many
factors and conditions can occur that may affect the performance and productivity
of the work, giving rise to a concept also known as disruption. Disruption is typically
defined as:
“[A] loss of productivity or increased cost of performance caused by a change
in the contractor’s anticipated or planned working conditions, resources, or the
manner of performing its work (…a ‘change in working conditions’).”2
The conditions and events that can cause disruption are widespread. These changes in
working conditions or construction means and methods can be a result of inclement
weather events, changes in crew sizes, intermittent workflow, changes in the nature of
the work, working in reduced spaces, stacking of trades, lack of materials or design,
design modifications, poor or insufficient supervision, or poorly trained or motivated
workers, among many others. In this regard, it is important to note that productivity can
be affected by the contractor’s own internal issues, while other factors are related to the
owner’s actions or inactions.
1. AACE International, Recommended Practice No. 10S-90, Cost Engineering Terminology, October 31, 2017.
2. Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).
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The contractor will often, but not always, suffer a loss in
productivity on disrupted work. As a result, the contractor may
incur additional labor hours to accomplish each given unit of
work, resulting in increased unit costs and cost overruns on the
affected work.
The issues of disruption and lost labor productivity are so
significant in the construction industry that they have been widely
addressed and discussed by all industry participants, including:
• Contractor groups and associations, such as the Mechanical
Contractors’ Association of America (MCAA), which
published Change Orders, Productivity, Overtime;3 and the
National Electrical Contractors’ Association (NECA), which
published Negotiating Loss of Labor Efficiency for Electrical
Contractors.4
• Construction owner groups, including public owners (U.S.
Army Corps of Engineers, which published its Modified
Impact Evaluation Guide5) and private owner groups
(Construction Owners Association of America).
• International legal organizations, such as the Society
of Construction Law, which in 2017 published its Delay
and Disruption Protocol;6 and AACE International, which
published Estimating Lost Labor Productivity in Construction
Claims (RP25R-03, 2004),7 among other various international
publications.
Claims for the increased costs incurred as a result of a loss of
labor productivity are very common in the United States, with
decisions from the court systems indicating that contractors may
be compensated for owner-caused disruption:
“Disruption may be compensable because, within the
limits of a particular contract, (i) a change order can affect
work beyond that directly targeted by the change, and (ii)
the owner should pay for all costs of its changes. In other
words, a change order modifies the ‘changed’ work and
might disrupt the ‘unchanged’ work.
Disruption may be compensable if there is (i) a loss of
productivity (ii) caused by a change in working conditions
(iii) for which the owner is responsible.”8
The concepts of disruption and lost labor productivity are very
well accepted, and claims for these concepts are common in
the United Stated and other international jurisdictions. However,
the same does not apply to Latin America. In our experience,
disruption is a concept that was seldom addressed in
construction claims in Latin America until recently. However, due
to the influx of international players (both construction owners
and contractors) into this market, and the growing sophistication
of the market, the concept of disruption and the quantification
and presentation of claims for loss of productivity are now
spreading throughout the region, and are becoming more
commonly recognized by the parties involved in construction
projects and litigation.
The following sections of this article aim to provide a review
of the status of disruption claims in the United States (with
respect to the demonstration of cause and effect and
quantification methodologies) and a comparison to the
status of these concepts in Latin America, based on our
experience. The objective is to provide U.S. practitioners with
an understanding of what to expect in the Latin American
construction market regarding potential disruption claims,
and to provide Latin American practitioners with a view of
the current state and recommended practices regarding such
claims in the United States.
The Current State of Accepted Law and Recommended Practices for Lost Productivity Claims in the United States
One basic requirement of any construction claim is that
there be a cause-effect relationship developed between the
causation events or issue(s) on which the claim is based and
the effect of those causes, i.e., the damages being claimed. Do
the claimed damages flow logically and necessarily from the
claimed causation event(s)? In the event of a limited or isolated
disruption impact, such as a distinct inclement weather event
that affects only a few days of work, this cause-effect linkage
is generally more readily established. One can demonstrate the
number of workers affected and the time lost due to the event.
However, in modern disruption claims, the claimed causes of
disruption are often a combination of events that occur over
a long period of time and affect a broad set of contractor
activities and resources. For example, a claim for disruption
caused by excessive requests for information (RFIs) issued due
to defective design will generally involve many hundreds of RFIs
issued over an extended period of time, affecting many different
activities and areas of the project. The demonstration of the
direct disruptive effect of each RFI on the contractor’s workforce
is a very difficult and generally impossible task.
3. MCAA, Change Orders, Productivity, Overtime: A Primer for the Construction Industry, 2005.
4. H. Randolph Thomas and Amr A. Oloufa, Negotiating Loss of Labor Efficiency for Electrical Contractors, NECA, 2001.
5. Department of the Army, Office of the Chief of Engineers, Modification Impact Evaluation Guide, EP 415-1-3, July 1979.
6. Society of Construction Law, Delay and Disruption Protocol, October 2017.
7. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
8. Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).
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Given that the quantification of the damages associated with
each and every disruptive event is not practicable, a particularly
useful and highly regarded methodology was created to
help meet this challenge: the measured mile methodology.
As a result, when the proper documentation is available, the
common conception is that the measured mile is the preferred
methodology for quantifying loss of productivity claims.9, 10
In general terms, a measured mile analysis compares the labor
productivity achieved by a contractor during an unimpacted
(or less impacted) period or area within the project with its
productivity on similar work performed in a period or area that
suffered from impacts. The actual labor productivity achieved
on the unimpacted work becomes the baseline for what
would have happened on the impacted work if it had not been
impacted. The contractor then claims for the increased costs
associated with the difference between the two (unimpacted
versus impacted work), based on contemporaneous records
that indicate the actual hours incurred and the quantity of work
performed during those periods.
When utilized correctly, the measured mile analysis isolates
the impacted work and demonstrates that the only conditions
that were different are the claimed impact causation issues.
For instance, in the previous example regarding the effect of
hundreds or thousands of RFIs due to defective design, the
contractor must attempt to isolate the period affected by those
RFIs, holding all else constant between the unimpacted and
impacted work. If performed correctly, this demonstrates a
level of cause-effect relationship that is otherwise so difficult
to establish for a broad, multi-issue or multi-period disruption
claim. The only significant difference between the impacted
and unimpacted work, and therefore the apparent cause of the
deterioration in productivity, is the existence of the claimed
causation issues and/or events.
It is important to note that use of this method does not relieve
the contractor of the demonstration that the causation events
occurred, and that they changed the means and methods or
conditions in such a way as to cause a loss in productivity.
However, by making such a demonstration, courts and
arbitration panels will generally accept a proper measured mile
calculation as a reasonable demonstration of cause and effect
and quantification of the resulting damages.
Crucial requirements for the proper use of the measured mile
methodology include the following:
9. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
10. Society of Construction Law, Delay and Disruption Protocol, October 2017.
4
• The unimpacted work must be of a similar nature to the
impacted work. While the work need not be identical, it must
be sufficiently similar to allow a reasonable comparison such
that the measured differences relate only to the claimed
impact and not inherent differences in the complexity of the
work. Simply put, comparing complex, inherently difficult
work (such as rock excavation) with relatively easy work
(such as soil excavation) does not provide a reasonable or
appropriate measured mile analysis.
• One must analyze the impacted period to determine whether
any other unique conditions or circumstances occurred
during that period other than the causation issues being
claimed. For example, if the contractor also suffered from late
deliveries of its supplied materials or excessive equipment
breakdowns during a claim period affected by owner design
changes, and such conditions did not affect the unimpacted
period, such unclaimed conditions would incorrectly skew the
productivity results and serve to overstate the claim amount.
• The unimpacted work must be of a sufficient quantity
that it would have been sustainable over the course of the
project. Selection of a very small component of the work as
unimpacted will raise legitimate questions as to whether the
contractor could have achieved that rate on the impacted
work absent the impacts, or whether there was something
particular to the small sample that allowed the contractor to
achieve excessively good productivity.
In addition to the establishment of the cause-effect relationship
between the claim causes of action and the damages, when
applied correctly the measured mile methodology presents
many other substantial benefits, such as:
• It is based on actual results achieved on the project, and is
thus based on fact rather than conjecture or theory.
• It reflects the contractor’s actual supervision, workforce,
equipment, etc., for the project, such that the contractor’s
own inherent inefficiencies are reflected in the productivity
baseline, and not claimed against the defendant.
• It is not based on the contractor’s bid or tender values,
rendering moot the ubiquitous arguments as to whether the
contractor’s bid was or was not reasonable.
• It relies on project-specific information and is supported by
the contractor’s contemporaneous records.11
Largely as a result of the many strengths inherent in the
measured mile methodology, it has been applied by claimants
and accepted by courts in the U.S. for decades.12 It is
recognized by most industry organizations as a recommended
approach for demonstration and quantification of claims for
lost labor productivity.
The Current State of Understanding and Acceptance of Disruption and Lost Productivity Claims in Latin America
Latin American civil codes practically unanimously accept that
a party who suffers an economic impact as a consequence of
a breach of contract by its counterparty, or is affected by the
occurrence of a risk event the responsibility for which is borne
by its counterparty, should be compensated. This is the legal
basis for any contractual claim, but especially for productivity
claims and, as such, the legal basis for these types of claim is
clear and undisputed.
What is new in the Latin American region is that contractors
have finally realized that their direct costs are also affected
in cases of disruption and loss of productivity, and that this
financial impact is not covered by the payment of the indirect
cost which owners customarily agree to pay for delay damages.
In some cases where the contractors were aware that their direct
costs were also affected, they preferred to increase the amount
of their indirect costs instead of claiming the payment of the
direct costs affected, as it was easier for them to recover money
from owners.
On the other hand, owners are incorrect in their belief that the
payment of the indirect costs (including overhead and other
related costs) is sufficient to compensate the contractor for
the consequences of breaches of contract and the occurrence
of risks borne by the owner when these affect the time for
completion of the project or discrete activities.
Consequently, when arbitral panels decide on disruption and lost
productivity claims, they easily understand the legal concept
that supports them, but are unfamiliar, as are the owners, with
the reason why the contractor is not fully compensated when
they are paid for the indirect costs incurred. Arbitral panels that
do not understand this could dismiss these types of claims, as
they think that the contractor has already been compensated
and now seeks to double dip.
However, in recent years, contractor representatives, attorneys,
and experts have demonstrated that contractors are also
affected in their direct costs in cases of disruption and lost
productivity claims, and have also demonstrated how to
quantify compensation due by the owner. Methods such as the
measured mile and others have been applied and understood
by arbitral panels.
In summary, Latin American arbitration panels, contractors, and
owners are progressively becoming familiar with the concepts of
disruption and lost productivity claims.
11. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
12. William Schwartzkopf and John McNamara, Calculating Construction Damages (Aspen Publishers, Second Edition, 2001).
5
The Current State of Recommended Practices for the Quantification of Lost Productivity in Latin America
As noted earlier, the disruption concept is relatively new in the
Latin American construction market. As a result, the level of
sophistication in this type of analysis is growing at a rapid pace.
It was not long ago that Latin American contractors would not
even submit a claim for loss of productivity because this was
not a widely recognized concept. Claims for highly impacted or
disrupted projects were typically prepared and presented by
contractors based on less preferred methodologies such as the
total cost approach (i.e., claim entire overrun in excess of the
contract price) or the modified total cost approach (i.e., claim
entire overrun in excess of the contract price less an adjustment
for obvious bid errors or contractor defects).
However, recently there has been a shift to utilizing the more
accepted measured mile methodology, a change led by the
contractor community. Since the method was only recently
introduced in Latin America, experts and lawyers have had to
educate arbitral panels about the basis of the methodology and
its advantages, as well as of the reliability of the information
sources used when the methodology was applied. Also, experts
have had to convince the arbitration panels that this is the
preferred methodology (when the appropriate documentation is
available) over other methodologies that were more familiar to
the arbitrators.
This has led to local arbitrators, many of whom participate in
international arbitration proceedings and are therefore exposed
to more U.S. or European pricing methods, becoming more
accustomed to and accepting of this type of claim and analysis.
As these arbitrators subsequently participate in local arbitration
matters in their home country (e.g., arbitrations held in the Lima
Chamber of Commerce, the Bogota Chamber of Commerce,
and/or the Santiago Chamber of Commerce), the knowledge
obtained from the international arbitrations is spread to the local
arbitration forums. In other words, disruption claims and the
measured mile analysis is quickly becoming a common topic in
construction disputes at various levels throughout Latin America.
Nuances of Meeting the Burden of Proof in Latin America as Opposed to the United States
As a byproduct of the civil law systems in Latin America, there
are no case law or landmark decisions on which attorneys,
experts, or parties can rely for disruption claims. Under civil law
systems, a judicial award can only be recognized as valid case
law when it is recognized as such by the country’s Supreme
Court, also known as “jurisprudencia.” In many countries, such
as Peru, the Supreme Court normally does not recognize any
jurisprudencia on disruption or lost productivity cases.
As a result, awards made by arbitral panels cannot be
considered as jurisprudencia in any case. Moreover, Supreme
Courts in Latin America hardly ever consider awards issued by
judges in construction cases as jurisprudencia.
Furthermore, as mentioned before, arbitrators and magistrates
are still unfamiliar with the concepts of disruption and lost
productivity, but arbitrators participating in construction cases
are becoming increasingly familiar with these concepts since
they are now more frequently claimed by contractors. Disruption
and lost productivity claims were previously considered to be
technical claims, and lawyers in general were not well versed
in them. However, arbitrators and magistrates are familiar with
the legal concepts that support these types of claims as these
concepts are part of the general principles of civil law.
In this regard, for decades, arbitration in Latin America has
been dominated by lawyers. The vast majority of arbitrators
are lawyers who do not have a thorough understanding of
construction and technical issues. Neither is it common in Latin
America to find lawyers who are also engineers, so there are a
limited number of engineers serving as arbitrators in the region.
As a result, as will be further explained, the burden of proof for
causation issues regarding disruption claims in Latin America
currently tends to be significantly higher than in the United States.
Nuances in the Quantification of Lost Productivity Damages in Latin America
Although disruption claims and the use of the measured mile
methodology for the quantification thereof is quickly gaining
ground in Latin America, contractors are still going through
some growing pains regarding these issues.
For instance, in jurisdictions in which disruption and loss of
productivity impacts are commonly recognized, such as the
U.S., it is generally accepted that the contractor does not
need to prove the cause and effect of every single instance of
productivity loss. However, in Latin America, there is limited
acceptance of this concept, and thus the burden of proof for
owner-caused impacts is usually higher than in United States
courts, as it requires a higher level of analysis and substantiation
for each specific event.
For instance, we refer to the aforementioned example of impacts
by RFIs. In the United States, the expectation to substantiate
this topic would be to present a list of RFIs to demonstrate that
the quantity of RFIs required was excessive (as an indicator of
design deficiencies); demonstrate that the RFIs occurred during
and affected the performance of the work (rather than being
resolved prior to performance of the work); and provide several
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examples of specific RFIs that affected the work, and the resulting change
to the conditions, means, and methods of the work. In Latin America,
however, the expectation is often that the contractor must demonstrate the
specific impact of each RFI.
Another key issue affecting the use of the measured mile method
in Latin America is the availability (or lack thereof) of the necessary
contemporaneous documentation to support and substantiate such
analysis. For this methodology to be effective, the contractor must collect
information of actual man-hours incurred and actual quantities installed.
In addition, this data must be categorized by trades or types of work
activity, and by areas of the project. It is not unusual that contractors in
Latin America will not have a project accounting system that allows the
recording of this type of detailed data; this can present a substantial
challenge (though not necessarily fatal) to the implementation of the
measured mile methodology.
CONCLUSION
Loss of productivity is an issue that can affect construction projects
throughout their life cycle. In the United States and other international
venues, claims for disruption associated with owner-caused impacts may
be considered compensable (under the proper contractual conditions).
The long history of disruption claims in these venues has allowed for the
development of accepted methodologies to quantify this issue. As such,
the measured mile methodology is now considered the preferred method
to prove and quantify disruption claims.
However, disruption, both as a concept and a claim item, is relatively
new in Latin America. Although the level of sophistication regarding
these types of claims is quickly growing in the region, there are certain
nuances that must be considered. These nuances include a higher level
of burden of proof expected in order to demonstrate the cause-effect of
owner impacts, as well as a fairly common lack of detailed documentation
needed to execute and substantiate the analysis. With that said, the
recent trends indicate that disruption analyses and the use of the
measured mile methodology are gaining traction at a rapid pace in both
international and local arbitration venues for construction projects and
disputes in Latin America.
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CONTACTS
ISRAEL ALMODOVARDirector [email protected]
SCOTT GRAYManaging Director [email protected]