Why Disruption Claims Are Wasted Opportunity for Contractors
Introduction In the intricate world of construction, delays and disruptions are not merely common occurrences; they are inevitable. Yet, it is infrequent for a contractor to be adequately prepared for a disruption claim. Such claims often fall into a "wait and see" category, with disruptions typically lumped together in a global claim alongside other claims,…
Introduction
In the intricate world of construction, delays and disruptions are not merely common occurrences; they are inevitable. Yet, it is infrequent for a contractor to be adequately prepared for a disruption claim. Such claims often fall into a “wait and see” category, with disruptions typically lumped together in a global claim alongside other claims, most notably Extension of Time (EoT) claims.
Moreover, there is a common confusion between disruption and prolongation claims. While both types of claims seek additional compensation due to the unforeseen expenditure of resources, they significantly differ. Notably, disruption claims often entail a higher value than prolongation claims. This article aims to explore why disruption claims frequently represent a missed opportunity.
Prolongation Costs vs. Disruption Claims
When a project overruns its scheduled completion date, contractors incur losses due to the extended deployment of resources on-site. These losses usually cover additional site overheads, equipment rental fees, and site operational costs, found in the contractor’s Bill of Quantities (BoQ) in the preliminaries section.
If the delay is excusable and compensable, the main contractor may be entitled to reimbursement for the added preliminary costs incurred due to the prolonged on-site period. However, granting an EoT does not automatically qualify for financial compensation (prolongation costs). Certain prerequisites must first be satisfied.
In contrast, disruption costs are unrelated to project delays. Although a disruption can lead to a delay, a delay is not a prerequisite for a disruption claim. Disruption costs stem from a loss in productivity and efficiency in executing work due to an event caused by the employer, resulting in interruptions, disturbances, or hindrances to the standard construction method or sequence. This leads to a significant drop in contractor performance.
For example, a design change in an area that does not halt the contractor’s work but requires a sequence alteration, moving equipment, and relocating materials, that can lead to disruption costs. These costs encompass both direct and indirect costs related to the interruption, unlike prolongation costs, which only cover the indirect costs of the delayed period. Hence, disruptions are often more substantial in value.
The Complexity of Disruption Claims
At their core, disruption claims represent a loss in productivity, leading to decreased production efficiency. Construction projects are priced based on labor and equipment rates, with specific quantities expected to be produced within a certain timeframe, equating to productivity. A disruption, therefore, results in reduced productivity, increasing the cost of labor and materials beyond the planned amounts.
To calculate disruption, it is necessary to have planned productivity rates for the trades and records of actual productivity rates. The productivity in areas affected by disruption is then compared with areas without disruption, with the difference representing the contractor’s loss.
However, contractors must also prove that the disruption was due to factors beyond their control. Establishing causation is a mandatory aspect of a disruption claim. The complexity of a disruption claim lies in maintaining extensive site records, anticipating disruptions, and conducting continuous analysis to prove the causation of the disruption. Yet, when executed correctly, the rewards far exceed the efforts.
Why Disruption Claims are a Missed Opportunity
Despite their potential to recover a significant costs, disruption claims are often overlooked within the construction industry. The primary challenge is the need for detailed and accurate records to support the claim. Unlike prolongation costs, which are relatively easier to document through project schedules, contracts, and direct bills, disruption claims require intricate details about the work being performed, the anticipated vs. actual resources needed, and a clear causal link between the event and the disruption.
The main reasons for this missed opportunity include:
- Lack of Awareness: Often, disruption claims are misunderstood and conflated with prolongation costs. Additionally, the methodology for calculating disruption costs is not widely known, with many construction professionals having never personally processed a disruption claim, typically leaving it to quantum determination experts.
- “Wait and See” Approach: Delays are inevitable in the construction industry, making disruptions a reality. However, many contractors adopt a “wait and see” approach, which often complicates and makes quantifying the situation more challenging. Contractors should anticipate disruptions early enough.
- Inadequate Documentation System: Disruption documentation requires a system that links the construction site progress, labor, and equipment actuals to the plan. It necessitates identifying work areas and breaking down key trades. Detailed documentation is key to a successful disruption claim.
- Resource Constraints: The extensive requirements for record-keeping necessitate significant resources, which are often not accounted for in the budget, thereby straining contractor resources or sometimes leading to the abandonment of the claim altogether.
- Establishing Causation: Unlike prolongation and EoT calculation, disruption calculation is rarely governed by the contract, but establishing causation might be linked to a contract clause or contract law. This requires all project team members to understand what constitutes a disruption and to report any suspicions of disruption to the concerned team to start analysis as early as possible and direct the recording team to specific areas or, more commonly, with Extension of Time (EoT) claims.
Conclusion
While prolongation costs and disruption claims both serve to compensate for the financial impact of delays and disruptions, the latter remains underutilized due to the challenges in substantiation. However, with the right approach to documentation and an understanding of the nuances involved in these claims, construction professionals can turn disruption claims from a missed opportunity into a powerful tool for recovering costs.