A Guide to Disruption and Lost Productivity

How to Identify Disruption and Claim Additional Costs

INTRODUCTION

Contractors often overlook Disruption Claims as a method of relief under their construction contracts. This typically occurs because:

the effects of disruption are not evident until sometime after the disruption event occurs (leading to time bar issues) and/or
the contractor is unable to properly develop and support its claim.

The major challenges of a Disruption Claim are to:

identify a clear pathway to entitlement under the contract or at law;
accurately and reasonably measure the loss in productivity; and
demonstrate causation/responsibility for the disruption to a compensable event under the contract.

When prepared correctly, Disruption Claims can be an effective recovery method for both time and costs associated with lost productivity. This article focuses on the cost recovery aspect of Disruption Claims.

WHAT IS DISRUPTION?

Disruption is defined by the Society of Construction Law’s Delay and Disruption Protocol 2^nd Edition (the SCL Protocol) as:

‘a disturbance, hindrance, or interruption to a Contractor’s normal working methods, resulting in lower efficiency.’ [1]

Disruption typically results in a loss of productivity, causing increased labour costs. Disruption may also result in critical delay and delay cost impacts. Disrupted work is work that is carried out less productively than it would have been had it not been for the disruptive event. A contractor may be entitled to recover costs arising from disruption under the contract (if the event causing disruption is a compensable event) or alternatively as a breach of contract.

Productivity measures the labour-hours required to achieve a unit of output. It is often confused with the term production, which measures the output itself. As an example:

Productivity (tonnes of reinforcing steel placed per labour-hour)—used to determine if an activity is performing below budget (at a profit), on budget or above budget (at a loss).
Production (tonnes of reinforcing steel placed per day)—used to determine the planned (or remaining) duration and whether an activity is behind or on schedule.

It is possible to achieve the planned rate of production without achieving the planned rate of productivity (and vice versa). In many cases, contractors often cannot recognise disruption in its early stages because the effects don’t become apparent until sometime after the event.

COMMON CAUSES OF DISRUPTION

Disruption can arise from various sources and events and may have both direct and cumulative impacts on productivity. A useful source that reviews common causes of lost productivity in greater detail is the American Association of Cost Engineers International (AACE) Recommended Practice No. 25R-03 – Estimating Lost Labour Productivity in Construction Claims. A useful source that reviews common causes of lost productivity in greater detail is the American Association of Cost Engineers International (AACE) Recommended Practice No. 25R-03 – Estimating Lost Labour Productivity in Construction Claims[2]. Some of the common causes observed in the building and infrastructure sectors are:

Acceleration	Material, tools and equipment shortages
Inclement weather	Out-of-sequence works
Cumulative impact of change	Defects and rework
Start/stop events	Site conditions
Slow / ongoing issue of documentation	Untimely approvals or responses
Learning curve

PREPARING A LOST PRODUCTIVITY CLAIM

A Lost Productivity Claim is a sub-set of a Disruption Claim that focusses on lost labour costs arising from compensable disruption events.

Fundamentally, a Lost Productivity Claim is an exercise in comparison, whether it be planned versus actual conditions or undisrupted versus disrupted conditions. When compiling a Lost Productivity Claim, a contractor will need to demonstrate that:

an event occurred that gave rise to an entitlement to claim;
the event identified has caused disruption; and
the disruption has actually resulted in the increased costs being claimed.

Lost Productivity Claims provide for the recovery of direct costs for trades and other elements. Generally, these costs are not fully recoverable through a prolongation claim, which only allows recovery for elements tied to the project’s critical path (such as indirect resources or preliminary costs).

ENTITLEMENT

Before deciding whether to pursue a Lost Productivity Claim, the first hurdle that must be passed is entitlement. To demonstrate entitlement, the following must be considered in respect of the relevant contract:

the event causing disruption is compensable (either under the contract or at law);
the event gives rise to an increase in actual cost; and
compliance with the contract’s requirements relating to notices and timings has occurred.

In order to achieve compliance with notice requirements of a contract, it is often necessary for a contractor to pre-empt the disruptive impact of certain events. Often, it is not until much later that the actual losses can be established.

Notwithstanding the above, even if a contractor’s entitlement is arguable or uncertain, it is often of benefit for a contractor to:

ensure it complies with any notice requirements under a contract; and
issue a claim setting out the disruptive events and their impacts,

in the event that entitlement is ultimately established (or other commercial factors lead to the claim being considered for payment).

ANALYSIS AND CAUSATION

After addressing entitlement, the next consideration is how the Lost Productivity can be proven. This generally requires demonstration of the following:

how the event causing disruption resulted in a loss of productivity – that is, demonstrating ‘cause-and-effect’; and
how the loss of productivity has been measured, including the method and basis of calculation.

While there is no prescribed way for contractors to prove a Lost Productivity Claim, the SCL Protocol states:

‘Disruption is demonstrated by applying analytical methods and techniques to establish the loss of productivity arising out of the disruption events and the resulting financial loss.’

The credibility and accuracy of these steps are contingent on the availability of relevant and contemporaneous project records. In many cases, the accuracy and completeness of project records are the ‘make-or-break’ element in pursuing any Disruption Claim. Examples of the record types (apart from contractual notices) that are useful in preparing a Lost Productivity Claim include:

statused programs;
PCG or monthly report meetings and minutes;
daily progress records;
daily site diaries;
daily timesheets [3] ; and
site phots (particularly timelapse photography)

The ability to access contemporaneous records of occurrences at any time and stage of the project provides the framework to build a Lost Productivity Claim (and any Disruption Claim, generally). This is necessary for completion of the cause-and-effect link and also enables application of an analytical method of productivity analysis.

Wherever a contractor identifies events that may cause disruption, it should ensure that the events and their effects are thoroughly recorded in contemporaneous project records. Analyses based on contemporaneous project records are far more likely to succeed than those based on a subjective reconstruction of events.

METHODS FOR DETERMINING LOST PRODUCTIVITY

There are a variety of different methods for analysing and determining lost productivity. The SCL Protocol includes a table[4] of the more common methods split by productivity-based and cost-based methods:

Productivity-based methods	Cost-based methods
1. Project-specific studies:	1. Estimated v incurred labour
(a) Measured mile analysis	2. Estimated v used cost
(b) Earned value analysis
(c) Programme analysis
(d) Work or trade sampling
(e) System dynamics modelling
2. Project-comparison studies
3. Industry studies

Generally, both published literature and the courts have a demonstrated preference for the productivity-based methods. While circumstances may dictate their use, cost-based methods are usually a last resort and are therefore not discussed any further in this article.

Data availability typically determines the most appropriate method of analysis to adopt. The chart below provides guidance on the most appropriate method by identifying the relationship between:

the availability/quality of project documentation;
the result/outcome uncertainty; and
the effort required to prepare the claim.

Figure 1 [5]

When selecting an appropriate method, these factors should be considered and weighed against entitlement and the likely size (quantum) of recovery. The most time-consuming portion of preparing any Lost Productivity Claim is the identification, investigation and review of contemporaneous records to support an analytical comparison exercise.

Productivity-based methods all rely on comparing a ‘baseline’[6] productivity with actual productivity. The difference between the two is the basis of the loss in productivity. The formula below from AACE[7] neatly summarises how Lost Productivity is calculated:

In the subsections below, brief overviews of two more common methods are provided—the ‘earned value’ and ‘measured mile’ methods.

EARNED VALUE

Earned value (EV) is a project management technique used to measure the progress of a project. It combines the project’s budget and schedule to determine the value of the work that has been completed. A simplified equation for EV is provided below:

The EV method relies on a comparison of ‘earned’ hours (derived from a budget or estimate) with actual hours to complete the work activity. The measured difference can be used to determine the productivity loss and a performance (or productivity) factor (PF). For example:

a contractor has budgeted that it will take a total of 80 labour -hours to pour a concrete slab—this is the EV assigned to this task;
if 40 labour-hours have been recorded to date, then the EV method estimates that 50% of the ‘work’ required to pour the concrete slab should have been completed; and
if the contractor ultimately spends 100 labour-hours to complete the slab, then 20 labour-hours are measured as lost productivity. The PF for this activity is determined by dividing the earned hours by the actual hours:

This equates to a 20% loss in productivity for the concrete slab.

The EV method can be applied at varying levels, from individual activities to a project-wide basis. This is typically a function of how the project has been estimated and the extent and accuracy of actual hours recorded.

The EV method assumes that the tender or estimate for the works is inherently correct and ignores any flaws or inaccurate assumptions that the contractor may have made when estimating the works. Consideration should be afforded to the reasonableness and credibility of the budgeted hours when determining the appropriateness of the EV method.

This becomes problematic when there is a dispute over the budget used as the comparison or where the Principal alleges disruptive events to the contractor’s account. These concerns can be addressed by applying factors or deductions to the measured productivity loss to account for events that are to the contractor’s account or non-compensable under the contract.

MEASURED MILE

To determine lost productivity, the measured mile approach compares the actual productivity for identical (or similar) work activities during undisrupted and disrupted periods. The benefit of the measured mile (in contrast to the EV method) is that it relies on the actual productivity rate achieved as the baseline rather than an estimate. This yields credibility to the analysis and avoids the scepticism often associated with theoretical productivity methods.

The figure below visualises the measured mile approach where ‘workhours lost’ are determined by using the productivity recorded in the ‘unimpacted portion’ as the baseline.

Figure 2 [8]

This approach is contingent on demonstrating causation between the disruptive event(s) and the increase in actual workhours following the ‘unimpacted portion’. This becomes problematic in cases where detailed and contemporaneous records are unavailable. Suppose either the progress of the works or the actual hours are not recorded at a sufficient level of granularity. In that case, it becomes difficult to identify what the actual rate of productivity is for a specific work activity in a given period.

Further, this method relies on comparing actual productivity between a disrupted and undisrupted period. If no undisrupted period can be identified, then there is no basis to be used for comparison. In these circumstances, performing the analysis may still be viable by identifying a period of ‘least disruption’ and using this as the basis for comparison. However, there will be an inherent loss that this type of analysis will not capture.

PROVING DISRUPTION

The chances of pursuing a successful Lost Productivity Claim (and Disruption Claims generally) are greatly improved by establishing systems and tools to maintain contemporaneous records and track the progress of the works. The nature and extent of these systems should be driven by the specific risk profile of the project and set up in the pre-contract phase.

When the circumstances arise, proving a Disruption Claim is typically a two-phase process:

determining the lost productivity using analytical means; and
demonstrating causation between the disruptive event(s) and the lost productivity.

Many contractors focus on the first phase and ignore the second when preparing a claim, often resulting in a disparity between the results of the analysis and what can be proven in terms of causation.

Adherence to the steps below will maximise the chances of succeeding with a Lost Productivity Claim and avert the common pitfalls associated with these types of claims:

proving the baseline productivity by verifying your budget or utilising actual productivity sourced from project records. If necessary, apply reasonable deductions or adjustments to productivity used as the basis for comparison;
ensuring the claimed narrative is specific in addressing disruption and its impacts on productivity—this will avoid the optics of a global claim[9];
keeping causation between the disruptive event(s) and the principal’s acts/omissions (or other compensable causes) at the front of mind—simply identifying lost productivity does not entitle you to make a claim; and
ensuring the claim is credible—identify and account for self-inflicted factors (or non-compensable events) that the other party is aware of.

The key element of proving a Disruption Claim is demonstrating causation. Equal effort should be applied to the cause-and-effect link. Ultimately it must be demonstrated, on the balance of probabilities, that the disruptive event caused the loss of productivity.

CONCLUSION

A Lost Productivity Claim allows recovery of direct costs that may not be recoverable under a traditional EOT and delay cost claims. The following must be considered before pursuing a Lost Productivity Claim:

identification of the contractual (or legal) basis and route to entitlement, and
the availability and accuracy of project records.

From there, it is a matter of choosing an appropriate method of productivity analysis based on your project circumstances and ensuring that the causative link between the events and the loss in productivity can be demonstrated.

When faced with a disruptive event, a contractor must focus on:

complying with the notification requirements of the contract; and
maintaining contemporaneous records to document the impact of disruption.

These two aspects are fundamental in successfully pursuing any type of Disruption Claim.

Brendan Spratt is an Associate Director at Calibrate Consulting and can be contacted at:

bspratt@calibrateconsulting.com.au

[1] Society of Construction Law 2004, Delay and Disruption Protocol, 2nd edition, page 44.

[2] Association for the Advancement of Cost Engineering (AACE) International, Inc. 2004, Estimating lost labor productivity in construction claims, AACE International Recommended Practice No. 25R-03.

[3] With timesheet records, the implementation of a work breakdown structure (WBS) to accurately record time against specific activities is an extremely useful tool.

[4] Society of Construction Law 2004, Delay and Disruption Protocol, 2nd edn, page 46.

[5] Nelson, D 2011, The Analysis and Valuation of Disruption, page 12 (adapted from Ibbs, W, Nguyen LD & Lee, S 2007, ‘Quantified impacts of project change’, Journal of Professional Issues in Engineering Education and Practice, 133(1)).

[6] In this context, ‘baseline’s is a reference to planned or undisrupted conditions under which the party expected to perform the work activity’.

[7] Association for the Advancement of Cost Engineering (AACE) International, Inc. 2004, Estimating lost labor productivity in construction claims, AACE International Recommended Practice No. 25R-03.

[8] Zink, DA 1986, ‘The measured mile: Proving construction inefﬁciency costs’, Cost Engineering, 28(4).

[9] In certain circumstances, there may be benefits associated with preparing a claim that is more global in nature. While these are less likely to succeed under strict dispute circumstances, it may be a trigger to commence a productive commercial discussion between the parties.