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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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.
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• 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
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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