Disruption claims in the construction industry

Disruption can mean various things to different people, so defining it is quite tricky. However, it’s important in a construction industry context, particularly from a Contractor’s perspective, and can have substantial implications to all stakeholders party to a construction contract.

What is disruption?

Disruption refers to a scenario in which an organisation has experienced a ‘loss of productivity.’ In relation to the construction sector, Borcherding and Alarcon categorised 5 major components of productivity loss as:

• Waiting idle
• Travelling
• Working slowly
• Carrying out ineffective work
• Carrying out re-work

There are countless cases in which contractors or subcontractors have encountered problems that affect their planned methods of work. There are several reasons that can be attributed to such inefficiencies occurring, including an organisations’ own poor performance and ineffective planning. However, the matter of disruption is of significance on projects when organisations begin claiming that the loss of productivity suffered is due to the actions, or in some cases inaction, of other parties within the contract.

Claims of this nature are common, especially on large and complex developments where there are several different interfaces and numerous stakeholders. An infrastructure project, for example a city centre tramway system development, can have a wide range of stakeholders, all of whom can have a unique influence. Projects such as this will usually have a lengthy programme and there may be extensive periods in which the contractor, or one of their subcontractors, cannot perform their works to maximum efficiency.

Such periods may arise because of several factors, which are through no fault of the contractor, and they could incur additional costs for falling behind on programme, subsequently needing to re-sequence the works. This is an unfortunate position for a business as many contractors and subcontractors who have experience in preparing claims for disruption will be fully aware that it is notoriously difficult to prove. Prior to diving into the reasons why this is the case, it’s critical to understand the causes of disruption and the detrimental effects they can have on contracting organisations if the claims made are unsuccessful.

The causes of disruption

To begin with, it’s useful to understand the significance and meaning of ‘labour productivity’ before exploring how it relates to disruption. In simple terms, labour productivity can be defined as production or resource output. It’s extremely important to contractors, as levels of production can determine if a project is going to be profitable or not. A drop in productivity levels equates to project disruption.

Conscientious employers will understand the importance of productivity and should be aware of the commercial implications if the reasons for a contractor’s loss of labour productivity can be linked to their own action or inaction. In such instances, the contractor may be entitled to claim for lost productivity to the extent that an employer is in breach of an obligation. For this to happen, the contractor must show that there is a ‘causal link’ to the offending party, meaning they can claim for disruption as being a breach of an implied term under the employer’s obligation to not prevent or hinder the contractor whilst the works are being executed. It is important to understand this, as most standard forms of construction contracts do not expressly deal with disruption.

The main causes of disruption on construction projects are strongly intertwined with one another and, in most cases, the reasons for such claims being made are often quite similar. Typically, the main causes relate to project changes, programme acceleration, access issues, unforeseen ground conditions, co-ordination of design information, cumulative impact of delays, and management problems. You will note that a lot of the causes described here will often be the outcome of a development from the employers’ side which is why effective management of such matters is crucial in terms of minimising their potential exposure. The same scenario can apply to a main contractor who could potentially receive a disruption claim from one of their subcontractors.

Let’s take a cause from above and apply it to a scenario using the tramway example referred to previously. A tramway has an Overhead Contact System that provides the structure for overhead cables etc. This structure consists of poles that need to be set in foundations in the ground. Can you imagine the amount of services and utilities (known and unknown) present beneath the surface in a city centre?

If a contractor encounters lots of clashes with utilities when excavating the holes for the foundations, this may lead to a number of delays, as liaison may be required with several 3rd party utility owners to ensure any obstructions are dealt with in the best interest of all concerned. The cumulative impact of several of these types of ‘clashes’ could result in the contractor facing a period of disruption which they may be able to claim back if the location and presence of such utilities is not accurately reflected within utility protocol drawings that form part of the contract documents. For arguments sake, we will assume the responsibility here rests with the employer’s consultant who produced the utility drawings in this case.

We referred previously to the term ‘causal link’, which is loosely associated to the phrase ‘cause and effect.’ This phrase is commonly used in commercial management language and is often referred to when a contractor presents their claims. In the example we have used, the cause of this disruption claim is due to the fact that the utility drawings do not reflect the works required. As a consequence, the contractor had to stop works and restart at a later point, which may have led to re-sequencing and re-work. These components will form the basis of the disruption claim and why it has come about.

How does Disruption differ from delay?

Often, contractors will just lump together costs for both delay and disruption in a single claim without making specific reference to the costs associated with a loss in productivity. Many Claims professionals will argue that this is poor practice and that separation of the two items is key if the claim is going to be understood, let alone accepted.

Contractors often face several issues on projects that may lead to them having to accelerate the works or implement certain mitigating measures to ensure they finish on time. If the issues they face are because of the employer, any request to accelerate the works so that they meet the agreed practical completion date will incur additional costs, which are to be borne by the employer. Such developments are often the result of the contractor having their planned work schedule affected, which is known as disruption and critically not delay. If the contractor were delayed through no fault of their own then, depending on the circumstances, any compensation would likely come in the form of an extension of time.

Delays are defined as singular events or conditions that result in the project work starting or completing later than originally planned. Disruption on the other hand refers to the effects of individual or multiple delays, as well as interruptions to the planned method, manner, sequence, and duration of work activities directly or indirectly associated with the impacting event. Simply put, delay means a loss of time whereas disruption indicates a loss of productivity. This distinction may appear marginal, but it’s considerable when trying to ascertain what a contracting organisation’s actual loss and expense really is.

What are the methodologies for proving disruption?

There are several accepted methodologies that organisations use when trying to prove they were disrupted. For the purposes of this article, we’ll focus on the methods most frequently applied and explain what they aim to achieve whilst describing their advantages and possible drawbacks.

Measured Mile Analysis

The measured mile, sometimes referred to as the ‘golden mile’, is widely acknowledged as the most acceptable method for calculating lost productivity costs. This methodology is based on a direct comparison in which identical tasks in impacted and non-impacted periods of the works are used to estimate productivity loss caused by the impact of a known series of events. This methodology, if applied correctly, produces the most reliable proof for claiming disruption costs. However, a somewhat restrictive caveat with the measured mile approach becomes apparent when a non-impacted period does not exist or is not extensive enough. The absence of this makes the measured mile methodology difficult or even impossible to prove.

Earned Value Analysis

In situations where there is insufficient information available concerning physical units on site, an earned value analysis can be performed to compare planned vs actual performance. The analysis is performed by calculating the difference between the earned hours, determined by the analysis method, and the actual hours expended for an impacted period. This will give an assessment of the inefficiency experienced by the contractor. The output from an earned value analysis will typically be an hour’s performance index, which if below 1 will show that the contracting business is behind programme and has potentially experienced disruption.

This methodology relies on a reasonable budget being included, which is then used to calculate the loss of productivity suffered. A noticeable disadvantage of this methodology centres on the credibility of the initial budget used to do the analysis. If this is unrealistic or unreasonable, then the results are likely to be misleading, which is a common argument for organisations defending themselves against claims of this nature.

• Other methodologies include:
• Baseline productivity analysis
• System dynamics modelling
• Sampling
• Comparison Studies
• Industry Studies

Why is disruption so difficult for a contractor to prove?

The key components to any successful claim are the following:

• Cause
• Effect
• Entitlement
• Substantiation

Disruption is one of these murky areas where establishing all of the above ingredients is complex, as they can never really apply to one noticeable event. Unfortunately, disruption very rarely occurs because of one such event and is instead a result of a cumulative build-up of issues that leads to a wider problem. Therefore, many disruption claims will be submitted in a ‘global’ style that try to outline a series of events that justify the costs being claimed for without having to refer to specific instances, which in isolation do not really offer much by way of convincing the defending party that their actions have resulted in disruption. Unfortunately, the opinion as to the cause of these costs are also subjective as they are often derived from methodologies, such as the measured mile and earned value analysis, which have renowned disadvantages.

A key challenge with disruption claims stems from the fact that they are usually carried out retrospectively. In attempting to explain entitlement and substantiation, contracting organisations will often need to find contemporaneous records to back up what they are claiming. Such records can come in the form of timesheets, invoices, and minutes of meetings. Whilst this information can be difficult to track down, using the data to form an argument is an entirely different challenge. Detailed analysis needs to be undertaken to see if a case can be built, but often to no avail, meaning more time and resource is potentially wasted if the raw data does not produce something telling. This is a key area of risk for contractors that requires strong proactive management. Ultimately, when it comes to record keeping, some businesses are better than others, but it’s often because of the bad experiences they have endured in not being able to substantiate their disruption claims on previous projects.

In conclusion

Disruption is an important yet often overlooked issue and contracting organisations all over the world are suffering from it even as we speak. With margins tighter than ever, especially in today’s climate, businesses need to focus their energy and efforts on ensuring their bottom-line streams of revenue are not exposed by loss of productivity that is extremely difficult to claim for. To address this, organisations must ensure that any claims they make for loss and expense are clear in that the disruption is treated separately from delay if they wish to maximise their chances of gaining what they are rightfully entitled too.

Image credit: iStock.com/technotr

About Chris Williams

Chris is a Chartered Surveyor with 6 years experience in the UK Construction industry, working for a range of clients, undertaking Quantity Surveying, Claims Management and Project Co-ordination roles.