Net Present Value Analysis 203

The resulting $8,807.37 represents the indirect cost to the Contractor for
the Project suspension in year 1. Note that this figure cannot be calculated if the
delay is analyzed using a pure accounting approach that does not consider the
time value of money.

Calculating Indirect Damages Using Cost-Loaded Schedules

Of course, the preceding example was quite simple. The technique, however,
is equally applicable to more complex situations. In some cases, a Contractor
can project a cash flow using a computerized, cost-loaded, CPM schedule
that becomes the as-planned part of the analysis. The pay requisitions that the
Contractor submits serve as the as-built cash flow data. The analyst can calcu-
late variances using these two pieces of data. The analyst would then have to
evaluate these variances in light of the as-planned versus as-built analysis. The
schedule analysis will show the liability for variances. From this information,
the financial (direct cost) extent of the liability for schedule variances can be
analyzed. The final step in this process is the calculation of the indirect affect
using Present Value Analysis, as shown earlier. The following example illus-
trates this approach.
A Contractor has an as-planned cost-loaded CPM schedule for a Project.
Based on this schedule, the following cash flow is projected:
Year 1: $1,360,000
Year 2: $2,540,000
Year 3: $ 950,000
Because of delays and changes by the Owner, the Project is performed later
than planned and in a different sequence. The actual cash flow based on the pay
requests shows the following:
Year 1: $ 900,000
Year 2: $1,000,000
Year 3: $1,950,000
Using the same method as shown earlier, the variance in years 1, 2, and 3
can be calculated and the NPVA performed to establish the costs incurred by the
Contractor.
It should be recognized that the effect would only occur in the areas of over-
head and profit. Costs for labor and materials, although shifted in time, should
not result in damages to the Contractor, in that the Contractor merely passes
along these dollars and does not have beneficial use of them. The NPVA pro-
cess can also be used in situations where a Contractor’s progress is not delayed
across the board but rather only some work activities are halted. Once again, the
schedule analysis, along with the Project documents, form the basis for assess-
ing liability for the delays. Delays that extend throughout the Project duration
but are not compensated for by change orders are evaluated on the basis of their
effect on the Project cash flow. Of course, there is a difference between a partial