THE COST OF DELAY IN CONSTRUCTION B-7

Daniel M. Uman
President
Member, AACE

Construction Cost Consu ltants, Ltd.

1757 S. W. Prospect Dri ve
Portland, Oregon 97201

The Construction industry is probably the construction industry, there are many frustrations
most competitive and least profitable industry for the members of the design and construction
in the United States. It is an industry in which team, and more often than not for the owner. As
a great number of companies compete in the market we Cost Engineers are aware, the most effective
and there they either succeed or fail, depending time to make cost savings is during the design
largely on their skill and knowledge in their stage; that once the project is released to con-
chosen field, and especially on their ability to struction contract, it is too late to obtain
manage their operations on very low margins of significant control of major costs. Construction
profit. cost control begins with design cost control. What
the construction contract does is fix a price for
While the construction contractor has every the final product.
incentive to manage his business efficiently, in
order to glean as much profit as practicable, he More often than not, both the owner and the
is always faced with the keenest opposition from architect/engineer feel that their final efforts
his competitors, not all of whom may be aware of are complete once the price is fixed; it's the
the many pitfalls of this often highly risky busi- contractor's responsibility to complete the work
ness. Consequently, to maintain a sufficiency of ON TIME. What they don't know, however, is that
work, a construction contractor may find himself should the design be faulty, or incomplete, in
from time to time operating under circumstances no way can the contractor complete the project
of profitless prosperity: large quantities of in a timely and economical manner. In too many
work with low net profit. If he cannot withstand cases, the architect hangs it on the contractor
these circumstances, he may fail financially. to build the plant within the bid price and on
There is no doubt, therefore, that those who time. In too many cases, cost extras crop up
succeed must be possessed of high technical and due to incomplete or faulty design which the con-
managerial skill, and an ample amount of financial tractor absorbs assuming that it is too minor to
resources! consider and, optimistically, the project can be
completed on time. In too many cases, theseminor
It is with this in mind that the industry, changes in construction due to incomplete design
faced today with more and more circumstances of can and do cause bankruptcy to some rather finan-
potential delay, must gear itself for this kind cially sound contractors. It must be stated that
of thinking; that delay in construction is be- cost and schedule control of any substantial con-
coming a reality of the business; that protection struction project (over $100,000 in size) must be
against delay considerations must be built into mandatory for the contractor to successfully main-
the project; and that a much higher quality of tain his reputation and his profit margin.
expertise in management of the construction pro-
cess is mandatory for success in this climate. Two cases come to mind concerning this impor-
Let us identify some considerations that lead to tant consideration, where found lacking, has re-
delay in the construction process, then build up sulted in contract default and bankruptcy. One
some methods that can possibly offset these con- concerns the mechanical subcontractor on a large
siderations. sewage treatment plant in the Pacific Northwest.
The other concerns a substantial building contrac-
It must be firmly stated that all partici- tor in Central Oregon, who, stretched to the maxi-
pants in the construction process areresponsible mum in cash flow, "lived" with a six month project
for timely, and economical, completion and a that "stretched" fourteen months, due to circum-
quality product. No longer can the industry stances much beyond his control. Both went "belly
tolerate the thinking that "points the finger" up".
at the construction contractor, the last major
entity in the process, for untimely completion in Neither of these contractors had either cost
all instances. Unfortunately, it is the contrac- or schedule control of their project. Both used
tor who bears the brunt of the effect of decisions the field superintendent to bear the brunt of the
made months, or occassionally years before the rapid number of change orders imposed by incom-
contractor becomes involved in the process. These plete design, neither of which was sophisticated
decisions are made by owners, architects, and con- enough to understand what was happening as the
sulting engineers, often via sins of omission project became delayed beyond normal understand-
rather than commission. Because of the rapidly ing. Neither contractor wished to stop the work
accelerating changes that are occurring in the due to circumstances beyond their control, "lived"
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out their project, and both went bankrupt, still The mechanical contractor was smart enough
so stunned by the events of what happened that to realize that major action was required to main-
even during court action still feel that the new tain his profit margin and that, as progress con-
project could be completed on time if they were tinued, more delays occurred. I immediately
allowed to complete it as bid. developed a 250 node activity network using pre-
cedence diagraming for the mechanical work and
The mechanical contractor, when asked about included major structural and concrete milestones
the project schedule and his input into it, said imposed by the project arrow diagram, which had
"That is the prime contractor's responsibility; to be completed prior to the mechanical work
we only saw the schedule at the beginning of the start. The system allowed imposed dates, which,
job and never have seen it at the construction when run, showed a final completion date nine
job site." The building contractor never used a months beyond contract completion, and not four
schedule at the job site but did submit a very months. A resource report also was run identify-
simplified bar chart with his bid to fulfill the ing manpower requirements throughout the project
needs of the bid documents. All of the timing on time span. The results were untenable and too
the job was in the head of the field superinten- costly. A thorough evaluation resulted by the
dent. By the way, the total cost increase asked mechanical contractors team, a schedule update
for by this building contractor, for thirty-seven was run, and the nine months completion stayed
change orders that stretched the job to fourteen firm. This schedule became the basis for the
months, was $8,137 from the base bid. The archi- delay claim which resulted. It effectively
tect made sure that architectural errors would identified progress problems and forced the prime
not cost the owner any substantial amount. The contractor to reschedule, which, by the way, also
attorneys for the surety are requesting $247,000 showed a nine month delay. As the progress slip-
for the delay from the owners; plus legal fees, ped, it eventually became a fourteen month delay.
of course. The prime contractor submitted a claim for $10.3
million in December 1974. The owners refused,
What are the cost of delays in construction? the prime contractor walked off the job, the owner
What can a responsible and knowledgeable contrac- gave them ten days, then terminated the contract
tor legally request when confronted by delay due to default. The case is now in court. A new
situations, many times beyond his control? How prime contractor was retained on cost plus and the
can the construction contractor protect himself mechanical subcontractor now is collecting his
from bankruptcy due to stretched out jobs on fixed actual costs to complete rather than absorbing
price bidding? all of the costs due to an untenable situation.
The mechanical subcontractor also recently picked
up a substantial contract from this new prime
Much, of course, has to do with the contract
contractor.
documents. Let us assume that the contractor is
knowledgeable in the work, and is prepared to com-
plete a project within the time span, has properly The project schedule and its resulting month-
evaluated his risks, and has developed a plan to ly reruns are a major document in assuring on time
make a profit on this project. The project sche- delivery of the final product,
dule must become a contract document as nicely
stated in the "Cost Engineers Notebook" submitted The change order system is also one that must
with the December 1974 AACE Bulletin. The project deserve some effort. I feel that it is a fair
schedule submitted with the bid and fleshed out statement to make that each change order imposed
within 30 days after award is as important a re- on the contractor by the owner/design team has an
quirement of successful contracting as providing impact on cost and schedule. Yet, the existing
a qualified field superintendent at the site. The change order system by nature of the format for
project schedule, inputted in the field, and moni- such a document precludes that there is no impact
tored closely, becomes a legal document bar none on time and cost.
for identifying and evaluating the cost of delay
on the project. In many instances, a contractor is directed
to perform additional work, but the word change or
change order is never used. For example, when a
A case in point is warranted to explain this contractor requests an answer to a technical ques-
maxim. I was retained by the mechanical subcon- tion involving an interpretation of a drawing or
tractor on the Seattle Domed Stadium project to specification, he may receive a written response
evaluate the cost of delay that was occurring on from a technical member of the owner's staff
this construction job. The owners, King County, which causes him to perform extra work because
Washington, retained a schedule contractor who of an erroneous interpretation of the performance
received progress input from the prime contractor requirements. The owner's representative, not
monthly and issued a progress schedule. The pro- being familiar with contracting procedures, may
gress schedule showed the project was to overrun have no idea that he is technically issuing a
by four months at about 4% complete. Yet serious change order by requiring increased performance
difficulties were occurring as major milestones over that originally intended. Upon questioning,
slipped due to incomplete design and lack of co- he may deny that a change condition is involved
ordination by the prime contractor. Finger point- or was ever intended.
ing started early. The progress schedule was the
standard 3,000 node arrow diagram used for pay- The contractor is continuously facing the
ment purposes, and appeared to me to have serious problem of identification. To minimize this, the
errors in its logic, much less the information it contractor must train his key personnel and field
generated. supervisors to recognize salient features of con-
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structive changes. Disciplined procedures should 3) Properly identify all change orders and
be established in the care and preparation of the unusual influences incorporated into the
supporting data necessary to justify claims which CPM network. Check for peculiar situa-
may arise. tions which may tend to mathematically
gimmick or distort the CPM solution.
When the contractor identifies a constructive
change and the owner or his representative is not 4) Consider, before you start your negotia-
in agreement with the interpretation, the contrac- tions, the maximum and minimum positions
tor should: you are willing to compromise. Consider
asking for more than you expect to gain.
Promptly notify the owner in writing of Do not hesitate to horse trade.
his intent to file a formal claim as soon
as all information is obtained. 5) Ee prepared to give and take, and stand
fast on points in negotiations that can
2) Use the phrase constructive change order be based on facts. When using a CPM,
in his letter of intent to file a c= strive to get an early settlement. Cite
to put the owner on notice as to his precedents to support your position.
right to relief.
The use of CPM in legal solution to claims
3) Send a copy of the letter of intent to has been recognized by courts of law at all levels,
file a claim to all persons involved in as well as by major organizations such as Corps of
the dispute. Engineers. The CPM approach, however, can be no
more effective than the contractor project records
4) Document all facts to support or justify that support it.
his position.
The cost of delay on construction projects
5) Promptly follow the owner's instructions can be identified by using a CPM based claim,
or directives to ensure against termina- develop the facts to back up the claim, and stand
tion by default. firm on crucial points in the negotiation. Costs,
which developed without a schedule appear as opin-
6) Submit his formal claim after collection ion only, become firmly based data upon which a
of all necessary data. well prepared claim can rest. Effective manage-
ment of the construction process, by utilizing
Presentation and bargaining tactics used CPM scheduling and accurately developed cost data
during negotiation of claims and appeals are of to identify claims, can result in a healthy climate
prime importance to the contractor. The contrac- in which to conduct this very risky business.
tor should always be ready for negotiations by
having all of the available facts and documenta-
tion necessary for justifying or proving his posi- References
tion. The following guidelines are offered for a
CPM-based claim. 1. Antill, James M. : "Civil Engineering Manage-
Ft", (p. X05), American Elsevier Publishing
1) Study the original scope and revalidate -, New York, 1970.
the CPM network as originally agreed to
by the owner. 2. O'Brien, James J. : "Contractors Management
Handbook", Claims, (pp. 16-8), McGraw Hill
2) Identify the 10 most critical paths and Publishing Co., New York, 1971.--
designate the paths of float by a color
scheme. 3. Ibid, (pp. 16-14).

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