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The Estimate and Construction Claims

The Estimate and Construction Claims 

by Christopher Molloy, Managing Director, FTI Consulting, Chris.Molloy@fticonsulting.com

The Subcontractor’s estimate is perhaps the most critical document used to determine how a Subcontractor prepared its pricing for a job. It is the framework that shows how the Contract price was determined and it details the basis for all labor, equipment, material and supplier costs. It also identifies the Subcontractor’s overhead markup and anticipated profit. Once the Contract is awarded, Subcontractors frequently forget about this critical document as they become consumed with the act of building the Project. In the unfortunate event of claim against a General Contractor or Owner, the estimate can be a critical tool for establishing entitlement to additional costs. Likewise, for an Owner or General Contractor, a review of the Subcontractor’s estimate can be useful in the defense of a claim. This article will discuss how the estimate can be used when preparing construction claims.

 

The Estimate and Delay Claims

 A Subcontractor’s estimate typically details the planned general conditions labor hours/costs and the overhead considered in establishing the Contract Price. This information is one factor to consider in preparing delay claims related to extended general conditions and home office overhead. For extended general conditions claims, it is important to verify the general conditions costs that the Subcontractor actually incurred during the delay period (if possible) prior to seeking recovery for such costs incurred during the extended project duration. I recently worked with a Subcontractor who was seeking damages for all of the general conditions costs that it incurred during the extended project duration. The Project had a planned duration of two years, but was delayed two years, resulting in total project duration of four years. In this particular instance, it was undisputed there was a compensable two‐year delay. The Subcontractor mobilized on the planned start date, and was on site continuously through the actual substantial completion date. Thus, the Subcontractor’s claim for recovery for all of its general conditions labor costs incurred during the extended two year duration seemed acceptable. However, a review of the Subcontractor’s estimate as compared to its actual expenditures indicated that during the planned two year project duration the Subcontractor incurred significantly less general conditions labor cost than planned. This was the direct result of schedule delays and the late release of work areas, thus the Subcontractor did not mobilize its full complement of supervision personnel as planned. Supervisory labor costs that the Subcontractor planned to incur during the first two years was delayed to the latter two years. An appropriate credit had to be made to the Subcontractor’s claim. The Subcontractor was only entitled to wage escalation (if applicable) on the delayed supervision, and general conditions labor in excess of its budgeted amount that was incurred during the extended project duration. For the recovery of extended home office overhead claims, it is important to know the Subcontractor’s overhead markup in its Contract price. The planned markup is frequently used to calculate home office overhead expenses during the extended project duration. For example, in New York State, the “Manshul Formula” is commonly used to quantify home office overhead claims. The formula requires that the Subcontractor determine the value of the incomplete base contract work at the time of the planned completion. The remaining contract value is then divided by the planned overhead markup to arrive at the cost of work to be completed during the extended project duration. The appropriate markup is then applied to the cost of work to be performed during the extended project duration. The accuracy of the formula is dependent upon the Subcontractor’s use of the actual overhead markup used to arrive at the Contract Price (the markup included in the estimate).

 

The Estimate and Loss of Productivity Claims

 In preparing a loss of productivity claim it is important to have an understanding of the planned labor and planned units of work and quantities anticipated for the project. This information is typically provided in the Subcontractor’s estimate. In order to determine if there was a productivity loss, one consideration is to determine if, in fact, there was a labor cost overrun. To make this determination, the Subcontractor must review the planned labor (from the Estimate), the actual labor (from payroll reports or other labor tracking documentation), and labor expended on change orders (from change order proposals, T&M sheets or other documents). If the actual labor, less change order labor, is greater than the planned labor, a labor overrun exists (Note that tying the labor overrun to specific productivity issues is a completely separate issue). This check of determining the actual labor overrun is also helpful in determining if a Subcontractor’s “productivity” claim is a total‐cost claim (seeking the full amount of the labor overrun). Total cost claims are usually subject to vigorous challenge, and therefore require additional levels of support to be successful (i.e. accuracy of Subcontractor’s estimate, consideration of Subcontractor’s own productivity issues, etc.). The labor and quantity values included in the estimate can also be used for a quantitative productivity analysis, one example being an Earned Manhour Analysis. An Earned Manhour Analysis compares the Subcontractor’s “earned labor” with the actual labor expended during select periods of time. To perform an Earned Manhour Analysis, the Subcontractor first needs to determine the planned productivity for specific work. The planned productivity rate is established by taking the planned labor and dividing it by the planned quantity or units for that work. For example, if the estimate shows the Subcontractor planned to expend 1,000 manhours to install 2,000 linear feet of pipe, the planned productivity is .5 manhours/linear foot of pipe. This planned productivity rate is then used to determine the earned manhours. For example, if a Subcontractor installed 200 linear feet of pipe over a one week period, the earned manhours are 100 manhours (.5 manhours per linear foot). If the Subcontractor actually expended 80 manhours to perform this work during the same week, he achieved a better productivity than planned since the actual labor is less than the earned labor. The earned manhour to actual manhour ratio is 1.25 (100 / 80). However, if the Subcontractor expended 120 manhours to perform this work, the productivity was less than planned (earned to actual ratio of .833, or 100 / 120). In such a case, the Subcontractor should investigate the causes of the additional labor expenditure and conduct a productivity analysis. It should be clear that a good understanding of the estimate can provide valuable assistance in the preparation and defense of delay and productivity claims.