DD13: Quantifying delay costs –labour
Updated: Mar 31
My last article, DD12, provided a brief introduction to quantifying delay costs. That article touched on whether the claim being made for delay costs is a claim under the contract or one for general damages at common law; the contractor’s duty to mitigate loss; claims for loss due to critical delay and non-critical delay; the primary heads of claim under which delay costs claims are often made; and keeping records.
There will now be a series of short articles that examine each of the following primary heads of delay cost claims:
1. Labour costs;
2. Preliminaries (site overheads/indirect job costs);
3. Claims from subcontractors;
4. Off-site/head office overheads;
5. Loss of profit;
6. Increased costs of resources/inflation; and
7. Finance charges and interest.
This article examines labour costs.
A contractor’s labour resources will comprise both direct and indirect labour; direct labour carrying out the ‘hands-on’ actual physical works on site and all other labour being indirect labour, for example, supervisors, foremen, cleaners etc who do not undertake the ‘hands-on’ physical work itself.
As a result of delay, a contractor may, and most probably will, incur additional costs in relation to its labour (in addition to its other time related resources) due to one or more of the following:
· working for extended periods;
· working overtime and/or on multiple shifts;
· increased pay to the labour resources;
· loss of productivity;
· non-productive overtime;
· non-productive labour; and
· demobilisation and remobilisation costs.
Whilst some of the above arise as a direct consequence of critical delay, this is not automatically the case; others may be a by-product of critical delay and related issues.
Each will now be considered in turn.
Working for extended periods, working overtime and/or on multiple shifts
If the contractor must work for extended periods of time due to employer delay, it will almost certainly incur additional costs and/or loss in doing so. In order to reduce the potential delay, the contractor may, either by employer instruction or of its own volition, work overtime and/or multiple shifts.
Depending on the terms of the contract, the contractor may be entitled to some, or all, of the costs incurred. Future articles on project acceleration and disruption will examine entitlement to and quantification of these costs in more detail.
The additional costs incurred will be a mix of delay costs, acceleration costs and possibly also disruption costs. It will therefore be necessary to separately identify the cause(s) and the different categories of costs incurred and this is very rarely straight forward.
Labour costs at the best of times are difficult to monitor (and control) during the progress of the works, never mind during periods of delay, acceleration and/or disruption. This exercise is compounded for contractors who commonly subcontract most, or all, of their work to subcontractors, which will result in:
The loss and/or expense being the subcontractor’s, not the contractor’s who engaged the subcontractor;
Only when the contractor pays the subcontractor(s) will the contractor have incurred the loss and/or expense; and
To recover the loss and/or expense due to the additional payments made to its subcontractor(s), the contractor will have to demonstrate that the payments made were reasonable and in compensation for the loss / additional cost incurred.
In this situation, the subcontractor(s) will have to prove its claim.
This sometimes puts the main contractor in the position of having to assist the subcontractor in making the claim against itself which could lead to the situation where the contractor makes payment to a subcontractor which itself may not be able to recover.
Delay may result in workers falling under a different trade labour agreement, resulting in pay increases. However, in William Sindall v North West Thames RHA, the court considered that pay increases made under a bonus scheme created pursuant to the rules and decisions of the National Joint Council for the Building Industry were not recoverable under the contract. The court considered the bonus payments were not recoverable because the amount of bonus was not established under the Joint Council, and the contractor established the bonus scheme voluntarily.
However, the court held that, whilst the contract provided that the contractor was deemed to have based its tender on “rates or wages and other emoluments and expenses” paid pursuant to the rules and decisions of the Joint Council, these increases were recoverable if the rates were increased following a decision by the Joint Council.
In JC & Sons v Southwark London Borough Council, the contractor claimed the cost of pay increases to self-employed workers engaged by the contractor to carry out the works. Clause 31A of the contract provided that the contractor could recover an increase in rates of pay which were payable by the contractor to or in respect of “workpeople” engaged upon or in connection with the works in accordance with the rules or decisions of the Joint Council. The contract defined “workpeople” as persons whose rates of wages and emoluments are governed by the rules or decisions or agreements of the Joint Council. The court did not consider that the contractor was entitled to recover the cost of the self-employed labourers, as self-employed workers were not “workpeople” and so did not come within those provisions. However, had the contractor made the self-employed workers subject to the clause 31A conditions, then the increases in payment would have been recoverable under that provision.
Of course, the outcome in cases like the above will turn on the wording of the contract. For example, if under the contract the contractor is entitled to all demonstrable reasonable costs, this being reasonable expenditure incurred, then this arguably would include pay increases and bonus schemes and the like.
Loss of productivity / disruption
Loss of productivity / disruption will be examined in more detail in later articles that focus on disruption.
However, in summary, delay to the progress of the works leading to further impacts like piecemeal site access, out of sequence working, lead to reduced productivity with the secondary consequence of the execution of the works being further impacted by, for example, overcrowding of labour, stacking of trades, dilution of supervision due to fragmented work gangs, excessive overtime leading to fatigue, and poor morale which further reduces productivity leading to delay, or increased hours/resources to maintain program.
There will also be, as a result, disruption issues such as idling and stand-by time being incurred.
Overtime working may be required to maintain program or to accelerate the progress of the works. Excessive overtime can lead to fatigue which in turn may reduce productive working.
When a contractor works overtime, suffers delay and loss of productivity, the contractor may change its labour mix from skilled to semi-skilled or vice versa when the progress of the work is accelerated. This may expand the labour hours without impacting the actual cost, or, increase the actual cost without increasing the labour hours.
It will therefore be necessary to check in detail the labour mix used by the contractor, against that which would have been required had the progress of the works not been impacted. Any analysis must take this into account. A properly conducted measured mile or similar type of analysis must pick this up for the analysis to be reliable.
Contractors often calculate the ‘overall’ increase in labour costs due to the combined causes of lost productivity. However, the problem with this approach is that there may be little, if any, correlation between the contractor’s assessment and for what is allegedly being claimed. For the reasons given in my article on global claims (DD02), this approach should be avoided.
Non-productive labour such as cleaners, helpers, traffic managers and the like are generally time related. There will therefore be a direct correlation between the costs of these resources and critical delays.
Demobilisation / mobilisation
Additional demobilisation and mobilisation may occur, for example, where the delay to the works means that work is unable to proceed in area A on site in which case the labour and other resources will need to demobilise from area A to say area B. This would then be repeatred when work area A becomes available again and the resources return. On multi-billion-dollar projects on large sites this could be very disruptive and costly.
This article has touched on how a contractor’s labour costs can be impacted as a direct and indirect consequence of critical delay. There are of course other ways in which labour costs/resources may be impacted and the accuracy of assessment of entitlement will often come down to the quality of administration and record keeping of the contractor.
At Aston Consult, as part of our commercial management services offered during the delivery of a project, we often to set up a contractor’s administration and cost recording systems so that these costs can be properly captured. This results in the early identification of increased costs and very importantly identifies ‘why’ the additional costs were and are being incurred which, for obvious reasons, is essential for good cost control management and early identification and settlement of delay claims.
My next article on delay costs will examine preliminaries, often the most substantial part of a contractor’s delay cost claim.
If you have any queries in relation to any matter in these articles, or any other issue, please do not hesitate to contact us: firstname.lastname@example.org
This and previous to articles
This and previously published DD articles on the DD Quantum Expert website blog page are:
DD01: Why is it necessary to distinguish between delay and disruption? What’s the distinction?
DD02: A global claim is doomed to fail, unless…
DD03: Comply with the notice provisions in the contract, or else…
DD04: ‘Prevention’ causing ‘time at large’: what does this all mean?
DD05: Float: what is float, who owns the float and how is float different to contingency?
DD06: Construction project delays 101 – plus concurrency!
DD07: What is concurrent delay? An overview
DD08: Concurrent delay: it is not parallelism or pacing
DD09: Concurrent delay and the prevention principle
DD10: Approaches to assess contributory causes of delay and additional cost
DD11: Concurrent Delay and the AS Forms
DD12: Quantifying delay costs – an introduction
DD13: Quantifying delay costs – labour