Everyone understands that delays in certain things can have consequences that no one wants to endure. In construction, delays extending construction projects have serious financial implications for everyone involved. This also includes architects, engineering firms, and construction companies.
These financial consequences can have both positive and negative financial results for owners, contractors, architects/architectural firms, and engineering firms. This depends on the cause, effect, and liability for the delay(s).
For a lot of owners, construction contracts often contain certain provisions for late delivery of projects. These are usually referred to as liquidated damages.
What are the kinds of delay factors in construction?
For a lot of contractors, construction contracts contain provisions for time extensions, as a result of delays created by unforeseeable issues. However, compensation does not necessarily have to be the reason or cause for delay.
There are fundamentally two kinds of them namely Excusable delays and Compensable delays. Excusable delays (delay excusable) is usually caused by factors like weather, natural disasters, and other natural acts not within the control of humans, etc.
On the other hand, compensable delays are caused by other parties or influences that were usually not foreseeable by the contractor at the time of the contract (i.e. when the contract is being signed). They involve factors like changes in design, extra work orders, stoppages in work, contract modifications, and the like.
To recover from the financial consequences of such kinds of delays, contractors must be able to demonstrate that the cause, effect, and liability for such delays can be attributed to other parties that are part of the contract.
What are the kinds of damages that contractors can recover?
The following are the kinds of damages that contractors can recover:
- Extended field overhead.
- Cost escalation.
- Unabsorbed home office overhead.
- Labor and equipment in idle state.
- Additional materials stored.
- Additional costs of financing and bonding.
- Loss of profit that was anticipated.
We will now discuss the important ones which need urgent recovery based on expert project advisory panels’ recommendations.
Extended field overhead
Also known as site overhead, it is one type of delay and can be due to a critical project delay, or an extended project duration. Field overhead costs consist of indirect costs that are needed to support work in the field and are related directly to the job’s costs. Its common components are as under:
- Field office rental.
- Salaries of field office staff.
- Field office staff vehicles.
- Utilities and consumables of the field office.
Unabsorbed Home Office Overhead
Unabsorbed home office overhead is also common. Yet it is a more complex delay. Like the extended field overhead, it can be caused by a crucial project delay or extended project duration. Home office overhead costs are costs that are incurred to support construction work. Yet they are not related directly to the costs of the work of a specific project.
These costs generally include the following:
- Home office ownership costs/rental.
- Corporate taxes.
- Insurance costs (especially those that cannot be assigned to a specific project).
- Home office utilities, equipment and maintenance.
- Salaries of home office staff (company officers, payroll clerks, estimators, receptionists etc.)
There are formulas that can calculate home office overhead:
- Eichel formula.
- Allegheny formula.
- Canadian formula.
- Carteret formula.
- Fixed percentage approach.
One example of cost escalation: If a contractor’s operation got delayed by a compensable delay from one labor agreement period to another, which causes the contractor to pay a higher hourly wage, then they might be entitled to additional compensation.
The same can apply to material acquisition where a compensable delay happened and consequently the materials’ cost raised during that delay period. Damages resulting from such are often determined by calculating the difference between cost of labor, equipment or materials contractor incurred, if there had been no delay and the actual cost of labor, equipment or materials the contractor now has to pay from performing work later than original date of start.
A contractor’s recovery of escalation damages can be caused by numerous factors. However, it is often related to either a critical delay or an extended project duration.
Idle equipment and labor
Costs for such can be caused by both crucial and non-crucial delays. Damages due to idle equipment and labor can also rise from inefficiency caused by owners, disruptions and suspensions from owners’ end too.
Contractors are entitled to recover additional costs of labor or equipment idled by either a stop work order or during the period waiting for design modifications. The suspension won’t necessarily have to be a critical delay for the contractor to be entitled to payment for this overhead, as construction claims consulting experts explain.