Project Management Institute

Lost costs

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Project managers on construction projects should be aware of how contract changes affect productivity. The effects of waning production are just as real as the direct cost of a change order, and project performance ultimately will pay the price. A contractor must be vigilant about identifying, notifying, documenting and pursuing damages related to lost efficiency. Project managers who are familiar with different tools used to measure productivity losses can thoroughly document the situation and request reimbursement from the responsible party.

The contractor may or may not be able to control the causes of inefficiency. If the issue stems from internal problems, a request for compensation cannot be made, and the contractor must immediately strive to improve efficiency. On the other hand, if the ineffectiveness is due instance, in massive earthwork projects, if the planned summer work is forced into the rainy season, significant production losses can be encountered.

Sequence. If production deviates from the optimum planned sequence, the contractor incurs losses due to work issues. To perform out-of-sequence work, unanticipated skills and resources often are required. For example, in a building project, installing the ceiling tile before the painter is finished may result in extra work for the painter removing or protecting the installed tiles or replacing any tiles that were inadvertently damaged.

Acceleration. Despite excusable delays, the contractor may be required to adhere to the originally scheduled completion dates. In this situation, a contractor may have to ask different subcontractors to work simultaneously even though sufficient space is not available for them to work efficiently. change condition. As a result, the contractor may have to store material further away from the jobsite then originally planned at the bid time.

Morale and Attitude. Excessive change orders can break the morale and change the attitude of the project personnel. Complex changes have a tendency to create a prolonged investigation, and employees are unable to complete a unit of work as planned. In some instances, employees start resigning and their turnover further affects production.

Down Time. If the work does not proceed optimally, then the equipment sits idle, while the costs of ownership and maintenance continue to accrue.

Availability. Precious resources usually are designated to a specific project for a limited amount of time. If a change delays a crucial work element, those resources to external or uncontrollable sources, a request to reimburse for losses is realistic.

Know the true source of scope changes and who is ultimately responsible for the resulting inefficiencies. It can mean the difference between a profitable contract and financial disaster.

BY ZARTAB ZAFAR, PMP, AND DEAN RASMUSSEN

Spotting the Source

A wary project manager should periodically review the productivity rate and explore the causes of inefficiency. Depending on the specific cause, the project may experience issues due to common problems.

Coordination. Resolving a conflict concerning a change can dilute the project manager's focus. Project administrators often spend a considerable amount of time coordinating the effort. Depending upon the magnitude of the change, various elements of the work team may be required to design, coordinate and implement changes on the project.

Weather. Change delays may push a project into inclement weather, and performance can be severely impaired. For Either overtime or multiple shifts can cause the project to incur additional cost.

Work Crew. Optimum crew sizes for a project or activity represent a balance between an acceptable rate of progress and the maximum return from the labor dollars invested. Increasing crew size above the optimum can usually produce a higher rate of progress, but at a higher unit cost. In addition, labor escalation may occur if a project is forced into a higher wage period instead of performing the work during a lower wage period.

Project Redesign. Sometimes, the building layout must be altered to accommodate new scope requirements. Redesign often suspends work and, therefore, productivity losses are incurred on the construction project.

Restricted Access. Admission to a jobsite may be temporarily denied due to a cannot be optimally utilized as planned. In a delay situation, a contractor may transfer labor to another project, use the crew in a less productive way or even lay off crews. Once the problem is resolved, the management has to remobilize the crew, who must go through the learning process again.

Quality. During tight labor markets, less-skilled workmen are brought “off the bench” and productivity suffers. Deterioration of quality workmanship may cause rejection of the work, further affecting productivity.

Cumulative Impacts. Multiple changes compound issues on the project. There is perhaps no greater loss of productivity than the ripple effect of change. Numerous complex changes cause a project to be built in a piecemeal, highly fragmented fashion. In this situation, the prebid efficient planning is unattainable, and day-today planning becomes the norm.

Reader Service Number 197

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Recouping Costs

Even with corrective measures, significant costs result from productivity losses. Project managers may have to reconcile costs by seeking reimbursement from whoever is accountable for the changes. There are several methods for gauging inefficiency on a project, and each has its place in remediation.

Measured Mile. The measured mile analysis is the most widely accepted method for measuring productivity losses. In this method, production on the same job is compared between the impacted period and non-impacted period. For example, a contractor forced to move material in inclement weather due to a change in site conditions may be entitled to recover productivity losses (Figure 1). This shift in planned work also may result in increased wages, burden rates, insurance rates and other financial factors.

This same approach can be applied to many other situations such as the cumulative impact of multiple change orders, and crew and equipment imbalances.

In W.G. Yates & Sons Construction Co. vs. the Air National Guard [ASBCA No. 49399, (May 18, 2001)], the Armed Services Board of Contract Appeals allowed the contractor to recover lost labor productivity damages that were calculated using the measured mile analysis.

Total Cost. Because it could include contractor inefficiencies as well as change-induced inefficiency, this approach is the least accepted method of calculating inefficiency cost. To determine damages, subtract the actual cost from the planned cost. This method is usually rejected by boards and courts, except under the following circumstances:

  • The nature of the problem was so prevalent that it was virtually impossible to determine actual damages with a reasonable degree of certainty with any other method
  • The contractor's bid estimate was realistic
  • The actual cost of performing the work was reasonable
  • The contractor is not responsible for any additional costs and expenses (work was completed efficiently all things considered).

This modified total cost approach is usually more acceptable to owners than the total cost approach. In this method, an analyst attempts to segregate inefficiencies related to the owner and those related to the contractor. The inefficiencies incurred by the contractor then are deducted from the total cost.

In Rodney McKie vs. Huntly [620 N.W. 2d 599, (S.D. 2000)], the South Dakota Supreme Court ruled that the contractor should have been allowed to calculate its damages using the total cost method.

Learning Curve. A learning curve analysis is performed to measure inefficiency when planned work cannot be completed in one continuous operation. When starting any job, a crew must become proficient with the specific work to be completed. If the construction crew is then forced to discontinue the work due to changes instituted on the project, when they resume work they must go through the learning process again. In this analysis, an attempt is made to recover additional costs due to the disruption in productivity and the inconvenience of having to go through the learning curve twice. This analysis is widely accepted if a correlation between change and impact is established.

In this example of measured mile analysis, a contractor plans to move 1 million cubic yards of material during midsummer, when maximum protection is anticipated. Once the contractor moves 10,000 cubic yards, a different site condition occurs, pushing work into the winter season. In the winter, the work cannot be performed as efficiently as in the summer. The contractor is entitled to recover productivity loss damages for moving the remaining 990,000 cubic yards in inclement weather. A productivity loss calculation due to inclement weather for the referenced graph is: Damages=($2.20 – $2.00) x ($1,000,000 – $10,000) = $198,000

Figure 1. In this example of measured mile analysis, a contractor plans to move 1 million cubic yards of material during midsummer, when maximum protection is anticipated. Once the contractor moves 10,000 cubic yards, a different site condition occurs, pushing work into the winter season. In the winter, the work cannot be performed as efficiently as in the summer. The contractor is entitled to recover productivity loss damages for moving the remaining 990,000 cubic yards in inclement weather. A productivity loss calculation due to inclement weather for the referenced graph is: Damages = ($2.20 – $2.00) × ($1,000,000 – $10,000) = $198,000

Reader Service Number 184

Reader Service Number 163

Even with corrective measures, significant costs result from productivity losses. Project managers may have to reconcile costs by seeking reimbursement from whoever is accountable for the changes.

In United States Industries Inc. vs. Blake Construction Company [671 f.2d 539 (D.C. Cir. 1982)], the jury awarded damages based on the learning curve analysis and was upheld on appeal.

Supporting Claims. Different universities and governmental agencies have performed analysis on productivity losses due to changes. Significant studies have been performed by:

  • Pennsylvania State University, University Park, Pa., USA
  • University of Texas, Austin, Texas, USA
  • Concordia University, Montreal, Canada
  • University of California, Berkeley, Calif., USA
  • The Business Roundtable, New York, N.Y., USA
  • U.S. Army Corps of Engineers, Washington, D.C., USA.

The published factor of inefficiency is modified according to the project conditions, as they may vary from contractor to contractor, job to job and crew to crew.

In addition, there are numerous industrywide inefficiency studies performed by several professional associations, including the Mechanical Contractors Association of America and the National Electric Contractors Association. To validate damages with studies, expert witness analysis is often required. This investigation can be used to support any of the conclusions reached by other methods.

Historical record analysis may be used in the absence of any other reliable method. In this analysis, the project in question is compared to a similar past project. However, every project is unique and contains countless variables, so this method is best used to support another more reliable analysis.

In the absence of any reliable analysis, jury verdict analysis can be performed. All project interruptions are presented to a jury because it is impossible to analyze inefficiency in any other manner. The jury then makes a decision with regard to damages incurred on a project and what percent of the claim is justified.

Preserve the Details

Preservation of the hard data necessary to support issues can help to successfully resolve construction inefficiency claims. The contractor must notify the owner in a timely manner if losses due to inefficiencies are experienced on a project. The project management team should ensure that the foreman's daily reports are detailed enough to ascertain what work is being done and how many hours were spent to perform the work. The superintendent and foreman should be trained to note inefficiencies on their daily reports.

All contemporaneous documents such as meeting minutes, correspondence, quantity calculations, diaries, schedules, cost-details and other pertinent documents should be preserved during the construction period. Project records should be sufficiently detailed enough to permit a third person to reconstruct activities solely from the files. Records of anything and everything that may pertain to inefficiency issues must be kept on file. PM

Zartab Zafar, PMP, has authored articles in the construction scheduling and claims area. For the past 20 years, he has been involved with the construction of major projects. He is based in Stevenson Ranch, Calif., USA.

Dean Rasmussen is the owner and chief executive officer of C.A. Rasmussen Inc., a privately owned major general engineering company in Simi Valley, Calif., USA. He sits on the board of several organizations including the ALS Association and Harvey Mudd College.

Reader Service Number 091

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK | AUGUST 2002 | www.pmi.org

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