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Nuances of Analyzing Disruption and Labor Productivity Claims on Projects in Latin America

By Scott D. Gray, Israel Almodovar

May 3, 2019

This piece was authored in conjunction with Jaime Gray, Partner – NPG Abogados.

INTRODUCTION

Labor productivity is defined as “a measure of production output relative to labor input.”[1] This concept is a key indicator of efficiency and effectiveness of performance during a construction project. From the bidding process to the management and control of cost and schedule during construction, productivity is a factor of significant importance for the management of a project.

During the bidding process and initial project planning, a contractor must determine its means and methods in order to build a project in accordance with the contract requirements. As part of these determinations, the contractor will establish the composition and distribution of its resources and the required construction sequences. Subsequently, based on those means and methods, resources, and sequences, the contractor will estimate the duration and cost for each activity.

However, once that plan is established and the construction work is underway, many factors and conditions can occur that may affect the performance and productivity of the work, giving rise to a concept known as disruption. Disruption is typically defined as:

“[A] loss of productivity or increased cost of performance caused by a change in the contractor’s anticipated or planned working conditions, resources, or the manner of performing its work (…a ‘change in working conditions’).” [2]

The conditions and events that can cause disruption are widespread. These changes in working conditions or construction means and methods can be a result of many factors, including weather events, changes in crew size, intermittent workflow, changes in the nature of the work, working in reduced spaces, stacking of trades, lack of materials or design, design modifications, poor or insufficient supervision, or poorly trained or motivated workers. In this regard, it is important to note that productivity can be affected by the contractor’s own internal issues, while other factors are related to the owner’s actions or inactions.

The contractor will often, but not always, suffer a loss in productivity on disrupted work. As a result, the contractor may incur additional labor hours to accomplish each given unit of work, resulting in increased unit costs and cost overruns on the affected work.

The issues of disruption and lost labor productivity are so significant in the construction industry that they have been widely addressed and discussed by all industry participants, including:

  • Contractor groups and associations, such as the Mechanical Contractors’ Association of America (MCAA), which published Change Orders, Productivity, Overtime;[3] and the National Electrical Contractors’ Association (NECA), which published Negotiating Loss of Labor Efficiency for Electrical Contractors.[4]
  • Construction owner groups, including public owners (US Army Corps of Engineers, which published its Modified Impact Evaluation Guide[5]) and private owner groups (Construction Owners Association of America).
  • International legal organizations, such as the Society of Construction Law, which in 2017 published its Delay and Disruption Protocol;[6] and AACE International, which published Estimating Lost Labor Productivity in Construction Claims (RP25R-03, 2004),[7] among other international publications.

Claims for the increased costs incurred as a result of a loss of labor productivity are very common in the United States, with decisions from the court systems indicating that contractors may be compensated for owner-caused disruption:

“Disruption may be compensable because, within the limits of a particular contract, (i) a change order can affect work beyond that directly targeted by the change, and (ii) the owner should pay for all costs of its changes. In other words, a change order modifies the ‘changed’ work and might disrupt the ‘unchanged’ work.

“Disruption may be compensable if there is (i) a loss of productivity (ii) caused by a change in working conditions (iii) for which the owner is responsible.”[8]

The concepts of disruption and lost labor productivity are very well accepted and claims for these concepts are common in the United States and other international jurisdictions. However, the same does not apply to Latin America. In our experience, disruption is a concept that was seldom addressed in construction claims in Latin America until recently. Due to the influx of international players (both construction owners and contractors) into this market and the growing sophistication of the market, the concept of disruption and the quantification and presentation of claims for loss of productivity are now spreading throughout the region, becoming more commonly recognized by the parties involved in construction projects and litigation.

The following sections of this article aim to provide a review of the status of disruption claims in the United States (with respect to the demonstration of cause and effect and quantification methodologies) and a comparison to the status of these concepts in Latin America, based on our experience. The objective is to provide US practitioners with an understanding of what to expect in the Latin American construction market regarding potential disruption claims, and to provide Latin American practitioners with a view of the current state and recommended practices regarding such claims in the United States.

The Current State of Accepted Law and Recommended Practices for Lost Productivity Claims in the United States

One basic requirement of any construction claim is that there be a cause-effect relationship developed between the causation events or issue(s) on which the claim is based and the effect of those causes, i.e., the damages being claimed. Do the claimed damages flow logically and necessarily from the claimed causation event(s)? In the event of a limited or isolated disruption impact, such as a distinct inclement weather event that affects only a few days of work, this cause-effect linkage is generally more readily established. One can demonstrate the number of workers affected and the time lost due to the event.

However, in modern disruption claims, the claimed causes of disruption are often a combination of events that occur over a long period of time and affect a broad set of contractor activities and resources. For example, a claim for disruption caused by excessive requests for information (RFI) issued due to defective design will generally involve many hundreds of RFIs issued over an extended period of time, affecting many different activities and areas of the project. The demonstration of the direct disruptive effect of each RFI on the contractor’s workforce is a very difficult, frequently impossible task.

Given that the quantification of the damages associated with each and every disruptive event is not practicable, a particularly useful and highly regarded methodology was created to help meet this challenge: the measured mile methodology. As a result, when the proper documentation is available, the common conception is that the measured mile is the preferred methodology for quantifying loss of productivity claims.[9],[10]

In general terms, a measured mile analysis compares the labor productivity achieved by a contractor during an unimpacted (or less impacted) period or area within the project with its productivity on similar work performed in a period or area that suffered from impacts. The actual labor productivity achieved on the unimpacted work becomes the baseline for what would have happened on the impacted work if it had not been impacted. The contractor then claims for the increased costs associated with the difference between the two (unimpacted versus impacted work), based on contemporaneous records that indicate the actual hours incurred and the quantity of work performed during those periods.

When utilized correctly, the measured mile analysis isolates the impacted work and demonstrates that the only conditions that were different are the claimed impact causation issues. For instance, in the previous example regarding the effect of hundreds or thousands of RFIs due to defective design, the contractor must attempt to isolate the period affected by those RFIs, holding all else constant between the unimpacted and impacted work. If performed correctly, this demonstrates a level of cause-effect relationship that is otherwise so difficult to establish for a broad, multi-issue or multi-period disruption claim. The only significant difference between the impacted and unimpacted work, and therefore the apparent cause of the deterioration in productivity, is the existence of the claimed causation issues and/or events.

It is important to note that use of this method does not relieve the contractor of the requirement for demonstration that the causation events occurred, and that they changed the means and methods or conditions in such a way as to cause a loss in productivity. However, by making such a demonstration, courts and arbitration panels will generally accept a proper measured mile calculation as a reasonable demonstration of cause and effect and quantification of the resulting damages.

Crucial requirements for the proper use of the measured mile methodology include the following:

  • The unimpacted work must be of a similar nature to the impacted work. While the work need not be identical, it must be sufficiently similar to allow a reasonable comparison such that the measured differences relate only to the claimed impact and not inherent differences in the complexity of the work. Simply put, comparing complex, inherently difficult work (such as rock excavation) with relatively easy work (such as soil excavation) does not provide a reasonable or appropriate measured mile analysis.
  • One must analyze the impacted period to determine whether any other unique conditions or circumstances occurred during that period other than the causation issues being claimed. For example, if the contractor also suffered from late deliveries of its supplied materials or excessive equipment breakdowns during a claim period affected by owner design changes, and such conditions did not affect the unimpacted period, such unclaimed conditions would incorrectly skew the productivity results and serve to overstate the claim amount.
  • The unimpacted work must be of a sufficient quantity that it would have been sustainable over the course of the project. Selection of a very small component of the work as unimpacted will raise legitimate questions as to whether the contractor could have achieved that rate on the impacted work absent the impacts, or whether there was something particular to the small sample that allowed the contractor to achieve excessively good productivity.

In addition to the establishment of the cause-effect relationship between the claim causes of action and the damages, when applied correctly, the measured mile methodology presents many other substantial benefits, such as:

  • It is based on actual results achieved on the project, and is thus based on fact rather than conjecture or theory.
  • It reflects the contractor’s actual supervision, workforce, equipment, etc., for the project, such that the contractor’s own inherent inefficiencies are reflected in the productivity baseline, and not claimed against the defendant.
  • It is not based on the contractor’s bid or tender values, rendering moot the ubiquitous arguments as to whether the contractor’s bid was or was not reasonable.
  • It relies on project-specific information and is supported by the contractor’s contemporaneous records.[11]

Largely as a result of the many strengths inherent in the measured mile methodology, it has been applied by claimants and accepted by courts in the US for decades.[12] It is recognized by most industry organizations as a recommended approach for demonstration and quantification of claims for lost labor productivity.

The Current State of Understanding and Acceptance of Disruption and Lost Productivity Claims in Latin America

Latin American civil codes are practically unanimous in accepting that a party who suffers an economic impact as a consequence of a breach of contract by its counterparty or is affected by the occurrence of a risk event — the responsibility for which is borne by its counterparty — should be compensated. This is the legal basis for any contractual claim, but especially for productivity claims and, as such, the legal basis for these types of claims is clear and undisputed.

What is new in the Latin American region is that contractors have finally realized that their direct costs are also affected in cases of disruption and loss of productivity, and that this financial impact is not covered by the payment of the indirect cost which owners customarily agree to pay for delay damages. In some cases where the contractors were aware that their direct costs were also affected, they preferred to increase the amount of their indirect costs instead of claiming the payment of the direct costs affected, as it was easier for them to recover money from owners.

On the other hand, owners are incorrect in their belief that the payment of the indirect costs (including overhead and other related costs) is sufficient to compensate the contractor for the consequences of breaches of contract and the occurrence of risks borne by the owner when these affect the time for completion of the project or discrete activities.

Consequently, when arbitral panels decide on disruption and lost productivity claims, they easily understand the legal concept that supports them, but are unfamiliar, as are the owners, with the reason why the contractor is not fully compensated when they are paid for the indirect costs incurred. Arbitral panels that do not understand this could dismiss these types of claims, as they think that the contractor has already been compensated and now seeks to double dip.

However, in recent years, contractor representatives, attorneys, and experts have demonstrated that contractors are also affected in their direct costs in cases of disruption and lost productivity claims, and have also demonstrated how to quantify compensation due by the owner. Methods such as the measured mile and others have been applied and understood by arbitral panels.

In summary, Latin American arbitration panels, contractors, and owners are progressively becoming familiar with the concepts of disruption and lost productivity claims.

The Current State of Recommended Practices for the Quantification of Lost Productivity in Latin America

As noted earlier, the disruption concept is relatively new in the Latin American construction market. As a result, the level of sophistication in this type of analysis is growing at a rapid pace. It was not long ago that Latin American contractors would not even submit a claim for loss of productivity because this was not a widely recognized concept. Claims for highly impacted or disrupted projects were typically prepared and presented by contractors based on less preferred methodologies such as the total cost approach (claim entire overrun in excess of the contract price) or the modified total cost approach (claim entire overrun in excess of the contract price less an adjustment for obvious bid errors or contractor defects).

However, recently there has been a shift to utilizing the more accepted measured mile methodology, a change led by the contractor community. Since the method was only recently introduced in Latin America, experts and lawyers have had to educate arbitral panels about the basis of the methodology and its advantages, as well as of the reliability of the information sources used when the methodology was applied. Also, experts have had to convince the arbitration panels that this is the preferred methodology (when the appropriate documentation is available) over other methodologies that were more familiar to the arbitrators.

This has led to local arbitrators — many of whom participate in international arbitration proceedings and are therefore exposed to more US or European pricing methods — becoming more accustomed to and accepting of this type of claim and analysis. As these arbitrators subsequently participate in local arbitration matters in their home country (e.g., arbitrations held in the Lima Chamber of Commerce, the Bogota Chamber of Commerce, and/or the Santiago Chamber of Commerce), the knowledge

obtained from the international arbitrations is spread to the local arbitration forums. In other words, disruption claims and the measured mile analysis is quickly becoming a common topic in construction disputes at various levels throughout Latin America.

Nuances of Meeting the Burden of Proof in Latin America as Opposed to the United States

As a byproduct of the civil law systems in Latin America, there are no case law or landmark decisions on which attorneys, experts, or parties can rely for disruption claims. Under civil law systems, a judicial award can only be recognized as valid case law when it is recognized as such by the country’s Supreme Court, also known as ‘jurisprudencia’. In many countries, such as Peru, the Supreme Court normally does not recognize any jurisprudencia on disruption or lost productivity cases.

As a result, awards made by arbitral panels cannot be considered as jurisprudencia in any case. Moreover, supreme courts in Latin America hardly ever consider awards issued by judges in construction cases as jurisprudencia.

Furthermore, as mentioned before, arbitrators and magistrates are still unfamiliar with the concepts of disruption and lost productivity, but arbitrators participating in construction cases are becoming increasingly familiar with these concepts since they are now more frequently claimed by contractors. Disruption and lost productivity claims were previously considered to be technical claims, and lawyers in general were not well versed in them. However, arbitrators and magistrates are familiar with the legal concepts that support these types of claims as these concepts are part of the general principles of civil law.

In this regard, arbitration in Latin America has been dominated by lawyers for decades. The vast majority of arbitrators are lawyers who do not have a thorough understanding of construction and technical issues. Neither is it common in Latin America to find lawyers who are also engineers, so there are a limited number of engineers serving as arbitrators in the region.

As a result, as will be further explained, the burden of proof for causation issues regarding disruption claims in Latin America currently tends to be significantly higher than in the United States.

Nuances in the Quantification of Lost Productivity Damages in Latin America

Although disruption claims and the use of the measured mile methodology for the quantification thereof is quickly gaining ground in Latin America, contractors are still experiencing some growing pains regarding these issues.

For instance, in jurisdictions where disruption and loss of productivity impacts are commonly recognized, such as the US, it is generally accepted that the contractor does not need to prove the cause and effect of every single instance of productivity loss. However, in Latin America, there is limited acceptance of this concept, and thus the burden of proof for owner-caused impacts is usually higher than in United States courts, as it requires a higher level of analysis and substantiation for each specific event.

For instance, we refer to the aforementioned example of impacts by RFIs. In the United States, the expectation to substantiate this topic would be to present a list of RFIs to demonstrate that the quantity of RFIs required was excessive (as an indicator of design deficiencies), demonstrate that the RFIs occurred during and affected the performance of the work rather than being resolved prior to performance of the work, and provide several examples of specific RFIs that affected the work and the resulting change to the conditions, means, and methods of the work. In Latin America, however, the expectation is often that the contractor must demonstrate the specific impact of each RFI.

Another key issue affecting the use of the measured mile method in Latin America is the availability (or lack thereof) of the necessary contemporaneous documentation to support and substantiate such analysis. For this methodology to be effective, the contractor must collect information of actual man hours incurred and actual quantities installed. In addition, this data must be categorized by trades or types of work activity, and by areas of the project. It is unusual that contractors in Latin America have a project accounting system that allows the recording of this type of detailed data, which can present a substantial challenge (though not necessarily fatal) to the implementation of the measured mile methodology.

CONCLUSION

Loss of productivity is an issue that can affect construction projects throughout their life cycle. In the United States and other international venues, claims for disruption associated with owner-caused impacts may be considered compensable under the proper contractual conditions. The long history of disruption claims in these venues has allowed for the development of accepted methodologies to quantify this issue. As such, the measured mile methodology is now considered the preferred method to prove and quantify disruption claims.

However, disruption — both as a concept and a claim item — is relatively new in Latin America. Although the level of sophistication regarding these types of claims is quickly growing in the region, there are certain nuances that must be considered. These nuances include a higher level of burden of proof expected in order to demonstrate the cause-effect of owner impacts, as well as a fairly common lack of detailed documentation needed to execute and substantiate the analysis. With that said, the recent trends indicate that disruption analyses and the use of the measured mile methodology are gaining traction at a rapid pace in both international and local arbitration venues for construction projects and disputes in Latin America.


[1] AACE International, Recommended Practice No. 10S-90, Cost Engineering Terminology, October 31, 2017.
[2] Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).
[3] MCAA, Change Orders, Productivity, Overtime: A Primer for the Construction Industry, 2005.
[4] H. Randolph Thomas and Amr A. Oloufa, Negotiating Loss of Labor Efficiency for Electrical Contractors, NECA, 2001.
[5] Department of the Army, Office of the Chief of Engineers, Modification Impact Evaluation Guide, EP 415-1-3, July 1979.
[6] Society of Construction Law, Delay and Disruption Protocol, October 2017.
[7] AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
[8] Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).
[9] AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
[10] Society of Construction Law, Delay and Disruption Protocol, October 2017.
[11] AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.
[12] William Schwartzkopf and John McNamara, Calculating Construction Damages (Aspen Publishers, Second Edition, 2001).