Due to numerous events in the last 5 years [1], multiple opinions have been published by various construction and legal professionals regarding the calculation and recovery of time and/or costs for disruption.
This article will identify some of the more common methodologies for calculating disruption on construction projects.
Author: Mark Murphy, Director, Singapore
CALCULATION METHODOLOGIES
Production output is a measure of what is actually produced. Whereas productivity loss (e.g. disruption) is experienced when the planned rate of production is not achieved using the planned resources allocated to a particular task.
This means, the contractor will likely need to expend more resources to achieve the same unit of output as initially intended, thus causing the contractor to incur additional costs.
Example one
If a contractor achieved 100% of its production target but utilised twice the resources than planned, then while the contractor would achieve the target production, such an achievement would be made by utilising resources at a 50% efficiency rate.
Example two
If the contractor did not increase the quantity of its resources, then it would likely take twice the planned duration to complete such works, and cost twice as much as originally anticipated.
While the contractor will be forced to incur the same level of increased costs in the examples above, in Example two, the contractor does not appear to have mitigated the durational effects of the event that reduced its rate of production by 50%.
Should the contractor intend to recover the costs associated with the event that resulted in the 50% reduction of the production rate, example no. one, then a prudent contractor would seek to utilise a calculation methodology that is widely recognised within the construction industry and/or internationally to evaluate the extent of such an event, before calculating the quantum of said event(s).
In the International Recommended Practice No. 25R-03 (“IRP No. 25R-03”), the Association for the Advancement of Cost Engineering (“AACE”) consider:
… there is no uniform agreement within the construction industry as to a preferred methodology of calculating lost productivity. There are, in fact, numerous ways to calculate lost productivity. …
In section C.1 of the IRP No. 25R-03, the AACE provide a list of different methodologies it considers are appropriate for calculating lost productivity, as brought about by a disruption event:
Project Specific Studies
- Measured Mile Study
- Earned Value Analysis
- Work Sampling Method
- Craftsmen Questionnaire Sampling Method
Project Comparison Studies
- Comparable Work Study
- Comparable Project Study
Speciality Industry Studies
- Acceleration
- Changes, Cumulative Impact and Rework
- Learning Curve
- Overtime and Shift Work
- Project Characteristics
- Project Management
- Weather
General Industry Studies
- U.S. Army Corps of Engineers Modification Impact Evaluation Guide
- Mechanical Contractor’s Association of America
- National Electrical Contractor’s Association
- Estimating Guides
Cost Basis
- Total Unit Cost Method
- Modified Total Labor Cost Method
- Total Labor Cost Method
Productivity Impact on Schedule
In paragraph 18.13 (Guidance Part B) of the Society of Construction Law (“SCL”) Delay and Disruption Protocol 2017 (“Protocol 2nd edition”), the SCL provides different methodologies it considers are appropriate for calculating lost productivity, as brought about by a disruption event:
Productivity-based methods
1. Project-specific studies
(a). Measured mile analysis
(b). Earned value analysis
(c). Programme analysis
(d). Work or trade sampling
(e). System dynamics modelling
2. Project-comparison studies
3. Industry studies
Cost-based methods
1. Estimated vs incurred labour
2. Estimated vs used cost
In the absence of any uniform agreement within the construction industry regarding a preferred methodology of calculating lost productivity, this article has blended the methods set out in IRP No. 25R-03 and the SCL Protocol 2nd edition, to explain the methodologies commonly implemented to calculate disruption on construction projects.
PRODUCTIVITY-BASED METHODS
1. Project-specific studies Measured mile analysis
A commonly used method of calculating the effects of lost productivity, as brought about by a disruption event. This method of analysis compares the production output of identical activities during two different periods of time: a period when the disruption event did not occur (non-affected period); and a period when the disruption event did occur (affected period).
This method considers the effect of production loss during the affected period, compared with actual production typically achievable during non- impacted periods. Normal productivity fluctuations caused by, amongst other things, the contractor’s own inefficiencies and non-claimable risk, such as inclement weather, are not usually addressed in this form of analysis.
Earned value analysis
This calculation methodology involves the comparison and analysis of the following cost concepts:
- Planned value (i.e., budgeted cost for the schedule/ programme works);
- Earned value (percent completed x budget cost of a unit of work); and
- Actual cost (how much was spent producing a unit of work).
These factors can be analysed to study project performance in terms of production, schedule / programme budget, and cost, typically via the following industry accepted formulas/indices [2]:
- Cost performance index = Earned value ÷ Actual Cost;
- Schedule performance index = Earned value ÷ Planned Value;
- Schedule variance (earned working hours or cost – budgeted working hours or cost); and
- Cost variance (earned working hours or cost – actual working hours or cost).
Calculated schedule and/or cost variances can be analysed to determine if any production/cost inefficiencies might be demonstrated to be related to the loss of production. For example, if planned and actual man-hours are used, and there is a 17.5% production loss, then where the contractor planned to expend 100,000 man-hours, the works would have taken 117,500 man-hours to complete.
An “Earned Value Analysis” greatly depends on the quality of the contractor’s records, and its demonstration requires a feasible resource loaded baseline master schedule/programme, with planned and marked-up production progress, matched to the budget.
Fully detailed records of production, and man-hours utilised along the baseline schedule/programme of each work activity being studied, would need to be analysed in detail. Success in the use of this method will depend on full and detailed project production records being available.
Work/trade sampling method
Typically, this method requires transparent studies, or a series of production tests, that record a normal or reasonable rate of production for a controlled portion of the works. The study typically breaks the activity down into its detailed components and the time normally taken for each component.
This test-controlled rate of production, if determined to be reasonable, will be a comparison of the average production rate that can be achieved during a normal period of construction, and the production rates during disrupted periods.
Craftsman questionnaire sampling method
This method examines productivity noted by tradesmen or supervisors during the disrupted period, that explains the specific reasons for the loss of production.
The method is heavily reliant on diligent records taken during construction, such as daily diaries/ production charts. While not entirely accurate or scientific, the contemporary records can be used to support a disruption claim. More credibility is afforded to these records if they have been exchanged regularly / periodically by the parties during the works and any corrections to the records being made jointly by the parties at that point.
Project-comparison studies
While the other party rarely agrees that the comparisons in these methods are realistic, they can be useful to support productivity loss estimations using other methods.
Comparable Work Study
This method involves an estimation of productivity loss on the disrupted work activity, and then comparing this to similar work activities on the same project that were known to be unimpacted (i.e. completed without disruption).
Comparable Project Study
This method resembles the “Comparable Work Study” but involves the comparison with a similar unimpacted work activity on the same project but done by another contractor.
Industry studies
These are often used as a last resort in the absence of sufficient project records to enable project specific or project comparison methods, or to back up other methods of evaluation, that have been employed.
Speciality Industry Studies
Speciality Industry Studies makes use of specific industry studies on productivity loss, such as:
- “Acceleration”;
- “Changes, Cumulative Impact and Rework”;
- “Learning Curve”;
- “Overtime and Shift Work”;
- “Project Characteristics”;
- “Project Management”; and
- “Weather”.
General Industry Studies
This calculation makes use of industry-wide publications and manuals, such as:
- U.S. Army Corps of Engineers Modification Impact Evaluation Guide;
- Mechanical Contractor’s Association of America;
- National Electrical Contractor’s Association; and
- Estimating Guides.
COST-BASED METHODS
In the absence of any other method of evaluating productivity loss, there are options to use the following alternative methods, to examine the actual man-hours associated with direct labour and costs.
Total Labour Cost Method
The estimated cost of labour, less the actual cost of labour, the difference being the production overrun cost.
Total Unit Cost Method
The difference between the labour cost per unit of work of an impacted period, less the labour cost per unit of work of a non-impacted period.
Modified Labour Cost Method
Same as the “Total Labour Cost Method” less allowances for known amounts such as excessive bid prices and inefficiencies not related to the disruption. This approach attempts to exclude unrelated inefficiency and is therefore the most preferred cost-based method.
Conclusion
Recollecting the common saying that ‘no two construction projects are the same’, it is similarly true for the effects of two disruption events. However, given the similarities between construction projects and disruption events, the means of understanding and calculating the extent to which a disruption event has affected a construction project, can be adjusted and replicated across projects.
Being that each project, its records, and disruption events are fundamentally different, it is practically impossible to recommend or prescribe the use of one specific calculation methodology over another. However, when attempting to calculate how much disruption has occurred, it is always advisable to use contemporaneous records to substantiate the calculation; thereby providing the most robust calculation possible, as that should in theory, improve the likelihood of the claim being accepted.
Should your project have experienced an event that you consider disrupted the works, and you require assistance in evaluating the extent of such disruption, Diales has experienced professionals worldwide, who are both able and willing to help.
This article was written for issue 27 of the Diales Digest. To view the publication, please visit: www.diales.com/diales-digest-issue-27
1. For example, the COVID-19 pandemic, USA / China trade-war, the Russia / Ukraine war, the Israel / Gaza war and the Red Sea attacks
2. https://www.pmi.org/learning/library/practical-calculation-schedule-variance-7028