Losses of labor productivity issues and claims seem to have taken on more prominence in the last few years due to labor shortages, material shortages, and the quickly changing economics and supply change issues affecting the construction industry. As a result, loss of productivity is one of the key issues faced in construction arbitration and litigation. But what is a loss of productivity claim, when might you have such a claim on your hands, and what challenges are faced in making a successful claim, or in defending against such a claim?

Productivity is defined as a measurement of output per unit of time or effort, usually measured in labor hours or equipment hours. Thus, when a contractor’s work on a project is impacted due to delay or disruption, or was otherwise more inefficient than planned, the contractor may consider bringing a claim to receive additional compensation for the negative impact.

Contractors must balance prevalent but sometimes competing goals of advancing work to finish projects according to schedule, while protecting the health and safety of workers and the public, dealing with other trades on the project site, labor or material shortages, or other issues that may affect a contractor’s efficiency on the jobsite. Many of these issues may be outside the control of the contractor. To deal with these issues and work to stay on schedule as best as possible, contractors often must utilize more labor hours on a project than originally reasonably anticipated—resulting in losses of productivity. Successfully identifying, quantifying, and proving such losses is critical for the reimbursement of such costs, and in turn, the financial success of these contractors. On the other hand, successfully and promptly identifying all available defenses to a loss of productivity claim is essential for an owner.

It is important to remember that the construction industry is still feeling the effects from the COVID-19 pandemic and other worldwide events, and their resulting fluctuations in the availability of both labor and materials. Moreover, with the uptick in natural disasters and inclement weather occurring across the country, changes affecting construction projects may only become more common. The impacts are still seen now in disrupted supply chains, and have caused owners, contractors, and subcontractors to make difficult decisions as to how to proceed on projects. For example, instead of accepting that an unforeseen disruptive event has necessitated a complete work stoppage, which would cause the owner to bear the financial exposure, it sometimes may be more beneficial for owners to instruct their contractors, and in-turn instruct subcontractors, to proceed with the project, be as efficient as possible, and work around the impediments.

Notably, with loss of productivity claims, it is irrelevant whether the impacted activities lie on the critical path—although the loss of productivity is often a consequence of a delay. Instead, loss of productivity is only concerned with unanticipated increases in costs to perform the subject work. Thus, to bring a successful loss of productivity claim, one must show liability, causation, and damages. On the other hand, an owner will want to point out that the contractor did not meet its burden of proof with respect to proving liability, causation, and damages.

1. Liability
Liability sometimes arises out of a change that impacted the claimant’s work on a project. For example:

• Impacts due to errors and omissions in design documents.
• Impacts caused by having to perform work out-of-sequence.
• Delays which push the project into periods of adverse weather conditions.
• Effects of excessive overtime due to acceleration.
• Stacking of the trades towards the end of a project.

2. Causation
Causation is the link showing that liability issues led to unavoidable damages for the claimant. In effect, the claimant must establish cause and effect. For example:

• Events were unforeseeable at the time of the contract or change order execution.
• Events were beyond claimant’s control.
• Events were caused by owner or design professional, if a general contractor loss of productivity claim or general contractor.
• Events were caused by owner, design professional, or general contractor, if a subcontractor loss of productivity claim.
• Events were caused by situations for which the owner assumed contractual liability, such as a force majeure or differing site conditions.

3. Damages
To be compensated, claimants must be able to measure and demonstrate how the changes adversely affected productivity.

Although the right to recover for losses of productivity is well-settled, there is no universal standard for calculating damages for these claims. And so, while the claimant must provide a reasonably accurate estimate of losses, this estimate may not necessarily be a precise calculation. That said, claimants and their experts should utilize a methodology recognized by the courts and/or arbitrator in reaching their estimation.

Some methodologies that have been used for quantifying damages are:

• Project-specific studies:
  • Measured mile analysis
  • Earned value analysis
• Project or baseline comparison studies
• Industry studies:
  • Special industry study
  • General industry study

As a quick tip, a contractor/subcontractor loss of productivity claim can be doomed by a lack of prior and proper planning and execution. To avoid this downfall, a general contractor or subcontractor may want to:

• Show in your contract price how the labor price was constructed, including norms and realistic production levels.
• Keep time records that allocate staff to specific work (further, ensure that real names are recorded along with certifications and qualifications).

Manage the job with precision—list changes and their impact on the workforce. Email these records to the client so that they are aware of the lost production contemporaneously.

Conclusion
Loss of production, though especially prevalent in current construction projects, can be difficult to prove in a reimbursement claim due to the difficulty quantifying and proving damages. That said, the law is settled regarding one’s entitlement to reimbursement if such damages are proved and the economic success of contractors who are impacted by production loss depend on these claims. Thus, if you believe you have a loss of productivity claim, it is important to discern a reasonable estimate of your losses at the outset of the project. Contractors may want to consult their legal counsel early to make sure that you are timely documenting these claims and complying notice provisions that may be applicable pursuant to the subcontract or law in the jurisdiction where your project is located, and owners may want to consult their legal counsel early to identify the defenses that may exist to the loss of productivity claim.