Claims in Construction Industry

8/10/2019 Claims in Construction Industry

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Michael R. LiborMorgan, Lewis & Bockius LLP

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V. OVERVIEW OF POTENTIAL CONSTRUCTION CLAIMS

AND DAMAGES ..................................................................................... 1

A. Claims Under the Contract............................................................. 1

B. Other Types of Claims ................................................................... 1

C. CONTRACTORS CLAIMS FOR DIRECT COSTS,PROJECT OVERHEAD AND IMPACT COSTS........................ 1

1. Formal and Constructive Changes ..................................... 2

2. Inefficiency and Disruption Claims ................................... 8

3. Acceleration Claims ......................................................... 11

4. Delay and Schedule Extensions Claims........................... 13

5. Wrongful Termination Claims......................................... 18

6. Quantum Meruit............................................................... 19

D. OWNER S CLAIMS FOR DEFECTIVE WORK ANDDELAYS...................................................................................... 20

1. Parties Sued by Owner..................................................... 20

2. Actions or Events Giving Rise to Owner Claims............. 21

3. Pricing of Owners Damages ........................................... 22

E. OTHER TYPES OF CONSTRUCTION CLAIMS..................... 26

1. Mechanics Lien Claims................................................... 26

2. Bond Claims..................................................................... 35

3. STATUTORY CLAIMS UNFAIR TRADEPRACTICES AND CONSUMER PROTECTIONLAWS............................................................................... 47

4. TORT ACTIONS............................................................. 50

F. CONTRACTUAL LIMITATIONS ON LIABILITY.................. 56

1. No Damages for Delay Clauses.................................... 57

2. Pay When Paid Clauses.................................................... 58


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V.

OVERVIEW OF POTENTIAL CONSTRUCTION CLAIMS AND

DAMAGES

A. CLAIMS UNDER THE CONTRACT

Disputes often arise between subcontractors, contractors and owners

regarding performance of the project. The potential number of players in aconstruction dispute is limited only by the number of parties involved with aparticular project. Expectations of owners, contractors, subcontractors, architects,

engineers, or materialmen may be disappointed and disputes may arise at any timebetween the first bid and the last bill. Owners take a dim view of non-performance by contractors, subcontractors, and others, who take an equally dim

view when their performance is not rewarded by timely payment by the owner.Moreover, disputes frequently occur over the scope, timing and quality of work

actually performed and materials actually delivered. Contractors contract-basedclaims are addressed in Section C below, and the Owners contract claims areaddressed in Section D below.

B.

OTHER TYPES OF CLAIMS

Complications arise when the claimant has not directly contracted with theparty against whom claimant wishes to file its claim. For example, claims may

arise between an owner and a subcontractor or materialmen. Under thesecircumstances, the subcontractor has no cognizable claim against the owner for

breach of contract because no privity exists between the parties. In Pennsylvania,as in most states, these types of claims are often brought in the form ofmechanics lien or bond claims, in the appropriate circumstances.

Other claims may arise with even more remote third parties, either against

the project owner or in some cases against one another, such as financing entities,end users and other members of the construction process for whom there are nocontractual remedies. These claims are often brought as tort claims (for examplenegligence, fraud and strict products liability), or statutory claims (for example,

under consumer protection statutes or the Uniform Commercial Code). Theseclaims are addressed in Section E, below.

C. CONTRACTORS CLAIMS FOR DIRECT COSTS, PROJECTOVERHEAD AND IMPACT COSTS

This section generally discusses the types of damages recoverable for

various types of contract claims. The concentration herein is on the actions andevents that may be compensable and result in claims by the contractor or owner

when these increased costs can be established with relative certainty, liability canbe determined, and liability and increased costs may be linked. These variousevents can be classified into the following general categories:

- Formal and Constructive Change Order Claims


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- Disruption Claims

- Acceleration

- Delay and Extension Claims

- Termination Claims

- Quantum Meruit

1. Formal and Constructive Changes

Any discussion on liability for changes assumes that the work wasperformed, and that it was outside the scope of the original contract. If either of

these events is not true, a contractor is not entitled to recover on a claim.

The analyses of issues involved in the pricing of direct costs and/or

disruptions, delays related to formal change orders are similar to those involvedwith claims for constructive changes. The only major difference is that in aformal change order the owner has, in essence, admitted that something is owed

for the changed work. Many times the contract provides the pricing scheme forthe change. On other occasions, the owner waits for the contractors pricingquote. Therefore, the pricing of direct cost related to formal changes is similar to

the pricing discussion regarding constructive changes.

Any conduct by a contracting officer (or other representative of the owner

authorized to order changes), or any event which is not a formal change order, butwhich requires performance of work different than anticipated or prescribed bythe original contract, may constitute a constructive change order. There are a

great many actions and events that can result in constructive changes to contractwork. Set forth below is a partial list of these actions and events. The reader will

observe that many of the items overlap, or in some instances are caused by eachother:

- rejected change orders, including differing site conditions, changed

or defective specifications, late or excessive inspection, or rights-of-way, permits and other site access problems

- suspension or delay

- acceleration

- inefficiency or loss of productivity

- disruption.

Direct costs as defined in this section include only the costs of labor,

equipment and materials needed to perform the actual work within the scope of


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the change. It does not include the consequential effect of changes such as costs

for the disruption and inefficiency created by change orders; costs of accelerationof work; and costs as a result of project extensions. These ripple effect costs

are explained below.

a. Use of Forms in Pricing Changes

A contractor should develop and utilize standard forms to calculate and

submit pricing of the direct cost of changes. Forms should be based on andinclude typical work performed by the contractor. The forms force the contractor

to critically examine all potential effects of the change with respect to direct costs.Therefore, all direct costs of labor, equipment, materials and other costs should becaptured and associated with the work as described on the forms. This is so

whether the change is being priced on a pre-performance basis or on an after-the-fact basis. Other direct costs associated with the change such as field overhead,

bond costs, insurance, interest and profit should also be noted on the forms.

Once the direct costs of the change are calculated, they should besummarized and transmitted to the owner or its agent via a standardized

transmittal letter. The standardized transmittal letter should, of course, identifythe project; provide a brief description of the work; state the total direct costs for

the work and attach a copy of the forms showing the breakdown of costs for thework; and should provide for a time limit for the owner to either accept or rejectthe pricing of the work. If the owner simply holds on to the pricing for the change

without approving and paying it, and if the amount is substantial, then thecontractor may not be fully compensated by payment several months after the

submittal because of financing charges or other costs which have increased on thechange during the interim period.

In addition, the form transmittal letter should identify any schedule

extensions requested or needed as a result of the change. Documentationsupporting the request should be attached. It is also best to identify in the letter

that the price assumes that the work will commence by a certain date, and that it isexpected the work will be completed by a certain date. This allows for furtherclarification on the pricing in the event subsequent occurrences prevent the

scheduled start or completion of the changes.


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costs of operation, repair and maintenance costs can be calculated from these

sources. Actual job conditions may require that these averages be adjusted eitherup or down. The rates do not include job site or all home office overhead costs.

However, because depreciation, taxes and storage can be considered part of homeoffice overhead, to the extent possible these costs should not be counted twice (in

the cost pool for home office overhead claims and again in the claim forequipment usage).

d. Job-Site Overhead

Job-site overhead is frequently referred to as general conditions orproject administration. These costs include costs of on-site project managementand administration, trailer rentals, storage charges, utilities, etc. Contracts usually

provide for percentage mark-ups on labor and other direct costs to account forjob-site overhead. If need be, the contractor can support its clam by reference to

bid documents and estimates, or industry practice. Further support can be shownby actual costs for additional time and effort spent on meetings and discussions

regarding estimating and engineering with respect to the change. Unanticipatedadditional manpower needed to perform work may also result in additionalexpenditures for small tools, supplies, consumables or other miscellaneous items

that were carried as general conditions.

e. Interest Claims

The financing of unreimbursed project costs as a result of changes can

have a significant impact. Interest charges may be appropriate to recoup financingcosts or the lost opportunity to utilize internal funds in a manner other than as

planned. The key factors to quantifying a claim for interest is to determine (1) the

period over which the interest is computed; and (2) the rate or cost of money.These factors may be set forth in the contract documents or by applicable local or

federal regulations. For example, Pennsylvania provides for the recovery of post-judgment interest at 6%. 41 P.S. 201. The New York statutes specifically allow

for a claim of pre-award interest at 9%. See C.P.L.R. 5001, 5004.

Under Pennsylvania law, if the amount of damages is liquidated or a summathematically ascertainable, and the onset of damages can be set with relative

certainty, prejudgment interest will be permitted if the defendant was in default.See Citizens Natural Gas Co. v. Richards, 130 Pa. 37, 18 A. 600 (1889); Sharp v.

Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 102

S.Ct. 1427 (1982). Pennsylvania courts will also allow interest on contractdamages prior to judgment as a matter of right as compensation for delay.

Daset Mineral Corp. v. Industrial Fuels Corp., 473 A.2d 584, 595 (Pa. Super.1984). It is important to provide evidence, however, that the fault for nonpayment

rests with the defendant, it is an ascertainable amount, and the date the money wasdue can be set with reasonable certainty. See Marrazzo v. Scranton Nehi BottlingCo., 438 Pa. 72, 263 A.2d 336, 337 (1970). See also Frank B. Bozzo. Inc. v. Elec.


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Weld Div., 498 A.2d 895, 899 (Pa. Super. 1985); JMB Realty Corp. v. Allright

Co., 34 Phila. Co. Rptr. 229, 252 (Pa. Cmwth. June 4, 1997).

The contractor may refer to change order logs as a basis to set the date of

the onset of the claim for interest. In other areas where the timing of theoccurrence is not as well established, such as claims for acceleration orinefficiency, the contractor should prepare a cause effect analysis to show whether

and when interest is appropriate. This can be done by a cash-flow analysis todetermine whether the contractor was actually out of pocket, and if so to what

extent and for how long. Sources of financing (internal vs. borrowings) should bedocumented. The ultimate goal is to show periods of negative cash flow or loss ofuse of funds that were due to compensable delays.

The appropriate rate for postjudgment and prejudgment interest is stated asthe legal rate of 6% simple annual interest. Carrolla v. City of Philadelphia,

735 A.2d 141, 146 (Pa. Cmwth. 1999); Daset Mineral Corp. v. Industrial FuelsCorp., 473 A.2d 584, 595 (Pa. Super. 1984); 41 P.S. 202. However, if a

contract provides for a specific rate of interest higher or lower than the legal rate,the specified rate should apply for all prejudgment interest. See OBrien & GereEngr., Inc. v. Taleghani, 525 F. Supp. 750 (E.D. Pa. 1981) (12% applied);

Reliance Security Service, Inc. v. 2601 Realty Corp., 557 A.2d 418, 419 (Pa.Super. 1989) (18% applied). However, the court in Reliance explained that oncea judgment against the creditor had been obtained, the rate of interest on the

judgment was to be 6% per annum, even if the contract provided for a higher rateof interest.

If funds are obtained internally, then the appropriate rate may be argued tobe the lost opportunity to use those funds elsewhere. The success of this argument

is not certain.

f. Profit

In addition to being entitled to recover excess costs attributable to a

partys breach of contract, Pennsylvania courts allow an injured contractor torecover the profit anticipated under the contract if the evidence is sufficientlycertain and definite to afford a basis on which to estimate its extent. There are at

least some exceptions. For example, in C. J. Langenfelder, infra, 404 A.2d 745,the contractor did earn the total profit contemplated by the contract, but sought an

additional markup of 10% for profit on damages of increased labor and equipment

costs resulting from delays. The court held that the 10% mark-up on provendamages, which was over and above the anticipated profit on the job, was not

recoverable because it was a profit or gain prevented by the breaches of contract.

The court in Commw. Dept of Highways v. S. J. Groves & Sons, Co., 20

Pa. Commw. 526, 343 A.2d 72, 78 (1975) also followed the rule that profits onout-of-pocket losses may not be appropriate where the contractor otherwisereceived its full anticipated contract profit. The project was delayed 14 weeks


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when the Commonwealth failed to provide site access. The court awarded

damages for the delay, plus it affirmed the Board of Arbitrations mark-up of10%, although the Board did not explain whether the mark-up was to cover

overhead, profit or both. The full contract price plus excess costs were paid, butthe contractor argued it was entitled to additional profit on its excess costs. The

court denied the recovery for profit on the excess costs for the following reason:

The total contract was to be performed in 280 working days and,by incurring the costs for extra time and labor herein recovered,

[the contractor] completed the work on time. Whatever profitswere anticipated on the total contract were presumably dulyreceived, there being no evidence to the contrary. We know of no

rule which provides that a contractor is entitled to receive a profiton each and every item of work on a contract of this nature.

Id.

The Pennsylvania Supreme Courts opinion in Exton Drive-In. Inc. v.Home Indem., Co., 436 Pa. 480, 261 A.2d 319 (1969) explains the tough burden anew and untried business must meet to recover lost profits from untimely

performance by a contractor. There, a contractor did not timely complete all of itswork to grade and pave a drive-in. The court denied the owners request for lossof anticipated profits and stated that the anticipated profits of a new and untried

business which were attributable solely to the unfinished condition of the businesspremises were too speculative to provide a basis to award damages. See also

Delahanty v. First Pennsylvania Bank, N.A., 318 Pa. Super. 90, 117-26, 464 A.2d1243, 1257-61 (1983) (burden of proof is very high with respect to new businessprofits). Lost profit may be awarded, however, if sufficient and proper proof is

provided. The traditional method is to present evidence of past profitability in anestablished business. Draft Systems, Inc. v. Rimar Mfg., Inc., 524 F. Supp. 1049,

1055 (E.D. Pa. 1981); Mass. Bonding & Ins. Co. v. Johnston & Harder, Inc., 343Pa. 270, 279, 22 A.2d 709, 714 (1941). It is clear, however, that underPennsylvania law, a plaintiff may not recover for loss of profits to a business

because of customer dissatisfaction or loss of goodwill. Neville Chem. Co. v.Union Carbide Corp., 422 F.2d 1205, 1225 (3d Cir. 1970), cert. denied, 400 U.S.

826 (1970); National Controls Corp. v. National Semiconductor Corp., 833 F.2d491, 495 (3d Cir. 1987).

The rate of profit may be set forth in the contract; or the bid rate of profit;

the contractors historical rates; or industry rates. No single profit rate is correctfor every claim. The appropriate rate should be determined by the nature of the

industry and job, and the risk inherent in the work. For example, if changesdramatically delay or disrupt the work, it does not follow that a contractor whichhas bid a low profit should be limited to that low profit on changes because the

project and conditions as they actually existed may not be as the were anticipatedto be at the time of bid.


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g. Legal Fees

Legal fees can represent a significant expense to parties involved in claimdisputes. As such, claimants may seek to recover these costs through the claim,

contending that these costs would not have been incurred if not for the unlawfulacts of the defendant. However, courts typically apply the American rule:litigants cannot recover expenses incurred in litigating disputes in absence of

contract language or statutes to the contrary. See In re Mailers Unlimited, Inc., 6B.R. 238, 240 (Bankr. E.D. Pa. 1980) (the American Rule precludes the await

of attorneys fees except on a showing of bad faith or on specific statutoryauthorization).

The contract may allow for the award of attorneys fees as damages.

There are limited exceptions to this rule, for example, where legal expenses areincurred in a lawsuit because the breach of contract of another person caused the

person who is seeking the attorneys fees to be in litigation. See C. J.Langenfelder & Son. Inc. v. Commw. Dept. of Transp., 44 Pa. Commw. 585, 404

A.2d 745 (1979). In Mercer Raceway Inc. v. Commw. Dept. of Transp., 435A.2d 1338, 1339 (Pa. Commw. 1981), Mercer alleged that PennDOT breached itslease by invading the electrical right-of-way which was not leased to it. As a

result, an employee of PennDOT was injured and cited PennDOT, Mercer andothers. This scenario sufficiently stated a case where Mercer would be entitled tolegal fees from PennDOT to defend the lawsuit.

Another exception is in extreme cases where a party employs bad-faithlitigation tactics or claims which are without merit and needlessly drive up costs

of litigation. In Chervenak, Keane & Co. v. Hotel Rittenhouse Assoc., 477 A.2d487 (Pa. Super. 1984), a consultant sought court enforcement of an arbitrators

award against an owner who refused to pay. The court found that the owners useof various procedural tactics to delay payment were instituted without merit andserved only to cause annoyance and acts. As a result, the court affirmed an award

of counsel fees and costs.

2. Inefficiency and Disruption Claims

In general, disruption can be described as the result of being forced to

perform contracted work in a manner different and less efficient than originallyplanned. When a contractor bids a project, the bid costs for the work are based on

assumptions concerning construction procedures, levels of manpower, and

sequences of work activities. Any deviation from these planned factors may resultin an increase in the costs required to perform the contracted work. For example,

numerous and unexpected changes can cause consequential affects of loweringproductivity of workers because of stop-and-go activities; trade stacking;

interferences with other trades; restricted access; extra shifts, over-manning; andother disruptions to the orderly progress of the work. If attributable to actions orinactions of the owner, such disruptions and the resulting cost growth often give

rise to disputes and claims for equitable adjustment.


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Other examples of disruption to project productivity include excessive

inspection (in terms of frequency and/or the stringency of requirements).Inspections interrupt worker productivity in two ways. First, during the period of

inspection or testing, workers may be denied access to work areas and required tointeract with inspectors, wasting productive time. Therefore, excessively frequent

testing and inspection can result in unplanned levels of down time. Second, andperhaps more importantly, overly strict inspection often results in significantamounts of rework or repair of completed areas.

Deviation from planned sequence or levels of manpower can also damageefficiency and productivity. Virtually any task has an optimum sequence, and alevel of manning that will provide the most cost-effective performance.

Exceeding that level reduces productivity due, for example, to shortages ofworkspace, trade stacking and resulting confusion. Under-manning the optimum

level may destroy the efficiencies of crew specialization and the learning effect,and wastes time in worker transition between activities. Any factor, therefore,which prevents a contractor from working at planned optimum sequence or

staffing levels may deteriorated productivity and raised the cost of performance.See Blake Constr. Co., Inc. v. C. J. Coakley Co., Inc., 431 A.2d 569 (D.C. App.

1981).

Similarly, a deficiency in other construction resources, such as tools,equipment or construction materials, can retard the rate of production. Crews

working without the required level of support from the equipment and materialsrequired to perform the work cannot achieve planned rate of production.

Inefficiency claims, then, attempt to quantify the substantiated incrementalcosts incurred due to losses in productivity encountered in construction. It is

vitally important, however, that the contractor reserve its right to seek recovery ofthe costs of ripple effects, if any, from excessive changes at the time it signs offon change orders. If the contractor fails to reserve such rights the owner may later

claim that the contractor waived such claims by failing to include costs associatedwith a change in the change order. For instance in Glasgow, Inc. v. Commw.Dept. of Transp., 529 A.2d 576, 580 (Pa. Commw. 1987), a contractor sought

delay damages from PennDOT due to additional work orders, redesigns and otherdelays in the construction of a bridge. The contractor sought recovery of all of its

costs overruns, including costs of extra work. However, the contractor failed tonegotiate for additional compensation resulting from the changes pursuant to theterms of the contract at the time it signed off on the change orders. The court

ruled that the contractor could not recover any additional monies for the extrawork.

A simple statement by the contractor in the change order such as thefollowing should suffice to preserve claims for costs not set forth or known whena change order is issued: The above change request/order is priced only to

include those direct costs of the change which can be identified at this time.Should it be determined at a later date that the change creates an impact such as


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delays, disruptions or other causes beyond our control, we reserve the right to

forward those costs at a later time.

Probably the most successful method of calculating loss of efficiency is to

present objective evidence of work productivity during a normal period on theproject and compare this measure with the productivity during the disruptedperiod (the so-called measured mile approach). See Natkin & Co. v. George A.

Fuller Co., 347 F. Supp. 17 (W.D. Mo. 1972) (lost productivity computed bycomparing actual productivity rates before and after the impact); General Ins. Co.

of America v. Hercules Constr., 385 F.2d 13 (8th Cir. 1967); Clark ConcreteContractors, Inc. v. General Services Admin., GSBCA No. 14340 (March 15,1999) (upheld one of measured mile approach even where compared work was

not identical). In Luria Bros. & Co. v. United States, 369 F.2d 701 (Ct. Cl. 1966),the court noted that mere expert testimony on an efficiency loss projection is

insufficient; comparison of similar work activities on the same project or similarprojects, or other corroborative evidence is necessary.

The emphasis here is to identify the actual rate of production that thecontractor would have realized if not for the claimed hardships. The time andactivity periods compared should be broken down into the smallest detailed

components; the normal and affected work should be as similar as possible; andthe trial period should be unaffected and sustained. For example, a contractorinstalls only 15 sheets of drywall per person each day in an affected area, but

installs 20 sheets per person per day in an unaffected area. The claim would bebased on the increased costs of 5 sheets per person per day in the affected area.

Critical analysis of this type of claim includes comparison of the type ofwork involved; length of the base periods for comparison; whether material

shortages were a problem; whether labor shortages were a problem; and otherfactors which may have caused the difference in the productivity rates such asweather.

Once the trial period productivity measure(s) have been identified,calculated and adequately supported, it is important to assess the overallreasonableness of that rate of production, in light of industry standards, bid

productivity, historical productivity, and the resources available to commit to theeffort. Any trial period rate of productivity that differs substantially from the bid

level of efficiency should be analyzed. Similarly, standard industry productivityrates may not consider the unique aspects of the subject project. However, they

can be used as a general gauge of the reasonableness of the selected rates.

After the predicted productivity rate is determined, it is compared to theactual productivity rates incurred on affected work. Consistent with the cause-

effect claim methodology, the comparison is made only for identified, supportedperiods of impact. To compare the trial period efficiency with work that cannotbe established as affected or damaged results again in a meaningless mathematical

calculation.


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If there are no unaffected periods during the project from which a

normal rate of productivity can be derived, an alternative comparison can beobtained by using identical or similar work on past contracts. Again, the

conditions during the prior work and the affected work should be as similar aspossible to remove variables that could account for the difference.

Another guide in determining inefficiency is the use of published industry

guide manuals setting forth expected rates of productivity. This, however, is notas persuasive because there is no indication whether this particular contractor is

either more or less efficient than the industry average. Other bases fordetermining inefficiency can be other bidders estimated productivity rates or theowners estimate. This type of pricing should be substantiated by data showing

that the contractors bids were reasonable and in accordance with industrypractice.

In addition to labor inefficiency, a contractor may be able to documentequipment inefficiencies. For example, differing site conditions such as

extremely muddy or wet soil can slow the equipment on the project. Costsrecoverable for equipment inefficiency can include additional costs ofmaintenance, repair and operating costs. Disrupted labor may also lead to higher

loss or breakage of tools. These costs can be quantified in the same manner aslabor: a comparison of predicted rates to affected rates.

As with labor inefficiency claims, claims for increased equipment, small

tools and supplies due to project disruptions are appropriate only for periods oraffected activities.

3. Acceleration Claims

Acceleration is the group of activities undertaken to make up time(production) in order to meet the originally planned completion date or to

complete a project earlier than planned. Acceleration can take many forms, suchas working longer shifts (overtime labor), adding second or third shifts, increasing

levels of manpower and equipment, or performing various tasks concurrently.

The requirement to accelerate may originate from three sources:

a. Contractor-Directed Acceleration

In some instances, the contractor may fall behind schedule due to factorsthat are not the responsibility of the owner, and may choose to accelerate his

efforts to meet the established deadline. If he determines that the costs ofacceleration would be exceeded by the costs of project delays (possibly includingliquidated damages imposed by the owner, the contractors own extension costs

and failure to meet other contractual obligations that require the committedmanpower and equipment), the contractor may decide to absorb the acceleration

costs as the least costly alternative. In this case, the liability for the delay and the


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acceleration costs clearly lie with the contractor, and disputes or claims would be

inappropriate.

b. Owner-Directed Acceleration

In other cases, such as a compensable delay, the owner may decide that itis in his best interest to pay the acceleration costs of the contractor rather thanface the costs associated with delay. The owner then will issue an order to

accelerate. Here again, the liability for the decision to accelerate and the resultingcosts is clear and should not cause disputes other than perhaps the quantification

of the associated costs.

c. Constructive Acceleration

Constructive acceleration usually occurs where the original or change

work must be completed within the original contract period despite the existenceof excusable and compensable delays. The owner forces the contractor to

accelerate by holding firm to the completion date without officially directingacceleration. The dispute centers on the cause for the need to accelerate on theproject.

In order to prevail on an acceleration claim, a contractor first mustestablish that he was ordered or forced to accelerate by the owner. Thus, he must

prove that the earlier delays giving rise to the acceleration were excusable, that anextension of time was requested and denied, and that he was directed to accelerateor otherwise meet the contracted date of completion. Once established, he then

must demonstrate that he actually accelerated performance and incurred addedcosts as a result.

Unlike the costs of inefficiencies, certain acceleration costs may not be asdifficult to isolate in the contractor costs records. For proven instances whereextra labor equipment was brought onto the job to step up the pace of

performance, or where premiums were paid to expedite manufacture or deliveryof material, invoices and/or supporting documentation setting forth the related

costs should be available. Acceleration claims frequently are joined with claimfor loss of efficiency because productivity may be lowered when worker arerequired to work overtime. Pricing of the claim for loss of efficiency is described

above.

The most difficult aspect of establishing acceleration claims may be

determining the reasons for and compensability of acceleration efforts. Often,accelerated work is self-imposed by the contractor to compensate for his owndelays or inefficiencies in performance. Acceleration claims are appropriate only

in instances where the owner has mandated explicitly or implicitly that thecontractor meet certain dates of completion, despite the existence of otherwise

excusable delays.


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4. Delay and Schedule Extensions Claims

Construction delays are very costly. Extended costs for delays are acommon and hotly contested element in pricing. Quantification of delay damages

requires (1) an analysis to determine the type of delay; (2) time analysis of thedelay period; (3) an analysis of the cause and liability for the delay; and (4) ananalysis to determine the costs related to the delay.

a. Types of Delays

Project delays can be segregated into three types regarding their impact on

the construction schedule:

(i) Direct Delay

A direct delay represents a situation in which a work stoppage or

disruption slows the contractors progress and extends the time required to

complete the contracted work. It is composed of a discrete delay to an activity onthe critical path. Examples of events that could cause a classic delay are workstoppage orders, lack of access to work areas, failure to receive materials,insufficient manning levels, strikes, etc.

(ii) Concurrent Delay

Concurrent delays are two or more unrelated delay periods occurring

simultaneously, each of which independently affects the project end date. Themore typical situation encountered is where two or more delays overlap at somepoint during their existence. The analysis of overlapping delays is especially

difficult because the individual delays can differ as to responsibility (owner vs.contractor), duration, impact on critical path and the ability to substitute other

work steps for the precluded activities. Each party must bear its own losses, andthe contractor has the burden of proving the costs attributable to the owner and tothe contractor, and if that is not possible no damages are recoverable.

(iii) Serial Delays

Serial delays are a chain of individual delays. These delays may arise

from different causes, but impact and extend the same activities. In serial delays,one delay can give rise to or exacerbate the impact of a subsequent delay, such asa delay in the receipt of materials extending project performance into a cold or

rainy period.

b. Causation and Compensability

Delays are classified in terms of causation and compensability.


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(i) Excusable/Compensable

Not the fault of the contractor, these delays are the result of actions orinactions by the owner or its representatives, or events for which the owner is

responsible, and for which the contractor is entitled to be compensated.

(ii)

Excusable/Non-Compensable

The fault of neither owner nor contractor, these delays are due to events

outside of the control of both parties-causes such as acts of God or labor strikes.As such, neither owner nor contractor is generally liable for damages. Thus,

damages are non-compensable. However, the contractor may be entitled to anextension of time to complete its work.

(iii) Non-Excusable

Such delays are due to actions/inactions of the contractor, such as poor

productivity, excessive repair or rework of defective work, or unreasonable failureto plan and coordinate work effectively. The owner, in addition to not beingliable for project time extensions and contractor delay damages, may be entitledto liquidated or actual damages based upon the provisions of the contract.

c. Time Analysis

Time analysis involves a thorough examination of the various activities o

the job, pinpointing deviations from planned performance, and then quantifyingthe delay. Time impact analysis requires first that the contractor review projectdrawings, specifications and other contract documents as well as schedules,

progress logs, and similar records. Next, planned and actual performance arecompared in the form of CPM network schedules to identify critical deviations.

An analysis is required of three basic types of CPM schedules. The contractorreviews the following schedules:

As-planned schedule. This schedule

represents the planned sequence and timing oforiginal contract work. It is important that this

schedule be reviewed for reasonableness, anddetermined to be a realistic, achievable plan.

As-built schedule. This schedule sets

forth the various project activities as they were aactually performed, reflecting the actual sequence

and duration of each activity, and the actualinterrelationships among activities.

As the as-planned and as-built schedules are compared, deviations, are

identified. These deviations represent changes in the planned performance. Aseach impact is identified, the as-planned schedule is revised to reflect the impact,


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yielding an as-adjusted schedule, which will then be compared to the as-built to

identify further impacts.

To develop as-adjusted schedules, the original as-planned schedule is

compared with a final as-built schedule to determine the overall magnitude of theproject delay and to identify major discrepancies.

Analysis centers on activities appearing on the critical path, but other

paths are also studied in case of potential shifting of critical paths an possibleresequencing, and to determine the largest schedule variance along alternative

paths. Comparisons of the schedules will reveal all major variances.

After specific activities and time periods have been pinpointed through thenetwork analysis, project records and interviews can be utilized to determine why

these delays occurred and who bears the responsibility of the time extension.

d. Costs of Delay

The object of pricing an extension claim is to quantify the increased coststhat were incurred only as a result of actions by the responsible party that caused alonger than planned period of performance. There typically are four types of

damages associated with delay: (1) extended project costs; (2) escalation; (3)inefficiency; and (4) unabsorbed overhead.

(i) Extended Project Costs

Throughout a period of delay the contractor continues to incur direct costswhich do not result in productive work. These costs which could not have been

avoided by good management are recoverable. For example, it may not bereasonable, or even possible, for a contractor to transfer resources to another job

because the extent of the delay is unknown or he has no other jobs to which hecan reasonably relocate. Unavoidable costs of idle labor that do not result inproductive work are recoverable. This can include the full salaries and fringes of

supervisory personnel if it is not reasonable to discharge them or lay them off.Labor charges for hourly workers can also be recovered if they cannot be

discharged without seriously risking later unavailability and there are no othertemporary job assignments.

Costs for extended or idle equipment are also recoverable. As explained

previously, rates for rented equipment and contractor owned equipment may bedetermined. The appropriate rates are the time-related costs associated with

owning or providing the equipment to the site. However, charges for idleequipment should be reduced because idle equipment does not depreciate at thesame rate as active equipment, and does not have major repairs or overhead

associated with active equipment.

Extended job-site overhead is also recoverable. Then costs would include

office trailers, temporary toilets, security, etc. An accepted method of quantifying


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these costs is to establish a daily rate for time-related costs. The daily rate can

then be applied to the period of compensable delays. The costs included in thepool of job-site overhead costs should be screened, however, to delete: (1) non-

time-related costs; (2) costs that do not benefit the subject contract; and (3) costsincluded elsewhere in the claim. Examples of non-time related costs are onetime

purchase costs of photocopiers; telephone hook-up charges; and utility hookupcharges. These charges are independent of time an will not change if the projectlasts longer than expected. Costs of general conditions can also be included in

other prior change orders. These should be excluded from the cost pool.

Other delay costs can include storage fees, winter weather protection andextended insurance costs.

(ii) Escalation

If the contractor is required to perform in a later period than expected, he

may suffer increased labor and material costs. Contract terms limiting escalation

may prohibit such a recovery. However, if owner caused delays force acontractor to perform work in a later period of higher wages, the contractor can

recover the difference in wages. Furthermore, a time-phase analysis must be doneto show the anticipated labor or material costs that should have been expended at

the time of the delay and the anticipated hours after the delay to account for anycontractor caused problem or delays. These costs are then compared with theactual costs, and the claim would be for the lesser of the two. For example,

suppose a contractor planned to spend 100 hours on a job and pay his workers$10.00/hr. The owner causes a delay and during the delay labor rates increased

by $2.00/hr. However, at the time of the owner caused delay the contractor hadexpended less than his planned manpower because of a self-imposed late start

which could not be attributable to the owner. A claim for escalation would becalculated as follows:

Original Schedule Actual Labor

Period 1 60 hours x $10 = $ 600 40 hours x $10 = $400

DelayedPeriod 2 40 hours x $12 = 480 60 hours x $12 = 720

$1,080 $1,120

The claim would be for $80 (the lesser of the actual and planned time-

phased labor costs). An important tool in calculating escalation is theconstruction bid and original and modified schedules of manpower and material

purchases.


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Again, previous change order work may have been recovered at escalated

rates. Previously recovered escalation costs should be deleted. Otherwise, thiswould result in double counting if also included in an overall delay claim.

(iii) Inefficiency

The same computation of costs would apply. Again, if a previous orseparate claim for inefficiency is asserted it should be deleted from a delay claim.

(iv) Extended Home Office Overhead

Extended home-office overhead is a recoverable item for delays to a

project. If a project is delayed it may preclude the contractor from taking on otherwork to absorb the cost of home office overhead. Therefore, more home officeoverhead costs should be absorbed by the delayed project. The problem is

calculating the cost in a credible way. The formula currently most widely used isthe formula first explained in Eichleay Corp., ASBCA 183, 60-2 BCA 2688

(1960). The formula is intended to produce a daily overhead rate of the originalcontract adjusted to reflect the number of days of actual contract performance.The daily rate is applied to the number of delay days to compute the unabsorbed

overhead. It can be calculated as follows:

1. Billings for this contract

total billings for thiscontract period

x Total Overhead for

Contract Period

= Allocable Overhead

2. Allocable Overhead Days

of Performance

= Daily Contract

Overhead3. Daily Overhead x Number of Days of

Delay

= Overhead Allocable to Delay

Many courts follow the Eichleay formula in public contracting, but some

do not. In fact, this formula has come under attack because (1) there is no proofof causation between delays and damages for extended home office overhead; and

(2) there may be no relationship between the overhead damages and actual costs.For example, in Berley Industries. Inc. v. City of New York, 412 N.Y.S.2d 589(1978), the court rejected the Eichleay formula as mere speculation or conjecture.

The court also pointed out that home office involvement normally follows a bellshaped curve during the contract, and therefore the average rate arrived at by the

Eichleay formula may overcompensate the contractor for delays near the start or

completion of the project, and undercompensate the contractor for delays in themiddle of the project.

In any event, a contractor should support a claim for home office overheadby showing that the home office was actively involved by devoting time and

effort to the project to solve design or engineering problems which caused thedelay or disruption. Fehlhaber Corp. v. State, 419 N.Y.S.2d 773 (1979). Thecontractor should also show that it was not reasonable or feasible for it to obtain


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other work to absorb the overhead during the period of delay. Finally, the pool of

overhead costs should be screened to remove costs of other lines of business ornon-time related costs which could not possibly be effected by a delay.

5. Wrongful Termination Claims

The objective of the wrongful termination claim should be to put thecontractor in the same position he would have been in if he had been permitted to

complete the contracted work. Many contracts, however, place limitations on thetypes of damage recoverable if a contractor is terminated. Therefore, the

appropriate damage amount should reflect the profit that would have been earnedby completing the project, any costs associated with the owners appropriation ofequipment, tools or operating materials, as well as any lost profits from revenues

or contracts lost due to the termination. In Action Engg. v. Martin MariettaAluminum, 670 F.2d 456, 460 (3d Cir. 1982), the court ruled that the subjective

good faith standard, and not the objective reasonable person standard, should beapplied in a situation when the contract allowed the owner to terminate the

contractor if in the owners opinion, contractor fails to carry on work diligentlyand on schedule.

The determination of this should-have-been profit amount is much more

complex than a comparison of planned revenues and planned costs. Instead, itinvolves the projection of the costs that would have been incurred to complete theproject, including any inefficiencies or problems encountered. This cost amount

can then be subtracted from the agreed upon price for the work (contract amountplus change orders), to yield the true fee that would have been earned had the

contract been completed.

The calculation should also reflect any mitigating factors or actionsundertaken by the contractor. For example, if due to the termination the

contractor was free to take on other work it would not otherwise have been able toperform, then the return earned on that work should be subtracted from the lost

contract profits calculated above, to produce a measure of damages due to thewrongful termination.

Upon termination for default, the owner is usually empowered to withhold

progress payments or amounts otherwise owing to the contractor for workperformed. If the termination is deemed illegal, the contractor may be entitled to

recover the reasonable costs of performing the work, as supported by his job cost

records.

Termination on a particular project can adversely affect the contractors

ability to acquire future business. Once again, such claims often have beendenied because of lack of the required level of proof regarding substantiation or

revenues actually lost. Moreover, linking them directly to the termination can beextremely difficult.


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6. Quantum Meruit

This section has focused on pricing the most common type of claim: aclaim arising from alleged breaches of, or changes to, the construction contract.

Such claims compose the overwhelming majority of construction disputes.However, this discussion on claim pricing would not be complete withoutincluding a discussion of the quantum meruit claim.

The quantum meruit claim is based on the theory that the contractorshould be compensated for its work to prevent unjust enrichment of the party

receiving the benefit of the work. The claim attempts to quantify the increased,unreimbursed value of the project accruing from the contractors additional effortsthat are caused by the owner. A difference between the quantum meruit claim

and a claim related to the changes or extra work clauses in the contract lies inthe rationale for recovery. Where a traditional changes claim is based upon the

rights conferred by the contract to recover the costs of changes imposed by theowner, the quantum meruit claim is based on an implied right to be reimbursed

for work performed. A claim for quantum meruit is inapplicable, however, wherethe parties have a written or express contract. Roman Mosaic & Tile Co., Inc. v.Vollrath, 226 Pa. Super. 215, 313 A.2d 305 (1973).

The claim is usually brought by a subcontractor against an owner withwhom the subcontractor does not have a contract, or after termination. Thesethird party claims typically fail. In Kemp v. Majestic Amusement Co., 427 Pa.

429, 234 A.2d 846 (1967), for example, a heating and air conditioning contractorbrought an action in quantum meruit against an owner. The contractor had a

contract with a tenant which the building owner did not learn of until after theinstallation. The contractors relief was denied. In Meyers Plumbing & Heating

Supply Co. v. West End Fed. Sav. & Loan Assn., 498 A.2d 966 (Pa. Super.1985), the court rejected the quantum meruit claim brought by a subcontractoragainst an owner where the owner had paid the contractor, but the contractor had

failed to pay its subcontractor. The court reasoned that having paid for the workonce, there was no basis for claiming that the enrichment of the owner wasunjust. Id.

Similarly, in D.A. Hill Co. v. Clevetrust Realty Invs., 573 A.2d 1005 (Pa.1990), the court ruled that an unpaid subcontractor could not recover from a

lender which had purchased the project from a defaulted owner. The lender wasnot liable under a theory of quantum meruit because the lender was not enriched,

as the value of the property was less than the funds it had advanced to thedefaulted owner. Furthermore, even if the lender was enriched by thesubcontractor, it was not unjustly enriched because it requested no work for the

subcontractor and it did not mislead the subcontractor into performing work.Instead, the subcontractor had waived its lien rights and went forward without theprotection of a payment bond. Id.


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If, however, a party contracts with another and accepts the service but

without specifying what compensation shall be paid, the party may recover thevalue of the services under quantum meruit. Martin v. Little, Brown & Co., 304

Pa. Super. 424, 450 A.2d 984 (1981)

The measure of damages on a claim of quantum meruit differs fromdamages available under theories of quasi-contract or unjust enrichment. The

measure of damages on a quantum meruit claim is the reasonable value ofclaimants materials and services.

D. OWNER S CLAIMS FOR DEFECTIVE WORK AND DELAYS

Owners may suffer direct damages from the actions of several parties inthe construction process. In many instances owners may have recourse against

parties for claim amounts owing to contractors. This section will briefly discusscertain parties against whom owners may have cause to seek compensation for

damages, the events and actions that can give rise to those damages, and methods

of quantifying the claim amounts.

1. Parties Sued by Owner

The majority of damage claims by owners involve one of threeparticipants (or some combination thereof) in the construction process:

contractor/subcontractor, architect/engineer, and construction manager.

a. Contractors/Subcontractors

Construction contracts set forth the obligations of the contractor to the

owner. These obligations revolve around the contractors obligation to perform inaccordance with the specifications and plans in a specified amount of time. Any

deviation in the quality of construction or the scheduled performance period candamage the owner and make the contractor liable to the owner for those damageamounts.

b. Architectural Firms

The architect performs many functions on a construction project,

depending upon his obligations outlined in his contract. These obligations caninclude design, estimating costs and overseeing the actions of the contractor.Failure to comply with its contract obligations or to otherwise adhere to a

minimum standard of practice could lead to compensable damage to the owner.

c. Construction Manager (CM)

On exceedingly complex or technical projects, e.g., projects with multipleprimes or projects utilizing fast tracking or phased scheduling, owners maychoose to employ a construction management firm to oversee the coordination

and performance of work. The services provided by the construction manager can


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take many forms, ranging from an oversight and guardian function to a

guaranteed maximum price for construction agreement, and beyond. As with thearchitect, if any problems arise in the performance of the construction managers

services, or in the performance of activities by third parties for which the CM isresponsible, he may be liable to the owner for damages suffered by the owner.

d.

Government Officials

Pennsylvania courts have been reluctant to extend liability againsttownship and other governmental officials for their negligent actions. For

instance, in both Bendas v. Upper Saucon Twp., 561 A.2d 1290 (Pa. Commw.1989), and in Schreck v. North Codorus Twp., 559 A.2d 1018 (Pa. Commw.1989), angry landowners sued township officials for negligence and breach of

warranty for the issuance of permits for certain on-site sewage disposal systems.The townships sewage enforcement officials had conducted tests to determine the

suitability of these systems. The systems, however, were determined to beunsuitable once they were installed. The courts dismissed the lawsuits as the

townships and their officials were immune from liability, and no implied warrantyof merchantability arose from the testing and issuance of permits as these wereservices and not goods under the Uniform Commercial Code. The governing

immunity statute is codified at 42 Pa. C.S. 8451, and contains a number oflimited exceptions, which were not implicated in this case.

2. Actions or Events Giving Rise to Owner Claims

The major events that can generate damages to an owner in relation to aconstruction project include the following items:

a.

Delay

Delays in project completion can be very costly to the owner in that theydeny access to the use of the facility. Delays caused by a contractor can arise

from many factors, including inadequate planning or scheduling and poorcoordination. As always, the complaining party bears the burden to show that the

contractor caused the delay; that it was not an excusable delay; and that theowners conduct did not concurrently cause the delay. The owner should alsoshow that any delays it may be responsible for were not critical activities.

b. Defective or Incomplete Work

Contracts with owners may include provisions where the other party

expressly guarantees its work, design or actions. Even in absence of such aclause, the law recognizes an implied warranty on contractor work, holding it tomeet certain standards. Any deviation from these specified levels of quality and

performance can result in the provision of a substandard facility, unsuitable forthe owners needs.


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In Elderkin v. Gaster, 447 Pa. 118, 288 A.2d 771 (1972), the Pennsylvania

Supreme Court recognized an implied warranty of habitability, as well as animplied warranty of reasonable workmanship, in contracts by builder-vendors

selling newly constructed houses. The court reasoned that these impliedwarranties were necessary to equalize the disparate positions of the builder-

vendor and the average home purchaser by safeguarding the reasonableexpectations of the purchaser compelled to depend upon the builder-vendor sgreater manufacturing and marketing expertise. Id. See also Tyus v. Resta, 476

A.2d 427, 430-33 (Pa. Super. 1984) (implied warranties apply to newlyconstructed homes). In Tyus, the court held that an implied warranty ofhabitability could be limited or disclaimed only by clear and unambiguous

language in the parties agreement. Language which merely provided that thepurchaser inspect the premises before purchase and that he accepted it in its

present condition did not amount to a waiver of the implied warranty. The courtfurther ruled that a reasonable pre-purchase inspection did not require thebuyers to examine the crawlspace below the house.

In Groff v. Pete Kingsley Bldg., Inc., 543 A.2d 128, 133 (Pa. Super.1988), the court extended the concept of implied warranties of habitability and

workmanship to a builder who constructed a house on land already owned by theowner/purchaser. The court explained that [W]e can see no difference between abuilder or contractor who undertakes construction of a new home and a builder-

developer. Id.

c. Third Party Claims

In some instances, actions by one party may give rise to a claim againstthe owner by a third party. For example, if the architect produces defective

drawings, which delay the work of the contractor (for time lost during drawingrevisions and rework necessary due to the error) and impact his productivity, thecontractor may seek to recover those damages from the owner. In such a case, the

owner may have recourse to sue the offending party (the architect in the exampleabove) for the amount of the owners liability on the third-party claim.

d. Contract Termination

If the owner terminates a party for default, the owner may suffer damagesrelated to the delays and increased costs associated with having a different party

complete the work. Loss of labor learning curve benefits, remobilization costs or

other factors can substantially increase the costs to complete the work.

3. Pricing of Owners Damages

In theory, the quantification of claims by the owner is no different than thequantification of contractor claims against the owner. The objective is to quantify

the entire incremental cost (actual cost incurred less the should-have-been cost)arising from the disputed action or event. Just as with contractor claims, it is


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essential to link the calculation of damages to the responsible partys actions,

using a cause-effect methodology. The following are some of the more commontypes of damages claimed by the owner.

a. Delay Claims: Liquidated Damages

The Owners damages for delay can include loss of use and revenue fromthe facility; increased financing costs; increased costs to other contractors and

extra administrative costs. All of these are typically recoverable.

The owners damages for delay frequently are governed by a liquidated

damage provision in the contract. The concept of liquidated damages arose as amethod of reimbursing the owner for delay damage where actual damages arisingfrom delay could not be forecast with certainty when the contract was negotiated.

As such, liquidated damages are a substitute for the actual damages suffered bythe owner, rather than a penalty to the contractor for late completion. Liquidated

damages are generally expressed as an amount to be paid per day that the

contractor is late completing all or a portion of the work.

The court in In re Plywood Co. of Penna., 425 F.2d 151 (3d Cir. 1970),

explained that liquidated damages is the sum which a party to a contract agrees topay as agreed damages if breach occurs. The liquidated damages are good faith

estimate of the actual damages that will probably ensue from a breach. Apenalty is not a pre-estimate of probable damages but is in the form of apunishment designed to prevent a breach. See also Commw., Dept. of Envt.

Resources v. Hartford Accident and Indem. Co., 396 A.2d 885 (Pa. Commw.1979).

In Holts Cigar Co. v. 222 Liberty Assocs., 591 A.2d 743 (Pa. Super.1991), the court struck down a clause as a penalty. The damages clause in theparties agreement provided for $500.00/day liquidated damages. The court held

that the clause was an unenforceable penalty because the amount was pickedarbitrarily and applied even on days that the lessees business was not open. The

court declined to enforce an agreement which clearly is not one for trueliquidated damages. See also RESTATEMENT (SECOND) OF CONTRACT 356(1)(1979).

In some states, [a] term fixing unreasonably large liquidated damages isunenforceable by statute, on grounds of public policy. See, e.g., Virginia

Uniform Commercial Code Section 8.2-718(1).

For liquidated damages to be enforceable, it is vitally important thatparties to a contract specify when the liquidated damages will start and end. In

Sutter Corp. v. Tri-Boro Municipal Auth., 487 A.2d 933 (Pa. Super. 1985), thecourt addressed the issue of when liquidated damages end under a contract

provision assessing $200/day damages for any work that shall remainuncompleted after the agreed completion date. Thirteen days after that date the


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project was substantially complete and the owner began using the sewage

treatment plant. The contractor did not finish all punch-list work until 283.5 dayslater when the engineer certified final completion. The contractor argued that no

liquidated damages should be assessed after issuance of the punch list since theproject was substantially complete. The Court disagreed, and held that the

contractor was liable for liquidated damages until final completion under thecontract terms.

Pennsylvania courts can be harsh in enforcing liquidated damages. In

Commw. Dept of Transp. v. Interstate Contractors Supply Co., 568 A.2d 294(Pa. Commw. 1990), a contractor was hired to clean and paint 6 bridges. Thework was eventually completed after a long period of delay caused by inclement

weather. The owner assessed liquidated damages of $200/day. The trial courtheld the damages unrecoverable as a penalty. On appeal, the court held the

liquidated damages were recoverable, even though there was an apparent absenceof actual damages and the owner never manifested its displeasure with the work.The court explained that the contract clearly shifted to the contractor the burden

of delays not caused by the owner, including the burden of unanticipatedhappenings such as bad weather.

Actual costs of delay are recoverable if liquidated damages are notapplicable, or if the contractor abandons the project without completion, even if aliquidated damage clause is present. See J. R. Stevenson Corp. v. Westchester

County, 493 N.Y.S.2d 819, 113 A.D. 2d 918 (1985). Actual damages usuallyincludes the costs of the loss of use of the facility. Such loss of use costs are

fact specific and vary from case to case. In addition, the owner may claim excessfinancing costs, interest and other incremental costs because of the delayedconstruction.

b. Pricing the Defective or Incomplete Work Claims

The approach most commonly employed to calculate claims of defective

or incomplete work corresponds to the action most frequently followed by ownersto remedy the defects: payment to have the faulty work repaired or completed. Ifperformed by the offending party, the corrective work may be performed at no

charge to the owner, and all incremental costs associated with the performance ofthe original defective work and corrections can be backcharged against amounts

owing to that party, or pursued through litigation. If performed by a third party,all costs related to execution of the repairs as well as any costs of procuring the

new contractor, remobilization, etc., should be aggregated, since they may besought against the offending party. Fetzer v. Vishneski, 582 A.2d 23, 26 (Pa.Super. 1990) (measure of damages for leaky skylights was the cost to repair or

replace).

Another approach to measuring damages is the difference in the value ofthe project as constructed and what the value would have been had it been

constructed properly. In Brourman v. Bova, 198 Pa. Super. 279, 182 A.2d 245


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(1962), involving an owners claim for failure to perform the contract work in

good faith and in a workmanlike manner, the court stated that generally themeasure of damages is the difference in value between what is tendered as

performance and what is due as performance under the contract, which mayconsist of the costs to repair. Damages are measured as of the date of the breach.

In cases where the cost of repairs is prohibitive or exceeds the diminished

value of the facility, measuring damages by the costs to repair is notappropriate. In this instance, the accepted measure of damages is the difference

between the market value of the building as built and the value had the projectbeen built to contracted specifications. In Freeman v. Maple Point, Inc., 574 A.2d684, 689 (Pa. Super. 1990). For example, the homeowners purchased a new

house for approximately $96,000. Water collected on certain parts of the lot dueto an improperly installed driveway, poor grading, and high clay content in the

soil. At trial, the homeowners presented testimony that it would costapproximately $50,000 to correct the problem, but presented no evidence as to thediminution in value of the property. The jury awarded only $45,000 in damages.

On appeal, the court reversed the award because there was no evidence whetherthe cost to repair was less than, or greatly exceeded, the diminution in value of the

property. The court ruled that there must be some reasonable basis fordetermining reduction in value, before a judgment may be made that the costs ofrepairs is a proper measure of damages, when required repairs to a new house

represent a high percentage of the cost of the house. Id.

Another explanation of the measure of damage can be found in Rabe v.

Shoenberger Coal Co., 62 A. 854 (Pa. 1906). In Rabe, the Pennsylvania SupremeCourt explained that the measure of damages for damage to property is generallythe cost of repair where the injury is reparable, unless the cost to repair is equal to

or exceeds the diminution value of the property injured. If the injury to theproperty is permanent, however, the measure of damages becomes the decrease in

the fair market value of the property. Id. Examples of non-reparable, permanentinjuries when the measure of damages is the diminution in the value of theproperty include Schlichtkrull v. Mellon-Pollock Oil Co., 152 A. 829 (Pa. 1930)

(infusion of salt water to wells due to defendants oil well drilling deemedpermanent), and Bumbarger v. Walker, 164 A.2d 144 (Pa. Super. 1960)

(infiltration of high sulfur content water into a spring due to defendants stripmining deemed permanent).

Therefore, the rule in Pennsylvania is that the measure of damages where

an owner sues for defective construction is the difference in market value of theproperty as constructed and the market value that the property would have had if

constructed as promised, with the qualification that if it is reasonably practical torepair the defects in construction, and if the costs of repairs do not exceed thedifference in market value, then the measure of damages in the cost of repairs.

Gadbois v. Leb-Co Builders, Inc., 312 Pa. Super. 144, 153, 458 A.2d 555, 557(1983)


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c. Pricing the Third Party Liability (Indemnification)

If the owner is sued by a party, and the owner believes that a third party isthe real culpable party who may have injured the suing party, the owner may

recover amounts by way of indemnification or contribution against the culpableparty. The measure of recovery is the amount that the owner was required to payto the complaining party, to the extent the owner shows that the real culpable

party caused or contributed to the complaining partys damages.

d. Pricing the Termination Claim

If a contractor or other party is terminated for default, it is most commonto find a delay or extension to the project as a result thereof. This results becauseof the need to determine exactly what work remains to be performed and obtain

services from another contractor or firm to finish the work. Pricing the delayclaim is the same as in any other case. In addition, the owner can recover the

excess costs to complete the work, including costs of loss of labor curve benefits;

remobilization; demobilization; interest; financing costs; and, if appropriate, lossof profit. Bloomsburg Mills Inc. v. Sordoni Constr. Co., 401 Pa. 358, 164 A.2d

201 (1960) (measure of damages is the costs to restore the work).

If a contractor is terminated for convenience on a federal government

project (or some private contracts containing a termination for convenienceclause), the contractor should attempt to settle with subcontractors and suppliersand obtain approval of same for the government, and then submit a proposed

settlement to the government of all costs incurred as a result of the termination.

E. OTHER TYPES OF CONSTRUCTION CLAIMS

1. Mechanics Lien Claims

The Pennsylvania Mechanics Lien Law of 1963 (hereinafter MechanicsLien Law or the Act), 49 Pa. Cons. Stat. 1101 et seq., like other states lien

laws, is designed to protect lower tier contractors by enabling them to bring aclaim for payment directly against the owner without requiring the presence of

privity between the parties. Although mechanics liens statutes are intendedprimarily for the benefit of parties not in contract with the owner, they may bealso be used by parties, such as general contractors and architects, who have

contractual arrangements with the property owner. The following is a briefreview of mechanics lien law.

a. Creature of Statute

A mechanics lien is a statutory claim on real property for the payment ofa debt incurred during the course of construction by a property owner, and owed

to a contractor, subcontractor, material supplier, architect or engineer. ThePennsylvania statute enables recovery to one who furnishes labor or materials in

the erection or construction, alteration or repair of an improvement if the amount


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of the claim exceeds $500.00. 49 P.S. 1301. Should payment not occur, the

debt may be satisfied ultimately through execution of a mechanics lien anddistribution of the resulting proceeds from the sale of the secured property

through judicial proceedings.

The mechanics lien is entirely statutory. Since proceedings under amechanics lien are in rem, the law of the state where the property is located

controls. See Halowich v. Amminiti, 190 Pa. Super. 314, 315, 154 A.2d 406, 408(1959). Therefore, although a number of other states have patterned their

mechanics lien acts after that of Pennsylvania, many have not, including NewJersey and Maryland, whose lien statutes are substantially different in form,theory and practical application. Each states statute and cases should be

consulted to file liens and perfect lien rights in the respective states. See 53AmJur 2d (Mechanics Liens) 26.

b. General Requirements

(i)

Written or Implied Agreement

Although the Mechanics Lien Law protects the party who does not have a

direct contractual relationship with the property owner, there must be a contractbetween the owner and general contractor, either written or implied, sufficiently

specific in its terms to serve as a foundation for valid mechanics lien claims. Inorder to protect all claims, the contractor should describe in the greatest possibledetail the full extent of the work to be done and should incorporate the

architectural plans, specifications, and blueprints into any contract with theowner. Prior to commencing work, the subcontractor should examine the prime

contract and satisfy himself that its terms are reasonably specific.

(ii) Compliance with Statute

It is elementary that a mechanics lien is a statutory proceeding, ... and,

if the statutory procedure is not complied with, the lien is wholly lost. HoffmanLumber Co. v. Mitchell, 170 Pa. Super. 326, 331, 85 A.2d 664, 667 (1952).

Because the right to file a mechanics lien is a statutory right and in derogation ofthe common law, the Mechanics Lien Law is strictly construed.

Despite the courts position that claimants under the Mechanics Lien Law

must strictly adhere to the terms of the Act, the courts often take a more lenientview of pre-lien notice requirements. If notice of the subcontractors intention to

file a mechanics lien claim includes the essential requirements, the courts usuallyfind that substantial compliance has occurred, and the claim is valid. HazelwoodLumber Co. v. Repoff, 51 Washington Cty. R. 50, 52 (C.P. Washington Co.

1970). However, if no notice is provided, or if essential requirements are omitted,the claim will fail.


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c. Who May Assert A Lien Claim And Who Is

Responsible

(i) General Contractor

The term contractor refers to the original, principal, prime or generalcontractor; often these terms are used interchangeably. He is the party whocontracts with either the owner of the property or with the owners authorized

agent for the work to be performed; his contract is the prime contract. Thecontract may be either express or implied. The contractor erects, constructs,

alters or repairs an improvement or any part thereof or furnishes labor, skill orsuperintendence to a construction project, or supplies or hauls materials,fixtures, machinery or equipment reasonably necessary for and actually used in a

project, whether as superintendent, builder or materialman. 49 P.S. 1201(4).

(ii) Subcontractor

The right to lien lies with both the contractor and the subcontractor againstthe improvement and title or estate of the owner. 49 P.S. 1301. Generally, thesubcontractor enters a contract, either express or implied, with the general

contractor to perform a specific portion of the work required under the contractbetween the general contractor and the owner. As with the general contractor, the

subcontractor who erects, constructs, alters or repairs an improvement or anypart thereof; or furnishes labor, skill or superintendence to a construction project,or supplies or hauls materials, fixtures, machinery or equipment reasonably

necessary for and actually used therein . . . whether as superintendent, builder ormaterialman, 49 P.S. 1201(5), is entitled to a mechanics lien.

(iii)

Material Supplier

A material supplier, or materialman, supplies or hauls materials, fixtures,machinery or equipment reasonably necessary for (a construction project) and

actually used therein. 49 P.S. 1201(5). A material supplier may assert amechanics lien claim only in his capacity as a general contractor, if he has

contracted directly with the owner, 49 P.S. 1201(4), or in his capacity as asubcontractor, if his contract is directly with the general contractor. 49 P.S. 1201(5).

A party who supplies materials to a subcontractor, e.g., to another materialsupplier, has no rights under the Mechanics Lien Law since the Act explicitly

excludes from its coverage any person who contracts with a subcontractor orwith a materialman. 49 P.S. 1201(5).


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(iv) Architects and Engineers

The Mechanics Lien Law provides protection to architects and engineerswho enter a contract, either express or implied, with the owner; who prepare

drawings, specifications and contract documents; and who superintend orsupervise the erection, construction, alteration or repair of a construction project.49 P.S. 1201(4). However, the Act explicitly excludes from its coverage an

architect or engineer who contracts with a contractor or subcontractor. 49 P.S. 1201(5).

(v) Successor Property Owners

A mechanics lien binds the interest of the party named as owner of theproperty at the time of the prime contract, or acquired subsequently by him. 49

P.S. 1509. In other words, the lien attaches to the improvement andcompromises the title of whomever holds it when the lien attaches. The owners

interest need not be in existence at the time a building is erected; the lien will

attach to a title subsequently acquired. Weaver v. Sheeler, 124 Pa. 473, 17 A. 17(1889). For a claim to be valid, it must be filed against whomever owns the

subject property when the claim is made. Edwards v. Stevens, 4 Pa. D.&C.3d137, 138-39 (C.P. Chester Co. 1977).

(vi) Lower-tier Subcontractors

Parties who provide materials or services to an improvement pursuant to acontract with a subcontractor are ineligible to assert a mechanics lien claim under

Pennsylvania law. Hamilton v. Means, 155 Pa. Super. 245, 247, 38 A.2d 528,529 (1944); 49 P.S. 1201(5); 49 P.S. 1303(a).

(vii) Employee of Owner

One who is admittedly an employee of the owner of property, whether alaborer or an individual hired for the purpose of superintending construction on

that property, is not a contractor or subcontractor entitled to file a mechanics lienclaim. Liebow v. Eagle Downs Racing Association, 1 D. & C.3d 671 (C.P. Bucks

Co. 1976); 49 P.S. 1303(a).

(viii) Contract with Government Entities for

Public Projects

Where labor or materials are furnished for a purely public purpose, nolien is allowed. 49 P.S. 1303(b). In other words, where the owner is a

governmental body engaged in an activity which may be characterized asgovernmental, as opposed to proprietary, the mechanics lien is unavailable. Forexample, where a public housing authority contracted for the construction of a

low income housing project on its property, the purpose was purely public.Empire Excavating Co. v. Luzerne County Housing Authority, 303 Pa. Super. 25,

28, 449 A.2d 60, 61 (1982). Similarly, the construction of a public school has a


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purely public purpose. Visor Builders, Inc. v. Devon E. Tranter, Inc., 470 F.

Supp. 911, 919 (M.D. Pa. 1978).

Where a governmental entity, in owning and operating a property, acts in a

proprietary and quasi-private manner, an exception to the general rule that amunicipal property is exempt from mechanics liens is created, and a mechanicslien claim can be brought against such entity. American Seating Co. v. City of

Philadelphia, 434 Pa. 370, 375, 256 A.2d 599, 601 (1969). Where the City ofPhiladelphia acted as an absentee landlord of the property upon which the

Spectrum sports arena was built, the arenas construction was arranged and paidby a private party tenant, and the city, in its capacity as a landlord was engaged ina purely proprietary activity, the Pennsylvania Supreme Court permitted

mechanics liens claims against the property. Id.

The Pennsylvania legislature has provided protection for public works

contractors, similar in practical effect to a mechanics lien, through the PublicWorks Contractors Bond Law of 1967, 8 P.S. 191-201.

(ix) Against Landlord/Owner

Generally, in order to establish the validity of a mechanics lien, theperson against whom the lien is filed must own the property at the time of the

filing of the lien. Edwards v. Stevens, 4 Pa. D. & C.3d 137, 138-39 (C.P. ChesterCo. 1977) (citing Weaver v. Sheeler, 124 Pa. 473, 475, 17 A. 17 (1889)). Incircumstances, however, where a tenant has contracted for the work to be done to

the property, a mechanics lien claim against such property and thelandlord/owner will be allowed only if the tenant obtains the owner/landlords

written consent that the improvement to be performed is for the owners

immediate use and benefit. 49 P.S. 1303(d). See Murray v. Zemon, 402 Pa.354, 356, 167 A.2d 253, 254 (1961). The writing may be contained in the lease.

Amos v. Clare, 9 Phila. 35 (1872).

An owner may be estopped from relying on the writing requirement where

fraud or lack of good faith is involved. See Chambers v. Todd Steel Pickling,Inc., 323 Pa. Super. 119, 470 A.2d 159 (1983).

d. What Items Are Covered

(i) Labor

The Mechanics Lien Law expressly provides that labor may form the

basis of a lien against property. 49 P.S. 1301. Labor includes the furnishing ofskill or superintendence. 49 P.S. 1201(9). However, the work in question mustbe done as part of the construction, erection, alteration or repair of a building. See

Metropolitan International v. Union Investment Co., 17 Pa. D. & C.3d 519 (C.P.Phila. Co. 1981) the (rejecting mechanics lien claim where security guards had

provided services during the construction of a building project).


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A lien for labor may be brought by a contractor or subcontractor, 49 P.S.

1201(4), 1201(5), but not by a laborer, Octave v. Beltz, 23 Westmoreland L. J.218 (1942), nor by an employee of the defendant. Mohler v. Johnston, 63 York

Legal Rec. 115, 116 (1949).

(ii) Materials

Generally, materials furnished for the construction or improvement of a

structure are lienable. Materials include building materials and supplies of allkinds, and also includes fixtures, machinery and equipment reasonably necessary

to and incorporated into the improvement. 49 P.S. 1201(7). The statute coversmaterials delivered to the site of construction.

(iii) Off-Site Improvements

In addition to liens for materials supplied and work performed on-site,liens may be permitted for improvements which are not directly upon the site, but

have a physical and beneficial connection to the property. For example, inMorrissey Construction Co. v. Cross Realty Co., 42 Pa. D. & C.2d 533 (C.P. YorkCo. 1966), the construction of a driveway on a lot, sidewalk, curb, storm and

sanitary sewer and street appurtenant to the lot, which was necessary for theordinary and usual purpose of the property, formed the basis of a valid claim. Id.

at 537. See also Grimes v. Barnes, 85 Montgomery Cty. L. Rep. 305, 306 (C.P.Montgomery Co. 1965) (construction of a trench was the proper subject of amechanics lien claim). Similarly, mechanics liens have been allowed, in other

jurisdictions, against property for pipes laid in the street for water or gas mains orfor sewers; against a pumping plant for piping laid in the streets and connected

therewith; and against a refrigerating plant for pipes laid in the streets to supply

vapor for cold storage to remote customers. See 53 AmJur 2d (Mechanics Liens) 85.

(iv) Materials Stored Off-Site

In Kissinger Structural Sales, supra, where materials were specially

manufactured for a project but never delivered to the site, the failure to deliverrendered the materia

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