NUANCES OF ANALYZING DISRUPTION AND LABOR PRODUCTIVITY CLAIMS ON PROJECTS IN LATIN AMERICA

By Jaime Gray, Partner – NPG Abogados, Scott Gray, Managing Director - Navigant, Israel Almodovar, Director - Navigant

INTRODUCTION

Labor productivity is defined as “a measure of production output relative to labor input.”1

This concept is a key indicator of efficiency and effectiveness of performance during a

construction project. From the bidding process to the management and control of cost

and schedule during construction, productivity is a factor of significant importance for

the management of a project.

During the bidding process and initial project planning, a contractor must determine

its means and methods in order to build a project in accordance with the contract

requirements. As part of these determinations, the contractor will establish the

composition and distribution of its resources and the required construction sequences.

Subsequently, based on those means and methods, resources, and sequences, the

contractor will estimate the duration and cost for each activity.

However, once that plan is established, and the construction work is underway, many

factors and conditions can occur that may affect the performance and productivity

of the work, giving rise to a concept also known as disruption. Disruption is typically

defined as:

“[A] loss of productivity or increased cost of performance caused by a change

in the contractor’s anticipated or planned working conditions, resources, or the

manner of performing its work (…a ‘change in working conditions’).”2

The conditions and events that can cause disruption are widespread. These changes in

working conditions or construction means and methods can be a result of inclement

weather events, changes in crew sizes, intermittent workflow, changes in the nature of

the work, working in reduced spaces, stacking of trades, lack of materials or design,

design modifications, poor or insufficient supervision, or poorly trained or motivated

workers, among many others. In this regard, it is important to note that productivity can

be affected by the contractor’s own internal issues, while other factors are related to the

owner’s actions or inactions.

1. AACE International, Recommended Practice No. 10S-90, Cost Engineering Terminology, October 31, 2017.

2. Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).

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The contractor will often, but not always, suffer a loss in

productivity on disrupted work. As a result, the contractor may

incur additional labor hours to accomplish each given unit of

work, resulting in increased unit costs and cost overruns on the

affected work.

The issues of disruption and lost labor productivity are so

significant in the construction industry that they have been widely

addressed and discussed by all industry participants, including:

• Contractor groups and associations, such as the Mechanical

Contractors’ Association of America (MCAA), which

published Change Orders, Productivity, Overtime;3 and the

National Electrical Contractors’ Association (NECA), which

published Negotiating Loss of Labor Efficiency for Electrical

Contractors.4

• Construction owner groups, including public owners (U.S.

Army Corps of Engineers, which published its Modified

Impact Evaluation Guide5) and private owner groups

(Construction Owners Association of America).

• International legal organizations, such as the Society

of Construction Law, which in 2017 published its Delay

and Disruption Protocol;6 and AACE International, which

published Estimating Lost Labor Productivity in Construction

Claims (RP25R-03, 2004),7 among other various international

publications.

Claims for the increased costs incurred as a result of a loss of

labor productivity are very common in the United States, with

decisions from the court systems indicating that contractors may

be compensated for owner-caused disruption:

“Disruption may be compensable because, within the

limits of a particular contract, (i) a change order can affect

work beyond that directly targeted by the change, and (ii)

the owner should pay for all costs of its changes. In other

words, a change order modifies the ‘changed’ work and

might disrupt the ‘unchanged’ work.

Disruption may be compensable if there is (i) a loss of

productivity (ii) caused by a change in working conditions

(iii) for which the owner is responsible.”8

The concepts of disruption and lost labor productivity are very

well accepted, and claims for these concepts are common in

the United Stated and other international jurisdictions. However,

the same does not apply to Latin America. In our experience,

disruption is a concept that was seldom addressed in

construction claims in Latin America until recently. However, due

to the influx of international players (both construction owners

and contractors) into this market, and the growing sophistication

of the market, the concept of disruption and the quantification

and presentation of claims for loss of productivity are now

spreading throughout the region, and are becoming more

commonly recognized by the parties involved in construction

projects and litigation.

The following sections of this article aim to provide a review

of the status of disruption claims in the United States (with

respect to the demonstration of cause and effect and

quantification methodologies) and a comparison to the

status of these concepts in Latin America, based on our

experience. The objective is to provide U.S. practitioners with

an understanding of what to expect in the Latin American

construction market regarding potential disruption claims,

and to provide Latin American practitioners with a view of

the current state and recommended practices regarding such

claims in the United States.

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

One basic requirement of any construction claim is that

there be a cause-effect relationship developed between the

causation events or issue(s) on which the claim is based and

the effect of those causes, i.e., the damages being claimed. Do

the claimed damages flow logically and necessarily from the

claimed causation event(s)? In the event of a limited or isolated

disruption impact, such as a distinct inclement weather event

that affects only a few days of work, this cause-effect linkage

is generally more readily established. One can demonstrate the

number of workers affected and the time lost due to the event.

However, in modern disruption claims, the claimed causes of

disruption are often a combination of events that occur over

a long period of time and affect a broad set of contractor

activities and resources. For example, a claim for disruption

caused by excessive requests for information (RFIs) issued due

to defective design will generally involve many hundreds of RFIs

issued over an extended period of time, affecting many different

activities and areas of the project. The demonstration of the

direct disruptive effect of each RFI on the contractor’s workforce

is a very difficult and generally impossible task.

3. MCAA, Change Orders, Productivity, Overtime: A Primer for the Construction Industry, 2005.

4. H. Randolph Thomas and Amr A. Oloufa, Negotiating Loss of Labor Efficiency for Electrical Contractors, NECA, 2001.

5. Department of the Army, Office of the Chief of Engineers, Modification Impact Evaluation Guide, EP 415-1-3, July 1979.

6. Society of Construction Law, Delay and Disruption Protocol, October 2017.

7. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.

8. Michael R. Finke, “Claims for Construction Productivity Losses,” Public Contract Law Journal, Vol. 26, No. 3 (Spring 1997).

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Given that the quantification of the damages associated with

each and every disruptive event is not practicable, a particularly

useful and highly regarded methodology was created to

help meet this challenge: the measured mile methodology.

As a result, when the proper documentation is available, the

common conception is that the measured mile is the preferred

methodology for quantifying loss of productivity claims.9, 10

In general terms, a measured mile analysis compares the labor

productivity achieved by a contractor during an unimpacted

(or less impacted) period or area within the project with its

productivity on similar work performed in a period or area that

suffered from impacts. The actual labor productivity achieved

on the unimpacted work becomes the baseline for what

would have happened on the impacted work if it had not been

impacted. The contractor then claims for the increased costs

associated with the difference between the two (unimpacted

versus impacted work), based on contemporaneous records

that indicate the actual hours incurred and the quantity of work

performed during those periods.

When utilized correctly, the measured mile analysis isolates

the impacted work and demonstrates that the only conditions

that were different are the claimed impact causation issues.

For instance, in the previous example regarding the effect of

hundreds or thousands of RFIs due to defective design, the

contractor must attempt to isolate the period affected by those

RFIs, holding all else constant between the unimpacted and

impacted work. If performed correctly, this demonstrates a

level of cause-effect relationship that is otherwise so difficult

to establish for a broad, multi-issue or multi-period disruption

claim. The only significant difference between the impacted

and unimpacted work, and therefore the apparent cause of the

deterioration in productivity, is the existence of the claimed

causation issues and/or events.

It is important to note that use of this method does not relieve

the contractor of the demonstration that the causation events

occurred, and that they changed the means and methods or

conditions in such a way as to cause a loss in productivity.

However, by making such a demonstration, courts and

arbitration panels will generally accept a proper measured mile

calculation as a reasonable demonstration of cause and effect

and quantification of the resulting damages.

Crucial requirements for the proper use of the measured mile

methodology include the following:

9. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.

10. Society of Construction Law, Delay and Disruption Protocol, October 2017.

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• The unimpacted work must be of a similar nature to the

impacted work. While the work need not be identical, it must

be sufficiently similar to allow a reasonable comparison such

that the measured differences relate only to the claimed

impact and not inherent differences in the complexity of the

work. Simply put, comparing complex, inherently difficult

work (such as rock excavation) with relatively easy work

(such as soil excavation) does not provide a reasonable or

appropriate measured mile analysis.

• One must analyze the impacted period to determine whether

any other unique conditions or circumstances occurred

during that period other than the causation issues being

claimed. For example, if the contractor also suffered from late

deliveries of its supplied materials or excessive equipment

breakdowns during a claim period affected by owner design

changes, and such conditions did not affect the unimpacted

period, such unclaimed conditions would incorrectly skew the

productivity results and serve to overstate the claim amount.

• The unimpacted work must be of a sufficient quantity

that it would have been sustainable over the course of the

project. Selection of a very small component of the work as

unimpacted will raise legitimate questions as to whether the

contractor could have achieved that rate on the impacted

work absent the impacts, or whether there was something

particular to the small sample that allowed the contractor to

achieve excessively good productivity.

In addition to the establishment of the cause-effect relationship

between the claim causes of action and the damages, when

applied correctly the measured mile methodology presents

many other substantial benefits, such as:

• It is based on actual results achieved on the project, and is

thus based on fact rather than conjecture or theory.

• It reflects the contractor’s actual supervision, workforce,

equipment, etc., for the project, such that the contractor’s

own inherent inefficiencies are reflected in the productivity

baseline, and not claimed against the defendant.

• It is not based on the contractor’s bid or tender values,

rendering moot the ubiquitous arguments as to whether the

contractor’s bid was or was not reasonable.

• It relies on project-specific information and is supported by

the contractor’s contemporaneous records.11

Largely as a result of the many strengths inherent in the

measured mile methodology, it has been applied by claimants

and accepted by courts in the U.S. for decades.12 It is

recognized by most industry organizations as a recommended

approach for demonstration and quantification of claims for

lost labor productivity.

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

Latin American civil codes practically unanimously accept that

a party who suffers an economic impact as a consequence of

a breach of contract by its counterparty, or is affected by the

occurrence of a risk event the responsibility for which is borne

by its counterparty, should be compensated. This is the legal

basis for any contractual claim, but especially for productivity

claims and, as such, the legal basis for these types of claim is

clear and undisputed.

What is new in the Latin American region is that contractors

have finally realized that their direct costs are also affected

in cases of disruption and loss of productivity, and that this

financial impact is not covered by the payment of the indirect

cost which owners customarily agree to pay for delay damages.

In some cases where the contractors were aware that their direct

costs were also affected, they preferred to increase the amount

of their indirect costs instead of claiming the payment of the

direct costs affected, as it was easier for them to recover money

from owners.

On the other hand, owners are incorrect in their belief that the

payment of the indirect costs (including overhead and other

related costs) is sufficient to compensate the contractor for

the consequences of breaches of contract and the occurrence

of risks borne by the owner when these affect the time for

completion of the project or discrete activities.

Consequently, when arbitral panels decide on disruption and lost

productivity claims, they easily understand the legal concept

that supports them, but are unfamiliar, as are the owners, with

the reason why the contractor is not fully compensated when

they are paid for the indirect costs incurred. Arbitral panels that

do not understand this could dismiss these types of claims, as

they think that the contractor has already been compensated

and now seeks to double dip.

However, in recent years, contractor representatives, attorneys,

and experts have demonstrated that contractors are also

affected in their direct costs in cases of disruption and lost

productivity claims, and have also demonstrated how to

quantify compensation due by the owner. Methods such as the

measured mile and others have been applied and understood

by arbitral panels.

In summary, Latin American arbitration panels, contractors, and

owners are progressively becoming familiar with the concepts of

disruption and lost productivity claims.

11. AACE International, Recommended Practice 25R-03, Estimating Lost Labor Productivity in Construction Claims, April 2004.

12. William Schwartzkopf and John McNamara, Calculating Construction Damages (Aspen Publishers, Second Edition, 2001).

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

As noted earlier, the disruption concept is relatively new in the

Latin American construction market. As a result, the level of

sophistication in this type of analysis is growing at a rapid pace.

It was not long ago that Latin American contractors would not

even submit a claim for loss of productivity because this was

not a widely recognized concept. Claims for highly impacted or

disrupted projects were typically prepared and presented by

contractors based on less preferred methodologies such as the

total cost approach (i.e., claim entire overrun in excess of the

contract price) or the modified total cost approach (i.e., claim

entire overrun in excess of the contract price less an adjustment

for obvious bid errors or contractor defects).

However, recently there has been a shift to utilizing the more

accepted measured mile methodology, a change led by the

contractor community. Since the method was only recently

introduced in Latin America, experts and lawyers have had to

educate arbitral panels about the basis of the methodology and

its advantages, as well as of the reliability of the information

sources used when the methodology was applied. Also, experts

have had to convince the arbitration panels that this is the

preferred methodology (when the appropriate documentation is

available) over other methodologies that were more familiar to

the arbitrators.

This has led to local arbitrators, many of whom participate in

international arbitration proceedings and are therefore exposed

to more U.S. or European pricing methods, becoming more

accustomed to and accepting of this type of claim and analysis.

As these arbitrators subsequently participate in local arbitration

matters in their home country (e.g., arbitrations held in the Lima

Chamber of Commerce, the Bogota Chamber of Commerce,

and/or the Santiago Chamber of Commerce), the knowledge

obtained from the international arbitrations is spread to the local

arbitration forums. In other words, disruption claims and the

measured mile analysis is quickly becoming a common topic in

construction disputes at various levels throughout Latin America.

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

As a byproduct of the civil law systems in Latin America, there

are no case law or landmark decisions on which attorneys,

experts, or parties can rely for disruption claims. Under civil law

systems, a judicial award can only be recognized as valid case

law when it is recognized as such by the country’s Supreme

Court, also known as “jurisprudencia.” In many countries, such

as Peru, the Supreme Court normally does not recognize any

jurisprudencia on disruption or lost productivity cases.

As a result, awards made by arbitral panels cannot be

considered as jurisprudencia in any case. Moreover, Supreme

Courts in Latin America hardly ever consider awards issued by

judges in construction cases as jurisprudencia.

Furthermore, as mentioned before, arbitrators and magistrates

are still unfamiliar with the concepts of disruption and lost

productivity, but arbitrators participating in construction cases

are becoming increasingly familiar with these concepts since

they are now more frequently claimed by contractors. Disruption

and lost productivity claims were previously considered to be

technical claims, and lawyers in general were not well versed

in them. However, arbitrators and magistrates are familiar with

the legal concepts that support these types of claims as these

concepts are part of the general principles of civil law.

In this regard, for decades, arbitration in Latin America has

been dominated by lawyers. The vast majority of arbitrators

are lawyers who do not have a thorough understanding of

construction and technical issues. Neither is it common in Latin

America to find lawyers who are also engineers, so there are a

limited number of engineers serving as arbitrators in the region.

As a result, as will be further explained, the burden of proof for

causation issues regarding disruption claims in Latin America

currently tends to be significantly higher than in the United States.

Nuances in the Quantification of Lost Productivity Damages in Latin America

Although disruption claims and the use of the measured mile

methodology for the quantification thereof is quickly gaining

ground in Latin America, contractors are still going through

some growing pains regarding these issues.

For instance, in jurisdictions in which disruption and loss of

productivity impacts are commonly recognized, such as the

U.S., it is generally accepted that the contractor does not

need to prove the cause and effect of every single instance of

productivity loss. However, in Latin America, there is limited

acceptance of this concept, and thus the burden of proof for

owner-caused impacts is usually higher than in United States

courts, as it requires a higher level of analysis and substantiation

for each specific event.

For instance, we refer to the aforementioned example of impacts

by RFIs. In the United States, the expectation to substantiate

this topic would be to present a list of RFIs to demonstrate that

the quantity of RFIs required was excessive (as an indicator of

design deficiencies); demonstrate that the RFIs occurred during

and affected the performance of the work (rather than being

resolved prior to performance of the work); and provide several

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examples of specific RFIs that affected the work, and the resulting change

to the conditions, means, and methods of the work. In Latin America,

however, the expectation is often that the contractor must demonstrate the

specific impact of each RFI.

Another key issue affecting the use of the measured mile method

in Latin America is the availability (or lack thereof) of the necessary

contemporaneous documentation to support and substantiate such

analysis. For this methodology to be effective, the contractor must collect

information of actual man-hours incurred and actual quantities installed.

In addition, this data must be categorized by trades or types of work

activity, and by areas of the project. It is not unusual that contractors in

Latin America will not have a project accounting system that allows the

recording of this type of detailed data; this can present a substantial

challenge (though not necessarily fatal) to the implementation of the

measured mile methodology.

CONCLUSION

Loss of productivity is an issue that can affect construction projects

throughout their life cycle. In the United States and other international

venues, claims for disruption associated with owner-caused impacts may

be considered compensable (under the proper contractual conditions).

The long history of disruption claims in these venues has allowed for the

development of accepted methodologies to quantify this issue. As such,

the measured mile methodology is now considered the preferred method

to prove and quantify disruption claims.

However, disruption, both as a concept and a claim item, is relatively

new in Latin America. Although the level of sophistication regarding

these types of claims is quickly growing in the region, there are certain

nuances that must be considered. These nuances include a higher level

of burden of proof expected in order to demonstrate the cause-effect of

owner impacts, as well as a fairly common lack of detailed documentation

needed to execute and substantiate the analysis. With that said, the

recent trends indicate that disruption analyses and the use of the

measured mile methodology are gaining traction at a rapid pace in both

international and local arbitration venues for construction projects and

disputes in Latin America.

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CONTACTS

ISRAEL ALMODOVARDirector 602.528.8055ialmodovar@navigant.com

SCOTT GRAYManaging Director 305.341.7841sgray@navigant.com