Thursday, December 17, 2015

Project Dispute on the Horizon? Put Your Money in a Bucket.

The following hypothetical might be familiar to some readers: An existing or prospective client comes into your office for a consultation and they relay the tale of a disastrous project full of incomplete designs, differing site conditions, excessive change orders, owner directed suspensions of work, defective material installations, and extreme weather delays.  When asked if they have some type of accounting of the financial damages, the client exclaims, “Of Course I Do!” and provides something akin to the following:

Current Costs

And now the client’s expectation is that since he has provided you with a suitable accounting, you can go quickly recover that money.

The above is an exaggerated scenario, of course, but I am willing to wager that many construction lawyers have found themselves in a similar situation at some point in their careers. The laundry list of issues encountered by our fictional client is illustrative of the types of claims that a general or specialty contractor might face on a project gone wrong, and each one has its own particular requirements for recovery.  It is important when providing counsel to a client during the course of a project to relay the importance of segregating all costs into individual “buckets”[1] related to any potential claim.  A contractor should also be proactive in placing costs in these buckets and not simply waiting for an owner direction or a PCO number indicating a change is occurring.  If contractors can foresee a potential change or delay, they should start the process of capturing the costs early. This is not only beneficial for the contractors to understand their costs for internal tracking purposes, but it also provides an owner with a detailed real accounting of costs for change order requests, or if need be, it provides a trier of fact with a clean, professional detailed outline of realized costs for specific claims as well.

Too often in a dispute, general and specialty contractors will produce change requests for project claims that are incomplete or comprised of a lump sum allocation of hours for delays without explanation.  If a contractor were to open a specific budget or cost code within their accounting system, all allowable costs could be captured in that bucket.  These costs could include not only field labor time, but also time for field supervision, project management, estimating support, accounting, shop fabrication labor, material storage costs, equipment rentals, site facilities, and downtime for all of the above.  This approach requires disciplined record keeping by management and field supervision, but it can provides dividends during negotiations and formal disputes.  Costs for schedule delays can be bolstered if a schedule analysis allocating responsibility can be overlaid with detailed payroll records showing real cost damages within those time periods. 

As an example, I would like to relay an instance of creating delay buckets in practice.  I was working for a general contractor who was contracted to build an addition at a federal facility when the government issued a suspension of work order.  I was tasked with assembling the REA and when I began my review, I saw that the PM did an outstanding job of researching all allowable costs through the FAR and federal contract common law, and he set up his suspension bucket accordingly.  Not only was each hour of management and field time tracked and allocated appropriately during the suspension, all of the equipment and site facilities were as well.  In addition, hours worked in anticipation of the imminent suspension and the subsequent hours worked to start up and remobilize were captured; costs that fell outside of the suspension time frame, but were allowable and were incorporated into the REA.  It was almost as easy as hitting print on a cost report from the accounting software.  Whenever the government attempted to discount hours, there was always a time sheet entry and description to turn to in order to validate the hours worked as a result of the suspension.  That information saved numerous days from being cut from the REA.  Conversely, the specialty contractors on the project had no such system in place and their lump sum suspension cost proposals, which did not capture nearly enough of the allowable costs, were resoundingly rejected by the government for not being specific enough. I believe that having the ability to present a professional accounting report with employee IDs, project codes, hours worked, and work descriptions made all the difference in recovering the greatest value of costs allowable, and such a practice should only benefit your clients as well.

[1] When I was a young project manager for an interior finishes specialty contractor, my boss told me while discussing budgets, “I’m a drywall guy, so we put our money in buckets.”

The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liasion to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or

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