Quantifying delay damages

Once a contractor has shown that it is entitled to time and that the delay is compensable, it must prove what the delay cost. Delay damages are different from the cost of changed work. A change adds work, and its cost is the cost of that work. A delay stretches the project, and its cost is the cost of being on site, and committed to the project, for longer than planned. This lesson explains the main heads of delay damages, works through the calculations on the Ashford project and discusses how owners quantify their own delay losses.

CON-220 introduced head office overhead and acceleration in legal terms, and CON-310 showed how the indirect costs of changes appear in cost reports. Here the emphasis is on building a quantum that a reviewer will accept: tied to the compensable delay period, supported by records and free of double counting.

The heads of delay damages

A contractor's delay claim is usually built from several heads, each with its own evidence.

Not every head is recoverable on every contract. Many contracts exclude consequential damages, which can include lost profit on other work and, in some forms, head office overhead. A201-2017's mutual waiver of consequential damages, for example, waives the contractor's claims for 'principal office expenses' and lost profit, while leaving site overhead recoverable. CCDC 2 has no equivalent printed waiver, but supplementary conditions often add one. Always check what the contract allows before building the quantum.

Extended field overhead

Field overhead, also called site overhead or general conditions, includes the costs of running the site that do not vary directly with the quantity of work: the superintendent and project manager, the site office and trailers, temporary power and heat, the hoist and tower crane if they serve the whole job, security, safety staff and so on. When completion is delayed, many of these costs continue for the extra period. The usual method is to calculate a daily or weekly rate for time-related field overhead during the delay period and multiply it by the compensable delay.

The important word is 'time-related'. Some general conditions are fixed (mobilization, permits, the site sign) and are not extended by delay. Others vary with work (consumables, some small tools) and should not be in a daily rate. And the rate should be the rate during the delay period, not the average over the job: during the truss redesign, Kestrel Ridge still had its superintendent, project manager, site office and crane on site, but it may have demobilized some temporary facilities.

# Time-related field overhead on Ashford during the delay period (illustrative weekly costs)
weekly = {
    "Superintendent":            3_850,
    "Project manager (60 %)":    2_640,
    "Project coordinator":       1_950,
    "Site safety officer":       2_300,
    "Site office and trailers":    950,
    "Temporary power and heat":  1_480,
    "Tower crane (rent, standby)": 3_200,
    "Hoist and scaffold rental":   780,
    "Security":                    900,
    "Site services and cleanup":   450,
}
week = sum(weekly.values())
day = week / 5
print(f"Time-related field overhead: ${week:,.0f} per week, ${day:,.0f} per working day")
compensable_days = {"contaminated fill": 9, "truss redesign": 30}
for event, d in compensable_days.items():
    print(f"  {event:<18} {d:>3} working days  ${d * day:>10,.0f}")
total = sum(compensable_days.values()) * day
print(f"Extended field overhead for {sum(compensable_days.values())} compensable days: ${total:,.0f}")

Time-related field overhead: $18,500 per week, $3,700 per working day
  contaminated fill    9 working days  $    33,300
  truss redesign      30 working days  $   111,000
Extended field overhead for 39 compensable days: $144,300

The calculation uses the 39 working days of compensable owner delay from the windows analysis in lesson 5: 9 days for the contaminated fill and 30 for the truss redesign. Abnormal rain is excusable but not compensable, so it earns time but no overhead. Kestrel Ridge's own 2 days of formwork delay earn nothing. If a tribunal found the crane breakdown concurrent with part of the redesign, the compensable days would fall, as lesson 4 showed.

Reviewers will check that the daily rate matches the records, that the items are genuinely time-related, that people charged to the job were actually on it and not shared with other projects without allocation, and that the same costs are not also included in change order prices. The truss redesign change order for extra steel (PCN-021 in lesson 2) must not include supervision for the delay period, or the overhead will be paid twice.

Idle equipment and labor

Equipment that is kept on site but cannot work because of a compensable delay may be claimed at a standby rate. For rented equipment, the rate is usually the rental actually paid. For owned equipment, it is usually the ownership cost (depreciation, interest, insurance and storage) without operating costs, often expressed as a fraction of the full rate. US federal contracts commonly use the Corps of Engineers' Construction Equipment Ownership and Operating Expense Schedule, with standby at half the ownership rate; other owners specify rate books or allow the contractor's own costs. In Canada, provincial rate guides and the contractor's own records are commonly used, and the contract may specify the source. Idle labor is recoverable only if the contractor shows that the crew could not reasonably be sent home or redeployed; a well-run contractor mitigates by redeploying crews, and a claim for weeks of idle time invites the question why it did not.

The rented crane appears here only for the six days it was on site before the redesign was discovered and Kestrel Ridge could send it back. Once the problem was known, keeping it on site for the whole redesign would have been a failure to mitigate.

Escalation

If delay pushes work into a period when wages or prices are higher, the contractor may claim the difference. A collective agreement wage increase that takes effect during the extended period, on hours that would otherwise have been worked before it, is a typical example. So is a material price increase where the contractor could not lock in the price because the owner's delay prevented ordering. The claim must show both the increase and that the delayed work would otherwise have been done at the earlier price. A contractor that would have bought the material late anyway, or whose own delays pushed the work into the higher-wage period, cannot recover.

Unabsorbed head office overhead

A contractor's head office costs, such as executives, accounting, estimating, office rent and IT, are paid from the contributions of all its projects. When a project is delayed, its billings slow, so it contributes less to head office per week than planned; if the contractor cannot replace that work with other projects, part of the overhead goes unabsorbed. Because head office costs cannot be traced to a project directly, formulas are used to estimate the loss.

The Eichleay formula, from a 1960 US Armed Services Board of Contract Appeals decision, allocates head office overhead to the contract in proportion to its share of company billings during the period of performance, divides by the days of performance to get a daily rate and multiplies by the days of compensable delay. Two other formulas, Hudson and Emden, come from English practice and use the overhead and profit percentage in the tender (Hudson) or the contractor's actual overhead percentage from its accounts (Emden) applied to the contract value per unit of time.

# Unabsorbed head office overhead on Ashford by three formulas (illustrative)
contract_billings = 43_900_000    # billed on Ashford during actual performance, including changes
company_billings = 312_000_000    # all company billings over the same period
head_office = 14_350_000          # total head office overhead over the period
performance_days = 735            # calendar days of actual performance
delay_days = 55                   # calendar days equivalent to 39 compensable working days

allocable = contract_billings / company_billings * head_office
eichleay_daily = allocable / performance_days
print(f"Eichleay: allocable ${allocable:,.0f}, daily ${eichleay_daily:,.0f}, claim ${eichleay_daily * delay_days:,.0f}")

contract_sum = 42_000_000
contract_period = 669             # calendar days in the original 22 months
tender_oh_pct = 6.5               # head office overhead and profit percentage in the tender
actual_oh_pct = 4.6               # head office overhead percentage from audited accounts
hudson = tender_oh_pct / 100 * contract_sum / contract_period * delay_days
emden = actual_oh_pct / 100 * contract_sum / contract_period * delay_days
print(f"Hudson (tender percentage {tender_oh_pct} %): ${hudson:,.0f}")
print(f"Emden (actual percentage {actual_oh_pct} %):  ${emden:,.0f}")

Eichleay: allocable $2,019,119, daily $2,747, claim $151,091
Hudson (tender percentage 6.5 %): $224,439
Emden (actual percentage 4.6 %):  $158,834

The three formulas give different answers because they rest on different assumptions. Hudson uses a percentage that includes profit and assumes the tender was a reliable measure, which tends to overstate the loss. Emden uses the contractor's actual overhead percentage and is generally regarded as more realistic in English practice. Eichleay uses actual billings and overhead over the contract period and is the formula US federal tribunals apply.

US federal law treats Eichleay as the exclusive method for unabsorbed home office overhead on government contracts, but only where the contractor was on standby (unable to work and required to remain ready to resume on short notice) and could not take on replacement work, under the test developed in P.J. Dick Inc. v. Principi (Fed. Cir. 2003) and later cases. State courts vary: some accept Eichleay, some reject it, and some require proof of actual loss. A201-2017's waiver of consequential damages waives 'principal office expenses', so on an unmodified AIA contract a home office overhead claim may be barred altogether. Check the contract and the governing law first.

Acceleration

Acceleration is working faster than planned, with overtime, extra shifts, extra crews or premium deliveries, to finish earlier than the delays would otherwise allow. If the owner directs acceleration, it pays for it as a change. If the owner refuses a justified extension and insists on the original completion date, a contractor that accelerates to avoid liquidated damages may claim constructive acceleration. The cost of acceleration includes premium time, extra supervision, the productivity loss that comes with long hours and crowded work areas, and extra equipment.

# Cost of accelerating the Ashford roofing and envelope to recover 10 working days (illustrative)
base_hours = 9_600          # remaining roofing and envelope hours at normal productivity
rate = 64.0                 # straight-time rate including burden
ot_share = 0.35             # share of hours worked at overtime
ot_premium = 0.5            # overtime premium over straight time
productivity_loss = 0.12    # extra hours needed because of fatigue and congestion
extra_supervision = 9_800   # second-shift foreman and safety coverage
extra_equipment = 6_400     # second telehandler and lighting

hours = base_hours * (1 + productivity_loss)
premium = hours * ot_share * rate * ot_premium
lost_productivity = base_hours * productivity_loss * rate
total = premium + lost_productivity + extra_supervision + extra_equipment
print(f"Overtime premium:         ${premium:,.0f}")
print(f"Lost productivity hours:  {base_hours * productivity_loss:,.0f} h = ${lost_productivity:,.0f}")
print(f"Supervision and equipment: ${extra_supervision + extra_equipment:,.0f}")
print(f"Acceleration cost:         ${total:,.0f}  (about ${total / 10:,.0f} per day recovered)")

Overtime premium:         $120,422
Lost productivity hours:  1,152 h = $73,728
Supervision and equipment: $16,200
Acceleration cost:         $210,350  (about $21,035 per day recovered)

Compared with $3,700 per day of extended field overhead, recovering a day by acceleration costs about $21,000. That is typical: acceleration is expensive, and an owner considering whether to direct it should compare its cost with the value of earlier completion to the owner, including avoided liquidated damages and earlier revenue. A contractor claiming constructive acceleration must show that it was entitled to an extension, that it asked for one, that the owner refused or failed to grant it, that it was required or effectively forced to meet the original date, and that it actually incurred the costs.

The owner's delay losses

Owners also suffer from delay. Where the contract has liquidated damages, the owner usually recovers only those, whatever its actual loss, unless the clause is unenforceable. Where there are no liquidated damages, or the delay is outside their scope, the owner must prove its actual losses: extended consultant and project management fees, extra financing, lost revenue or rent, temporary accommodation, higher operating costs of old facilities. For a public owner like the City of Ashford, the losses from late opening of a pool may be real but hard to quantify in money, which is one reason public owners use liquidated damages.

The owner's losses from the truss redesign raise a different question: the redesign was caused by the owner's consultant. The city must pay Kestrel Ridge for the delay, but it may recover those payments, and its own losses, from Halloway Partners under the consultant agreement, subject to that agreement's limits of liability. Owners should give their consultants notice of such claims promptly, as CON-350 discussed for insurance.