Subcontractor Record-Keeping and Inefficiency Claims
Labor inefficiency or lost productivity on a construction project occurs when the actual labor hours required to perform work take longer than anticipated because of some outside impact. When a subcontractor experiences inefficiency because of an impact upstream in the chain of contracts—such as work controlled by the general contractor or issues stemming from the design team—the subcontractor often can make a change order request (“COR”) and/or claim for the cost of those extra hours.
Though inefficiencies occur frequently on construction projects, they are one of the more difficult claims to put together, especially when it comes to establishing causation and the amount owed. Inefficiency CORs or claims are rarely resolved quickly, and while construction is ongoing. Rather, they are often set aside by general contractors or owners and pushed to the end of the project. However, subcontractors who keep strong cost and event records through all their projects put themselves in the best position to make compelling claims for inefficiency. And the more compelling the claim, the more likely the subcontractor is to get paid early and avoid a courtroom.
The legal formula is straightforward, generally:
• What happened?
• Who was responsible for it?
• How did it cause the subcontractor to incur more hours?
• How many hours did it cause?
On this last prong, subcontractors frequently resort to comparing their actual hours against their original estimated hours.
In terms of record keeping, many subcontractors only keep job costs that track their labor on a job as a whole. However, complex jobs almost always involve many different items of work, and very rarely do efficiency impacts sweep across all work items for the duration of the entire job. When a subcontractor creates an inefficiency claim by simply taking all its actual job costs and subtracting out its estimate, almost always that claim will be attacked as an improper “total cost method” approach, which courts often reject.
A subcontractor can best approach its record keeping by tracking and coding its labor hours based on the individual work items contained in its scope of work. A great place to start would be with the items contained in the schedule of values for payment applications. But even better would be to break down those items even further, into more detailed descriptions of the work contained in each line. As the work is being performed, the hours tracked should record what work is being performed, when it is being performed and how many hours it is taking. Obviously, that process is not something that can be implemented with the flip of a switch, but rather something that will require buy-in and training of a subcontractor’s project managers, superintendents, administrative staff, and laborers.
This method proves beneficial for claims and beyond. Detailed cost tracking not only allows subcontractors to put together compelling claims, but it allows them also to identify their own internal inefficiencies and address them. It also provides actual cost data that can be used to improve estimating for future bids.
Estimates are another crucial part of cost tracking and determining inefficiencies. Ideally, the estimates should be significantly detailed and used as the baseline for the tracked costs as the work is in progress. This is what will show inefficiencies. But the less detailed the estimates, the more likely any inefficiency claim put together using estimate information will be challenged from a legal standpoint as a “total cost” analysis or otherwise claimed to be lacking in causal connection.
When estimates are used in court as one component of proving an inefficiency claim, the subcontractor must show that its estimate is accurate and reasonable. Inefficiency claims are regularly challenged in court based on allegations of a “bid bust” or bad estimate. Subcontractors need to be sure from the start that their estimates are well-founded, and they should save the documents they used when they prepared their bid. Those documents may become invaluable years later during a lawsuit.
In terms of proving the cause of inefficiency, the subcontractor needs to connect the extra hours to specific impacts. Every subcontractor should keep daily reports or regular logs describing the work as it is being performed, recording whether any events or conditions hinder the work, taking photographs and recording any other information that may capture everything that occurred on a particular workday. When accurate daily reports are used alongside detailed labor tracking, additional hours and their direct causes often can be established with strong clarity.
Finally, record keeping goes beyond a subcontractor’s internal records. It is essential that a subcontractor provide notice upstream of the impact as soon as possible. For one, nearly every sophisticated construction subcontract requires notice when work is impacted and has the potential to increase time or costs, and most of those subcontracts provide that such claims for additional time or cost are waived if the subcontractor fails to provide timely notice. State courts vary in how strictly they enforce provisions like that, but the fact remains that if a subcontractor follows the notice provisions in a subcontract strictly, then the subcontractor has given the parties upstream one less thing to use to challenge the claim.
Moreover, timely notice gives an offending party an opportunity to address any impact it is causing. Most parties want a successful project, and subcontractors generally are not in the business of filing lawsuits. A quick notice can resolve an issue promptly and potentially save high costs for all parties, which could otherwise grow and create a significant cost gap that drives a long-lasting lawsuit.
There are many different methods recognized for proving inefficiency claims, but the method described above is perhaps the most frequently used. It also includes elements frequently employed by other methods. Good record-keeping processes provide subcontractors with a significant advantage in identifying inefficiencies, preparing claims and ultimately improving their own internal productivity. Subcontractors who seek to grow and build more sophisticated projects should seek to establish strong record-keeping practices as outlined above.
