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Inside This Issue:

  • Presenting Delay Claims:  Where’s the Logic?;
  • No CGL Insurance Coverage for Defective Work;
  • Limitation of Liability Clause Enforced;

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Article 1

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Presenting Delay Claims:  Where’s the Logic?

Kenneth R. Baker, P.E.
Trauner Consulting Services, Inc.
San Diego, CA

Introduction

An overview of the concepts of delay analysis and a brief discussion of delay analysis methodology is presented in this paper.

The technical side of delay analysis is detail-intensive work that uses terms and concepts unfamiliar to many potential audience members such as jurors or mediators.  In delay analysis presentations, however, it is imperative to convey the delay analysis and findings simply and clearly to that same audience.  Unfortunately, some experts will employ analysis methods that are easy for the audience to understand but, when de-constructed and studied in detail, the analysis will contain major flaws and be distorted by assumptions and subjectivity.  The most successful and valuable experts will perform the delay analysis using a sound methodology and then develop a presentation of the analysis and findings that is compelling, yet easy to understand. 

DELAY CONCEPTS

Delays can be categorized into the following types:

1.      Critical and Non-critical

2.      Excusable and Non-excusable

3.      Compensable and Non-compensable

In order to determine if a delay is critical, an understanding of some basic scheduling terms and concepts is needed.  A critical delay is a delay to an activity that will cause the project completion date to be delayed.  A delay is critical only if it extends the duration of work that is on the then-prevailing critical path.  The critical path is the longest continuous path of work that establishes the project completion date.  The activities on the critical path do not have float.  Float is defined as the amount of time between when an activity could start and when it must start to avoid delay to the project completion date.  Thus, the analyst’s job is to systematically determine with objectivity the delay issues that affected work activities on the critical path.  To accomplish this task, the analyst will work through a myriad of delay issues to determine which issues delayed the critical path work, or delayed non-critical work to the extent that all the available float for the activity was expended causing it to become critical.

Review of the project contract documents will often establish which delays are considered excusable or non-excusable.  Typically, delays caused by unforeseen events beyond the control of either party, such as extreme adverse weather and strikes, are classified as excusable delay.  In cases such as these, absent contract language to the contrary, neither party is at fault for the delay and the owner should grant a time extension if the contractor follows the prescribed procedure to request one. Non-excusable delays are those that are the contractor’s responsibility.

The project contract documents will also usually establish which delays are compensable or non-compensable.  Compensable delays are excusable delays for which the contractor is entitled to additional time-related compensation.  Subject to the contract language, the contractor is typically entitled to the labor, material, and field office costs associated with the delay period; and may, in some cases, be entitled to additional home office overhead costs.

DELAY METHODOLOGY

All delay analysis techniques are most often a variation of one of the following five methods:

1.      Impacted As-Planned

2.      Collapsed As-Built

3.      Windows Analysis

4.      Contemporaneous Analysis

5.      As-Built Analysis

Each of these techniques will be briefly discussed in the paragraphs that follow.

Impacted As-Planned

The impacted as-planned (IAP) method makes use of the schedule that was created at the start of the project – the as-planned schedule.  The analyst inserts delay activities into this schedule to allegedly represent the impacts to the work caused by the particular delay events.  These inserted activities cause the project completion date to be extended.  This is taken to be support for the number of days of delay and entitlement for additional costs.  Most construction industry professionals and third-party venues have agreed that the IAP method is not an accurate method to quantify the impact of delays on a construction project.  The IAP method disregards all of the as-built project information.  It also affords the analyst great latitude to select what issues to address or overlook.  This provides additional opportunity to manipulate the results of the analysis.

Collapsed As-Built

The collapsed as-built (CAB) method is similarly flawed.  The CAB method, also referred to as a “but for” analysis, gives the analyst great latitude to manipulate the analysis to produce the desired results.  An attractive aspect of this technique is the use of an ‘as-built’ schedule as the starting point for the analysis.  The project records are used to establish the start and finish dates for the activities shown in the ‘as-built’ schedule.  This wealth of factual documentation, often in the form of daily reports, meeting minutes, letters, and photographs, lends the impression of validity to the analysis.  The first major opportunity for manipulation comes in the analyst’s creation of logic relationships for each activity.  Next, the analyst identifies particular delay events, retrospectively creates ‘fragnets’ to represent those delay events, and then removes the fragnets from the ‘as-built’ schedule, to show the improvement to the project completion date “but for” the delay issues.  The CAB method is highly subjective because the analyst creates the as-built schedule, assigns preferential logic, chooses the delay issues to address, creates a ‘fragnet’ to represent those issues, determines how those ‘fragnets’ tie-in and affect the work, and then removes the delays in some chosen sequence.  The choices made by the analyst in these areas largely determine the results of the analysis.

Windows Analysis

The windows analysis method (WAM) organizes the events that occurred on the project into specific, analyst-defined time periods.  A major shortcoming of the WAM is that the analyst’s selection of the analysis time period, or ‘window,’ is subjective and materially affects the results produced.  Another shortcoming of the WAM is that although various methods of analysis can be used within the window time period, all versions are generally referred to as a windows analysis.  The WAM can also fail to consider and address out-of-sequence progress or delays that occur outside the ‘window,’ which may be the real cause of the project delays.  Again, the choices made by the analyst in these areas materially affect the analysis and can largely determine the results.

Contemporaneous Analysis

The contemporaneous analysis is usually the preferred method of analysis.  The monthly project schedule updates that were produced by the project participants are used. The critical path of a schedule is compared to the critical path of the schedule from the preceding month.  The analyst tracks the day-to-day progress of the activities on the critical path from month to month and records any delays or savings.  This method produces a specific identification of the activities causing delay to the project completion date from the beginning to the end of the project.  Since the analyst employs the schedules created and used by the project participants, the method is less susceptible to analyst manipulation.  The method does require project schedules that were updated regularly and reasonably accurately during the course of the project.

As-Built Analysis

The as-built method of analysis differs from the previously mentioned CAB method.  The as-built method is typically used when detailed project schedules do not exist, or they exist but are flawed to the extent that they cannot be relied on to support the delay analysis.  The project documents are used to establish a detailed record of the as-built work.  The analyst has the responsibility to identify and document any revised logic from the as-planned sequence in the as-built work.  Delays are determined in a sequential manner through comparative analysis of the critical as-built work to the critical as-planned work.  The as-planned schedule dates are updated to recognize the chronological impact of each delay in turn.  In the event that no reliable as-planned information exists, the analyst will identify critical delays by comparing the as-built information to a retrospectively developed plan that allocates the overall project duration into reasonable time periods to accomplish the major work tasks. The successful use of an as-built analysis requires an analyst very experienced in construction means and methods making choices that are transparent, documented, and supportable.

CONCLUSIONS

Although many methods of analysis are used to determine delays on construction projects, one of the five basic approaches outlined in this article is usually at the heart of these methods.  Many of these approaches are prone to manipulation and can produce favorable results that are pre-determined and controlled by the schedule analyst.  In evaluating delay analysis presentations, third parties need to have a basic understanding of the assumptions inherent in the delay analysis methodology used and they must carefully examine and question analyst-driven decisions in order to identify subjectivity and manipulation that affects the findings.

About the AUTHOR

Kenneth R. Baker, P.E.
Western Region Vice President
Trauner Consulting Services, Inc.
3111 Camino Del Rio North – #1350
San Diego, CA 92108-5720
ken.baker@traunerconsulting.com
619-640-8500[T]

Ken Baker is the Western Region Vice President for Trauner Consulting Services, Inc., a consulting engineering firm with offices in San Diego , Boston , Orlando , and Philadelphia .  He earned his undergraduate degree in civil engineering, with honors, from the University of Massachusetts .  He earned his M.B.A. degree, with highest honors, from the University of Denver .  He is a registered professional engineer in Colorado and a B-licensed general contractor in California .  Mr. Baker has been in responsible charge of design, construction, and consulting work for some 34 years through the operations, management, and consulting positions he has held with five firms.  Mr. Baker’s clients include federal and state public agencies, private owners, sureties and insurance companies, general contractors, subcontractors, and attorneys.  His expert witness and dispute resolution work for these construction clients is in the areas of CPM scheduling, delay analysis, lost productivity evaluation, disputed extra work, specification interpretation, claim damages, design build and construction management professional practice.  Mr. Baker’s construction project experience includes hotels, casinos, schools, power generation facilities, industrial plants, roads and bridges, parking structures, hospitals, prisons, hi-technology and bio-technology laboratory facilities, low-rise and high-rise commercial buildings, and land development projects.  Mr. Baker’s lectures, seminars, and technical training programs have been attended by more than 1,000 industry professionals throughout the United States .

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Article 2

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No CGL Insurance Coverage for Defective Work

By:  J. Kent Holland, Jr.

In an insurance coverage case arising out of a lawsuit by a condominium association against a number of contractors for faulty work, a New Jersey appellate court held that the contractors’ commercial general liability (CGL) policies did not require the insurers to indemnify the defendant contractors for the claims against them because faulty workmanship does not constitute “property damage” or an “occurrence” within the meaning of the applicable insurance policies.

The case of Fireman’s Insurance Co., et al. v. National Union Fire Insurance Co, et. al., 387 N.J. Super. 434 (2006), arose out of litigation by the condominium association of the Society Hill Condominiums in Cherry Hill, New Jersey against the contractors that built the condominium complex.  The claims against the contractors in the underlying litigation included breach of express and implied warranty, negligent design and construction, negligent supervision of subcontractors, and failure to investigate and correct defects.   All of the alleged defective work was performed by subcontractors.  The trial court in the construction defect case found several of the contractors liable on seven specific construction defects.

Fireman’s Insurance Company, The Home Insurance Company and Crum and Foster Insurance defended the contractors in the construction defect litigation.  Rather than going through the details of how the numerous carriers submitted declaratory judgment actions against each other, this article will just explain the essential holding of the insurance coverage litigation which held that none of the carriers involved had any duty to indemnify the construction defendants in the underlying action.

It is interesting to note that as a result of summary judgment being granted to the insurance carriers on the grounds that none of their policies provided coverage for the defective work, there was no insurance coverage available for any party to satisfy the judgment against the contractors.

The policies at issue in this case included standard provisions of the 1973 ISO form for CGL coverage.  That language provided that the carrier would pay sums caused by damages due to “property damage” that were “caused by an occurrence.”   In granting summary judgment, the trial court found there was no property damage and there was no occurrence as defined by the policies.  It is important to note that in addition to finding no coverage under the insuring agreement sections of the policies the trail court went further and ruled that even if the claims were for damages and occurrences, coverage would nevertheless be denied pursuant to exclusions in the policy.

In holding that there was no coverage, the appellate court relied largely upon the seminal New Jersey case, Weedo v. Stone-E-Brick,  regarding insurance coverage for a contractor’s defective work.   The court in Weedo stated that the risk of the contractor’s work may being faulty and breaching express or implied warranties is a “business risk” that is not covered under the CGL policy.  This is because the contractor retains control over the quality of its own work and is expected to bear the cost of curing its own deficient performance.

The kind of risk that is intended to be covered under the CGL policy is the risk of injury to people and damage to property.  This includes injury and damage caused by faulty workmanship. The Fireman’s Insurance court, quoting from Weedo, explained the thinking this way: “In other words, the key distinction is the predictability of the harm:  damage for breach of contractual warranty is limited and is an expected cost of doing business; liability for injury or damage to a person or property is potentially ‘almost limitless’ and is ‘entirely unpredictable.’  The policy is intended to insure against the latter risk.  As concisely stated, ‘the policy in question does not cover an accident of faulty workmanship, but rather faulty workmanship which causes an accident.’”

The court explained that it applied the Weedo principle which stands for the following proposition:  “There is a critical distinction between insurance coverage for tort liability for physical damages to other persons or property, and protection from contractual liability of the insured for economic loss caused by improper workmanship.  Ordinarily, the coverage is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargains.”

The trail court in the Fireman’s Insurance case correctly applied this principle because there was no property damage since property damage, by definition, “is generally not inclusive of inferior material or poor workmanship.”  In affirming the trial court’s decision the appellate court considered whether it made a difference that the defective work was performed by subcontractors rather than the prime contractor.  In holding that it made no difference, the court stated that “cases that have considered the issue equate subcontractors with general contractors for the purposes of determining whether there was ‘property damage’ ….”

Several reported decisions were cited by the court for the proposition that subcontractor performance of the work did not get the prime contractor out from under the “work performed” exclusion or what in current versions of the ISO form would  be called the “your work” exclusion” of the policy.

One final point made by the court was that faulty workmanship does not constitute an “occurrence” under the policy definition.  The majority view of courts around the country, is that “faulty workmanship standing alone, resulting in damage only to the work product itself, does not constitute an occurrence under a CGL policy.”   For these, reasons, the court affirmed the decision finding no insurance coverage under any of the CGL policies at issue.

Comment:  For an interesting contrast in judicial decisions concerning faulty workmanship coverage, see my article on the decision of Limbaugh Company v. Zurich North American.  (Published in Construction Risk.com Report, Vol. 7, No. 4 (2005).  There the court found coverage and relied heavily on the fact that the defective work in question was performed by subcontractors rather than the prime contractor.

About the author: J. Kent Holland, Jr. is a construction lawyer  in Tysons Corner , Virginia , and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 1 (January, 2007).

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Article 3

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Limitation of Liability Clause Enforced

By:  J. Kent Holland, Jr., Esq.

A geotechnical engineering firm’s contract with a real estate developer contained a limitation of liability (LoL) clause, limiting the engineer’s liability for claims arising out of breach of contract, warranty or negligence to the amount of the contract price or $50,000 whichever was greater.  When the developer sued for over $1 million in damages, the trial court refused to apply the LoL clause because it deemed the clause to be contrary to the state’s anti-indemnification statute and, therefore, contrary to public policy and unenforceable.    This decision was reversed on appeal, with the court holding that LoL clauses are distinct from indemnification clauses and distinct from exculpatory clauses in that they do not seek to contract away all liability.  Instead, they merely limit the amount of damage one must pay for its own negligence.  Since the dollar amount of the LoL was reasonable in light of the fee charged, it was not relevant that the actual damages far exceeded the amount of the LoL.  It was not unconscionable and it was not contrary to public policy.

In the case of Fort Knox Self Storage, Inc. v. Western Technologies, 142 P.3d 1, (N.M. 2006),  the court considered the terms of a contract between the parties in which Western was to provide geotechnical engineering services to evaluate subsurface conditions of a proposed building site for Fort Knox Self Storage.  The contract contained a limitation of liability (LoL) clause, typed in all capital letters, expressly limiting Western’s liability to the contract sum, or $50,000, whichever was greater.  Since the contract sum was only $1,750, the higher specified amount of $50,000 applied.

The LoL clause stated that liability would be limited “whether such liability is asserted for breach of representation or warranty, under any indemnity, in any other respect under or for breach of contract, or as a liability arising in tort or by statute.”

Western sought to enforce the LoL clause by a motion for summary judgment, arguing that even if it were liable to Fort Knox , the extent of that liability must be limited to the $50,000 amount specified by the LoL clause.  Fort Knox argued that the clause was unenforceable because it violated a New Mexico anti-indemnity statute which prohibits parties to construction contracts from agreeing to indemnify any entity for its own negligence.  The trail court agreed with Fort Knox that the LoL clause violated the anti-indemnity statute because “ Fort Knox ends up indemnifying Western if the losses are more than $50,000, because they don’t get to collect them from Western.”  As explained by the appellate court, this reasoning by the trail court was incorrect.

The appellate court explained, “We do not read [the statute] as prohibiting a limitation of liability based on one’s own negligence but as prohibiting the avoidance of all liability for one’s own negligence…. The limitation of liability clause in this case does not seek to contract away all liability for Western’s negligence but seeks to limit the amount of damages Western must pay for its own negligence.  The contract does not indemnify Western against its own negligence.  Indeed, it provides that Western may be liable for damages, based on its own negligence, that are twenty-eight times higher than the amount of the contract.”

For support of its view, the court here cited Valhal Corp. v Sullivan Assocs., Inc. 44 F.3d 195 (3rd Cir. 1995) which involved similar facts concerning the applicability of an LoL clause to an architect’s services.  The question then was whether a Pennsylvania anti-indemnity statute applied to an LoL clause.  In Valhal, the court concluded that the anti-indemnity statute had no applicability to the LoL clause.  First that court distinguished the LoL clause from both an indemnification clause and a pure exculpatory clause.  The court there explained that under the LoL clause the architect remained liable for its own negligence and was exposed to liability up to $50,000.  “Thus, the amount of liability is capped, but the [architect] still bears substantial responsibility for its actions.”

One key to the Fort Know court’s decision to uphold the LoL clause, and to not apply the state anti-indemnity statute, was the court’s reasoning that “there is a significant difference between contracts that insulate a party from any and all liability and those that simply limit liability.”  The court quoted favorably from Valhal noting that “clauses limiting liability ‘are a fact of everyday business and commercial life’ and that such clauses are enforceable as long as they are ‘reasonable and not so drastic as to remove the incentive to perform with due care.”

The dollar amount of the LoL was a significant factor in the court’s decision to uphold the clause.  Fort Knox argued that the large difference between its total damages of over $1 million and the $50,000 LoL violates public policy.  The court stated it was not persuaded that the correct measure of whether a cap is so small as to render the clause unenforceable is the difference between the damages suffered and the cap.

Just as the court in Valhal recognized that the $50,000 might be considered nominal when compared to the more than $2 million in damages at issue in that case, the court here stated that the only “relevant inquiry” of whether the amount is “nominal” must be “whether the cap is so nominal compared to the expected compensation as to negate or drastically minimize concern for liability for one’s actions.”

Here, the LoL amount was many multiples of the small fee that the geotechnical engineering firm was paid by its client.  For the reasons discussed herein, the court held that the LoL clause must be enforced to limit the engineer’s liability.

Comment:  This decision follows the reasoning of many cases in numerous jurisdictions throughout the country affirming that LoL clauses are enforceable, provided that certain basic conditions are met.    A few pointers for drafting LoL clauses include the following:

1)  Several courts have explained that LoL clauses are entitled to much greater favor than Indemnification clauses.  For this reason, if you are including both types of provisions in a contract, it is advisable to keep them in separate paragraphs or articles and not mix them together into a single article. As with the LoL clause quoted in this decision, you can reference the Indemnification clause in the LoL clause to state the indemnity you provide to your client will be limited to the amount specified in the LoL clause.

2)  The limitation amount specified by the LoL clause needs to be an amount that is sufficient, when compared to the fee for services.   Otherwise a court may deem it to be “nominal”, making it unenforceable.

3)  The LoL clause should be clear and obvious in the contract.  In this case the clause was in all capital letters, although that may not be required in many jurisdictions.

4)  The LoL clause here specifically stated that it applied to all claims regardless of whether based on breach of contract, breach of warranty or tort (negligence).  It is important to specify all these causes of action.

5)  The fact that both parties to this contract were commercial entities was considered by the court.  LoL clauses are also enforceable in many contracts between commercial entities and private persons, but the equality of bargaining power is one factor discussed by the courts.  What some firms do in their contracts to help demonstrate that the LoL was bargained for is include a provision permitting their client to obtain an increased LoL amount for the payment of some small additional fee.  This can be used to show that the LoL was negotiable and the client made a conscious decision to accept the amount of the LoL.

6)  Some states have statutes or common law making it contrary to “public interest” for certain entities such as public utilities and transportation carriers to limit their liability.  I am not aware of such LoL “public interest” exceptions being applied to architects and engineers.

7)  Insurance carriers and professional risk managers generally recommend that design professionals include reasonable limitations of liability in their contracts.    These clauses are not frequently seen, however, in standard construction contracts.  On the other hand, they have been successfully used in large design-build contracts.

In professional consultant contracts, LoL clauses are often deemed a necessity in view of (1) the relatively small fees that consultants obtain for providing professional services on large, complex and expensive projects, (2 the increasingly litigious nature our society is becoming, (3)the difficulty in obtaining project-specific insurance policies and (4) the cost of obtaining appropriate design professional practice policies. (Premiums can be reduced for firms that demonstrate that they seek and obtain LoL clauses in a large percentage of their contracts).

8)  LoL clauses have the benefit of encouraging clients to be more realistic and reasonable in negotiating other risk allocation clauses of the contract.  This may help to avoid inappropriate and uninsurable risks.

About the author: J. Kent Holland, Jr. is a construction lawyer  in Tysons Corner , Virginia , and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 1 (2007).

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RED VECTOR.COM — ON-LINE COURSES
Do you need year end continuing education courses?  Currently available on-line risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include: ABCs of Time, Goals and Purpose – The Big Picture.  Also available are: Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

Copyright 2007, ConstructionRisk.com, LLC

Publisher & Editor:
J. Kent Holland, Jr., Esq.

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