Scope of Work – Impacts
This McLaughlin and McLaughlin (M&M) Project Professionals post is the eighth in a Subject Series Construction Claims and Disputes.
Recent posts (Parts 6, 7) address scope of work within the overall subject of Construction Claims and Disputes. Claims and disputes regarding scope of work are a widespread problem and represent the most common issue. Perhaps 75 to 90% of all engineering and construction claims and disputes involve contract scope of work. However, this is not confined to engineering and construction.
Direct compensation for a scope of work change may merely be the proverbial “tip of the iceberg.” What about the rest of the story? Is the contractor missing many other costs or schedule impacts? Often, this is the case. This issue may be broader that an added piece of equipment, redesign to avoid a conflict or similar events.
Scope of work disputes are building blocks to other claim elements in the dispute.
- Delay – Changes can add work to the project critical path. If so, this would cause the forecasted project completion date to be extended (potentially later than planned).
- Progress – Changed work adds to the overall project work content, thereby changing the progress measurement and reporting (Earned Value).
- Disruption / Productivity – Changed work impacts field labor productivity, a major risk to contractors.
- Overheads / Indirects – Changed work may add requirements for additional construction support, supervision, insurance and other indirects.
- Terms and Conditions – The cost of bonding, insurance, warranties, guarantees, and many others can be impacted by changed work.
- Profit / Fee – proper compensation in this area can be challenging.
The majority of the discussion will address entitlement to recovery (rather than pricing or quantum). For pricing (or quantum), please see McLaughlin & McLaughlin’s Project Professionals Construction Claims and Disputes Part 4 and Part 5.
Delay – Changes to the contract scope of work can influence (or impact) the overall project critical path and, hence, result in forecasted delays to the planned schedule performance.
In Construction Delay Claims, Bramble and Callahan characterize delay as follows”
In construction claims, the term “delay” is used to mean two different but related matters. Delay is often used to mean the time period during which some part of the construction project has been extended beyond what was originally planned due to unanticipated circumstances. Extension beyond what was initially planned may also be called prolongation.
Delay can also be the incident that affects the performance of a particular activity, with or without affecting project completion. This concept of “postponement” occurs when the planned start of an activity or project is delayed.
The effect of variations or changes on the remaining or unchanged work may entitle the contractor to a time extension. It is difficult to make this determination, because the effect of the variations may not be readily apparent. In some situations, the owner may grant a time extension to deal with the time associated with the change order work. If a time extension is given by the owner relating to changes in the work, there may be a rebuttable presumption that the time extension is compensable.
In fact, use of Time Impact Analysis or other forms of critical path analyses are proscribed in some scheduling specifications. In Construction Scheduling: Preparation, Liability, and Claims, Wickwire et.al. address this technique and provide examples of several noteworthy scheduling specifications.
Remember to include Extension of Time and Damage for Delay (delay damages) if the schedule analysis supports this entitlement.
Progress – Progress of the work or scope can be measured and reported in terms of Earned Value. In Practice Standard for Earned Value Management [link], Project Management Institute (PMI) defines as follows:
Earned Value (EV). The measure of the work performed, expressed in terms of the budget authorized for that work. Earned value can be reported for cumulative to date or for a specific reporting period.
This PMI standard discusses scope change analysis and the adjustments that may be needed to the Performance Measurement Baseline (PMB). Referred to as “Rebaselining,” it takes two forms: replanning and reprogramming. The results of these project controls efforts may reveal conditions that have or will lead to cost and schedule variances. Therefore, these can be considered as impacts resulting from scope change. Entitlement to additional compensation may be appropriate.
Disruption / Productivity – The impact of changed work or variations on the field labor productivity has been widely studied and analyzed. Please see McLaughlin & McLaughlin’s Project Professionals Subject Series – Productivity (18 posts) for extensive coverage.
In Calculating Lost Labor Productivity in Construction Claims, Schwartzkopf devotes a chapter to “The Effect of Change Orders on Productivity.” In this discussion, he cites a threshold of approximately 10% Change Orders (man-hours) as the onset of impacts of loss of productivity due to these accumulated change orders. Further, in Impact of Change’s Timing on Labor Productivity, Ibbs (a very prominent authority on the subject of labor productivity) relates the impact of changed work and the timing (earlier or later in the project execution period) and impact.
Overheads – Normally, this term refers to Jobsite and Home Office compensation that may be calculated using allocations or percentages (of direct costs).
In Calculating Construction Damages, Schwartzkopf and McNamara devote individual chapters to Jobsite Overhead, Home Office Overhead and Profit. In Construction Damages and Remedies , the American Bar Association (ABA) editor Douglas S. Oles devotes sections in Chapter 2 Elements of Damages to:
- Site Overhead
- Home Office General and Administrative Expenses
- Markups for Bond Premiums, Insurance Premiums and Taxes
- Attorney’s Fees and Costs
- Consultant Fees
The lesson here is that these categories of potential compensation can be complex and robust. It is worthwhile to evaluate these areas when larger change orders are being priced. Use of a simple percentage my result in missing legitimate and significant compensation.
Terms and Conditions – Warranty and guaranty requirements… Bonding and insurance… Liquidated damages… Permits… Risk… all have potential cost and time impacts when changed work is present.
Profit / Fee – Assuming that the contractor is intent on making a profit on the work, suitable profit or fee (profit plus non-reimbursable expenses) should be included. This may be stipulated in the contract or from normal and customary levels for the industry and location in question.
Has the contractor been paid or otherwise compensated for these impacts created by changes (additions) to the scope of work? This point is important when pricing changed work (see McLaughlin & McLaughlin’s Project Professionals posts on pricing changes – Parts 4 and 5 to this series [link]).
We wish you good luck in your construction claims and disputes regarding scope of work and the related impacts to time, progress, disruption, overheads and other claim elements.
It is important to note that McLaughlin and McLaughlin [M&M] is not a law firm and is not intending to provide legal advice. M&M is a consulting firm providing (among other services) non-legal expertise in construction claims, dispute resolution and litigation support. The Resource Center is for the convenience of blog visitors and M&M does not offer this for commercial purposes. For further information on M&M services, please see www.McLaughlinandMcLaughlin.com.