Constructing a Claim for Lost Productivity Damages

When a construction project is disrupted through no fault of the contractor, lost productivity may be an important element of the contractor’s damages. Quantifying the cost of lost productivity, however, is one of the most difficult challenges in construction litigation.

What is lost productivity?

Productivity generally refers to the amount of work a contractor can perform during a given time. Lost productivity simply means that an unanticipated disruption of the project causes the contractor to work less efficiently, which may lead to additional labor, equipment and material costs.

Lost productivity is often associated with a delay, but lost productivity damages and delay damages aren’t the same thing. A contractor may suffer lost productivity even if the project isn’t delayed. Of course, when a delay occurs, lost productivity may become a component of the contractor’s damages.

How do you measure damages?

Appraisers can use several methods when quantifying lost productivity damages. Determining the appropriate method depends on the particular job’s facts and circumstances. One difficulty in establishing damages is distinguishing whether additional costs were caused by lost productivity or by the contractor’s failure to estimate correctly.

For this reason, one of the most common methods (and the one generally favored by the courts) is the measured-mile. It compares a contractor’s productivity levels during periods in which work was disrupted with productivity levels during undisrupted periods. The advantage of using this method is that it reflects only recoverable productivity losses, eliminating the need to determine whether a loss is attributable, in whole or in part, to bidding mistakes.

The measured-mile method won’t work, however, if a project is disrupted from start to finish. This is because periods of optimal productivity for use as a baseline don’t exist. Also, for a baseline period to be appropriate, it must involve work that’s reasonably similar to the work being done during the disrupted period. Finally, the measured-mile method relies heavily on thorough documentation of the type of work being done, the disruptions to the work and the additional costs attributable to those disruptions.

Other methods for calculating lost productivity damages include:

• Total cost method. Under this method, the appraiser calculates lost productivity damages by taking actual contract costs and subtracting the bid amount (taking into account agreed-upon change orders). Although this method’s simplicity may be appealing, it fails to reflect productivity losses caused by bidding mistakes or otherwise attributable to the contractor. It also ignores the reasonableness of costs the contractor incurred. A “modified total cost method” attempts to address these problems by requiring adjustments to account for unreasonable bids or other cost overruns that are the contractor’s responsibility.
• Actual cost method. This method, which relies on actual cost and productivity numbers, is the most accurate, but it may not be practical. Why? First, the labor-intensive nature of the method may render it cost prohibitive. And second, it demands detailed, accurate records that include productivity measurements — something few contractors possess.
• Jury verdict method. Essentially, this method involves an educated guess on the part of the trier of fact. Some courts have allowed this method when it’s clear that a contractor suffered lost productivity damages but there’s no other reliable method of quantifying those damages.

How do you build a case?

Proving lost productivity damages requires lawyers and damages experts to work together closely to establish lost productivity. They also need to identify its causes, document the additional costs involved and select the most appropriate method for measuring it.

If you have any questions about this article, please contact our Valuation & Litigation Advisory Services Group at 440-449-6800.