Measuring Delay Damages: Labor, Material and Equipment Escalation Costs

For those that missed the earlier parts of this Blog series, as of this post, the series has discussed:  what is necessary to prove a delay occurred, combating the most common defenses, varying methods to calculate delay damages—Total Cost Method, Modified Total Cost Method and the Eichleay Formula for calculating overhead damages.  Often, because of the delay, the work is performed in a higher wage period than initially planned; similarly, the cost of continuing to rent and possess idle equipment negatively affects the contractor.  Part six of this series will discuss the potential recovery related to labor, material and equipment escalation costs directly associated with the delay.

Labor and Material Escalation

Spoiler alert:  delays in projects generate additional costs.  The work force should remain employed, machinery should remain on site and materials should continue being acquired; the delay might be resolved at any moment on any day.  According to the Eleventh Circuit, this line of thinking was found to be reasonable.  The Court reasoned that terminating employees might result in the loss of other potential jobs.[i]  Performing the work during a higher-than-expected wage period is relatively easy to recover.  The contractor is entitled to recovery for the excess labor escalation costs incurred in light of the delay.[ii]

Recovery for the escalation in material costs is generally not as easy to recover.  This is because most courts require the contractor to establish that it could not ensure the price of material at or about the time that the initial contract was signed.[iii]  This can be thought of as simply another method for the court to determine whether a contractor acted reasonably in trying to mitigate its damages.  Generally, however, damages for material escalation are easier to prove, and therefore recover, if seeking recovery after the original contract period.[iv]

Additionally, the type of contract used in the agreement can predetermine or preclude any potential recovery.  The occurrence of natural disasters does not automatically provide for or negate delay damages.  According to the Eleventh Circuit, a contractor is not entitled to recover escalated labor and material costs through a force majeure clause when a hurricane impeded the timely completion of a project.[v]  The specific contract in dispute was a fixed price contract; nonetheless, there was a delay that resulted in the contractor incurring additional expenses.  Despite a delay resulting in additional expenses, the wording of the contract and the fact that it was a fixed priced contract precluded recovery.  The reasoning supporting this finding was that allowing recovery under the facts “subvert[s] the entire purpose of a fixed price contract . . . .”[vi]

Additional Labor and Equipment Costs

Delays can also cause additional expenses and damages related to equipment costs; causing the contractor to extend rental equipment for longer than expected or having to pay for idle equipment.[vii]  These damages are calculated by multiplying the period of extended use or idleness by the cost of the equipment.  It is imperative that the contractor proves the rates paid were reasonable as proof of its reasonable cost of labor.[viii]  Damages may also be sustained when an owner orders acceleration of the work on a project.  Acceleration can occur by either an express order or an implied order.  An implied order occurs when an owner denies to grant an excusable or compensable time extension request; impliedly demanding acceleration.  Damages recoverable for acceleration can sometimes be significant, but recovery can be complicated through the use of one of the previously mentioned methods to measure delay damages and often must be calculated with other methods.  Stay tuned for the next method discussed to measure damages:  a method that is similar to the Total Cost Method, but involves the jury.